SIRS NOTES SUMMARY

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GDP may increase by:

  • increases in volume (economic growth)
  • increase in price (inflation)

isolate inflation : real GDP = Nomial GDP growth - inflation

population controlled by calculating GDP per capita - allows comparison

PPP- exchange rate used to reflect the relative PP of a currency

measuring GDP:

  • PRODUCT: add up value of g/s produced in country
  • INCOME: add up all incomes of households
  • EXPENDITURE: add up expenditure necessary to purchase the nation's wealth

GNI: GDP + Net income from abroad - some income earned will go abroad & some will come in

Actual Growth: The % annual increase in national output

Potential Growth: The % annual increase in the capacity of the economy to produce

Potential Output: The level of output when the economy is operating at normal capacity utilisation

  • rate of technological advancements
  • level of investment
  • discovery of raw materials

Full Capacity: The absolute maximum that could be produced with firms working flat out

in the LR AG is limited to PG

CIRCULAR FLOW

WITHDRAWALS:

  • S = saving - borrowing
  • T = taxes - benefits
  • M = imports

INJECTIONS

  • I: Firms invest to increase potential capacity
  • G: gov spend money on g/s
  • X: exports

 - OUTPUT GAP: higher than normal unemployment as firms are operating below normal level of capacity utilisation.

downward pressure on inflation as labour demand low

+ OUTPUT GAP: excess demand and increase inflation

AGGREGATE DEMAND

AD = Cd + I + G + X

Cd = C - M

AD = C + I + G + X -M

sloping down because:

  • Real income higher when prices lower
  • M/P = people have more income
  • PL low = interest rates low
  • low PL = demand for X high

a) CONSUMPTION:

  • wealth - increase house price = increase consumption
  • interest rate - low rates = low cost of borrowing
  • confidence - expectatios regarding future economic performance
  • expectations - buy now if inflation is rising

b) INVESTMENT:

Return e = Revenue e - Costs

  • interest rate - if investment is done by borrowing
  •                       firms use own funds = IR represents opportunity cost
  • expectations - about the future will influence investors expected return
  • confidence - animal spirits: investors are tempormental so investment is volitle
  • gov policy - taxs, regulations etc.

c) GOV SPENDING

kenyes suggested to increase G to stimulate AD in recessionary conditions

d) TRADE IN G/S

  • exchange rate - SPICEE (strong pound = trade deficit worsens)
  •                         - Marshall Lerner condition (PEDx + PEDm >1)
  • relative prices - cheaper abroad = M increases
  • domestic supply - cant meet demand = M increases

AGGREGATE SUPPLY

Classical: national ouput is always at full employment level. Determined by FofP & their productivity.

represents LR when prices are flexible

Y| is fixed because resources + productivity are fixed

Saving = Investment: flexible interest rate in the market = S=I at intersection of r vs q

Exports = Imports: flexiable UK prices + wages = X=M at ExRate intersection

Keynesian: AS is upward sloping

represents SR

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