SIRS NOTES SUMMARY
- Created by: NadiaRahman123
- Created on: 16-05-15 16:12
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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