AD = C + I + G + (X-M)

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  • Created on: 01-03-14 15:49
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  • AD = C + I + G + (X-M)
    • Aggregate demand
      • Aggregate demand curve
        • Shape
          • The general price level (GPL) on the y axils and there RNO ( real national output) on the x axis
          • Leave space for diagram
      • Aggregate demand equations
        • Aggregate demand = National income (Y)
        • In a closed economy AD= C+ I +G
        • Aggregate demand = Real national output (RNO)
      • Multiplier affect
        • When a change in AD can have a larger final impact on Y
        • injections of new demand for goods and services into the circular flow of income stimulate further rounds of spending – so by spending your giving others income
        • The multiplyer
          • The number of times a rise in Y exceeds a rise in injections
          • Multiplier = 1/ sump of propensity to save + tax + import
        • The multiplier will be higher if:
          • theres a high propensity to spend extra income and spend instead of saving
          • theres a low marginal rate of tax
          • consumer confidence is high
    • Consumption
      • Determinants of consumption
        • Interest rates
          • The > the interest rates the > the propensity to save and therefore the < consumption
        • Taxes
          • The > the taxes the < the consumption as people have less money to spend
        • Income
          • The > the income the > the consumption
          • Redistribution of income
            • The richer groups save more proportionately so the redistribution takes from the rich to give to the poor and increase consumption
        • Unemployment levels
          • The > the levels of unemployment the < the consumption because more people save
        • Population change
          • Change in structure of population change consumption level e.g. the older the population the > the consumption as they have nothing to save for
        • Consumer confidence
          • The > the consumer confidence the > the levels of consumption
        • Wealth
          • The > the levels of wealth the > the consumption as people believe they are better off
          • Wealth is the values of stock assets owned by people: e.g car, home etc
        • Possibility of future inflation
          • fears of inflation increase precautionary saving  and therefore decrease consumption.
          • It can bring forward purchases of major objects : e.g cars
          • High inflation leads to higher interest rates which incentivises saving
        • Availability of credit
          • The > the willingness and availability of banks to lend the > people consume
      • Saving
        • The > the saving the < the consumption this means money goes to the banks instead of businesses making economic growth more difficult which causes a decrease in AD. The significance of this depends on the economic cycle e.g its worst when saving increases in a recession
        • Savings ratio
          • Actual personal saving / personal disposable income
          • Personal saving is saving for individuals and unincorporated businesses ( not owned by shares)
      • Theorys of consumption
        • Keynes theory
          • Richer households save more as they have higher proportion of income. So as households grow richer spending rises slower than income
      • Marginal propensity to consume
        • The % of each additional pound earned that will be ne spent as apposed to saved
    • Investment
      • Definition
        • The total planned saving by firms on capital goods e.g. machinery
        • An injection of capital aimed at increasing future production e.g new machine or trainting
      • Determinants of investment
        • The rate of interest
          • This is the cost of borrowing
          • The < the interest rate the > the investment as it is cheaper to borrow money to make large purchases
        • Business confidence
          • The > the business confidence the > investment is as firms believe profits will increase in the future
        • Technical progress
          • An advancement in technology leads to an increase in investment as firms want the most efficient equiptment
        • The relative prices of capital and labour
          • When wages increase firms adopt more capital technologies to replace labour in order to keep costs low
        • The accelerator
          • Definition
            • It is a change in investment in capital goods due to a change in national income (AD) Its size depends on the capital output ratio.
            • The capital output ratio is the ratio between a firms current output and their existing stock.
          • Positive accelerator
            • If income speeds up investment increases this increases economic growth
          • Negative accelerator
            • If income slows down investment decreases this decreases growth
      • Gross investment v net investment
        • Gross investment is the total an economy spends on new capital including depreciation (when money is pent keeping technology up to date so there is no change in efficiency e.g. repairs)
        • Net investment = gross investment - depreciation expenditure
      • Key terms
        • Infrastructure
          • The network of services and facilities, that can be used by firms and households in an economy e.g. libraries , airports, internet
        • Human capital
          • Is the skills and cpabilities and the competitiveness of the work force - it is part of a broader definition of investment. e.g. training
      • Effect on policies
        • The > the investment the > AD. Supply side is the impact on production as the > the investment the > the capacity
    • Balance of Trades
      • Definition
        • Exports
          • Goods and services sold abroad represents an injection and so increases AD
          • Exports > Imports = +
        • Imorts
          • Goods and services bought abroad representing a leakage and so reduces AD.
          • Imports > exports = -
        • The balance of trades is dis aggregated into smaller sections
      • Balance of payments
        • Definition
          • The financial record of trade what flows in and out the country
          • Exports are positive on the balance of payments and imports are negative
        • The current account
          • Measures the amount of income flowing in and out of the economy in a certain period of time
          • Non trade items in the current account
            • Investment income
              • Is profit and interest income flowing into a country that is generated from assets of that residence of the country own abroad
              • Net investment income is the difference between the inward and outward flows of profit
            • Transfers
              • Are payments flowing between countries in forms such as aid, grants and gifts
            • Inward flow of profit
              • If a foreign company reinvests its profit into the company it is an inward flow of profit as the money is being spent on British workers etc
            • Dividend income
              • If a foreign company has dividend income ( profit is shared between shareholders) the money goes back to the foreign country and so is a capital outflow
            • Inward transfer
              • When the UK get subsidized by the European union due to things such as the common agricultural policy, its an export of money
            • Outward transfer
              • When the UK send aid to other countries such as Syria it is an import of money
        • Capital flows
          • When businesses of one country by capital assets (factories) in another country the payment for these is the capital flow
          • When a British company invest abroad it is outward investment and when a foreign company invests in Britain it is a Foreign Direct Investment (FDI)
    • Government expenditure
      • Determinants of government spending
        • The economic cycle
        • Taxation reciepts
        • Opinions and beliefs
        • Dept
        • Credit rating
          • Countries are rated on how likely they are to repay their debt with AAA being the highest rating
      • Policies
        • Policy objective
          • A target the government want to achieve
        • Policy instrument
          • A tool used to help achieve an economic target
        • Fiscal policy
          • Trying to achieve objectives by using taxation, spending and the budget
        • Monetary policy
          • The use of interest rates to achieve the objective
        • Supply-side policies
          • A policy aimed at improving competitiveness and efficiency of markets
          • Can be done by: privatisation, reducing limitations, policies to promote investment and encourage skills
        • Contractionary policy
          • A tightening of policy aimed at decreasing Aggregate demand it increases taxation and decreases spending
        • Expansionary policy
          • A loosening of policies to increase Aggregate demand it decreases taxation and increases government spending
      • Componants of government reciepts
        • Income tax
        • National insurance
        • Excise duties
        • Corporation tax
        • VAT
        • Council tax
        • Business rates
      • Components of government spending
        • Social protection
        • Social services
        • Health
        • Transport
        • Education
        • Defence
        • Industry/training
        • Housing and environment
        • Public safety
      • Definition
        • The spending of state provided goods (merit and public) decisions on the what the money is spent on depend on the government and the policies they use
        • can be subdivided into capital spending, current spending and transfer payments
          • Current spending is the government spending on the day to day running of the public sector
          • Capital is government spending to improve the productive capacity of the nation
          • Transfer payments are government payments to individuals with no service in return e.g benefits
      • Deficits and surpluses
        • Deficit
          • A deficit is when the government spending is > than the tax coming in
          • Defecits are financed by government bonds (gilts) which people borrow with interest
            • Gilts are debt securities issued by the government via the bank of England. Theses tend to pay a fixed rate of interest like an IOU.
        • Surplus
          • There is a leakage out the economy as tax revenue is > than governement spending
  • Government expenditure
    • Determinants of government spending
      • The economic cycle
      • Taxation reciepts
      • Opinions and beliefs
      • Dept
      • Credit rating
        • Countries are rated on how likely they are to repay their debt with AAA being the highest rating
    • Policies
      • Policy objective
        • A target the government want to achieve
      • Policy instrument
        • A tool used to help achieve an economic target
      • Fiscal policy
        • Trying to achieve objectives by using taxation, spending and the budget
      • Monetary policy
        • The use of interest rates to achieve the objective
      • Supply-side policies
        • A policy aimed at improving competitiveness and efficiency of markets
        • Can be done by: privatisation, reducing limitations, policies to promote investment and encourage skills
      • Contractionary policy
        • A tightening of policy aimed at decreasing Aggregate demand it increases taxation and decreases spending
      • Expansionary policy
        • A loosening of policies to increase Aggregate demand it decreases taxation and increases government spending
    • Componants of government reciepts
      • Income tax
      • National insurance
      • Excise duties
      • Corporation tax
      • VAT
      • Council tax
      • Business rates
    • Components of government spending
      • Social protection
      • Social services
      • Health
      • Transport
      • Education
      • Defence
      • Industry/training
      • Housing and environment
      • Public safety
    • Definition
      • The spending of state provided goods (merit and public) decisions on the what the money is spent on depend on the government and the policies they use
      • can be subdivided into capital spending, current spending and transfer payments
        • Current spending is the government spending on the day to day running of the public sector
        • Capital is government spending to improve the productive capacity of the nation
        • Transfer payments are government payments to individuals with no service in return e.g benefits
    • Deficits and surpluses
      • Deficit
        • A deficit is when the government spending is > than the tax coming in
        • Defecits are financed by government bonds (gilts) which people borrow with interest
          • Gilts are debt securities issued by the government via the bank of England. Theses tend to pay a fixed rate of interest like an IOU.
      • Surplus
        • There is a leakage out the economy as tax revenue is > than governement spending
  • Theorys of consumption
    • Keynes theory
      • Richer households save more as they have higher proportion of income. So as households grow richer spending rises slower than income
  • Aggregate demand curve
    • Shape
      • The general price level (GPL) on the y axils and there RNO ( real national output) on the x axis
      • Leave space for diagram
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