Introduction to development<br />Circular flow of income: simplified model of the economy that shows the flow of money through the economy.<br />Gross Domestic Product (GDP): total money value of all final goods and services produced in an economy in one year.<br />Gross National Product (GNP): total money value of all final goods and services produced in an economy in one year, plus net property income from abroad.<br />Real GDP: GDP, not adjusted for inflation<br />Per capita GDP: total money value of all final goods and services produced in an economy in one year per head of the population.<br />
Aggregate Demand (AD)<br />AD: total spending in an economy consisting of consumption, investment, government spending and net exports.<br />Consumption: spending by households on consumer goods and services over a period of time<br />Investment: addition to the capital stock of the economy in the form of factories, offices, machinery, and equipment which is used to produce goods and services.<br />
Aggregate Supply (AS)<br />AS: total amount of domestic goods and services supplied by businesses and the government, including both consumer goods and capital goods.<br />Short-run aggregate supply (SRAS): AS that varies with the level of demand for goods and services and that is shifted by changes in the costs of factors of production.<br />Long-run aggregate supply (LRAS): AS that is dependent upon the resources in the economy and that can only be increased by improvements in the quantity and/or quality of factors of production.<br />
Macroeconomic Models<br />Inflationary gap: situation where total spending (AD) is greater than the full employment level of output, thus causing inflation.<br />Deflationary gap: situation where total spending (AD) is less that the full employment level of output, thus causing unemployment.<br />
Policies<br />Demand-side policies: any government policies designed to influence AD in the economy, thus affecting the average price level and real national output.<br />Supply-side policies: any government policies designed to shift the LRAS curve to the right, thus increasing potential output in the economy.<br />Fiscal policy: policy using changes in government spending and/or direct taxation to achieve economic objectives.<br />Monetary policy: policy using changes in the money supply or interest rates to achieve economic objectives.<br />
Unemployment<br />Unemployment: situation that exists when people who are willing and able to work cannot get a job.<br />Unemployment rate: number of unemployed workers expressed as a percentage of the total workforce. <br />Full employment: when the number of jobs available in an economy is equal to or greater than the number of people actively seeking work.<br />Underemployment: when workers are carrying out jobs for which they are over-qualified, or when workers are employed part-time even when they can work full-time.<br />Real wage unemployment; exists when real wages in the economy get pushed up above their equilibrium<br />
Unemployment Cont.<br />Structural unemployment; exists when in the long term the pattern of demand and production methods change and there is a permanent fall in the demand for a particular type of labor.<br />Frictional (search) unemployment: exists when people have left a job and are in the process of searching for another job.<br />Seasonal unemployment: exists when people are out of work because their usual job is out of season.<br />Demand deficient (cyclical) unemployment: exists when there is insufficient AD in the economy and real wages do not fall to compensate for this.<br />
Real wage unemployment<br />ASL<br />Average wage rate<br />a<br />b<br />W1<br />We<br />ADL<br />0<br />Number of workers<br />Q1<br />Q2<br />
Inflation<br />Inflation: sustained increase in the general (or average) level of prices and a fall in the value of money.<br />Demand-pull inflation: inflation that is caused by increasing AD in an economy that shifts the AD curve to the right.<br />Cost-push inflation: inflation that is caused by an increase in the costs of production in an economy that shifts the SRAS curve to the left.<br />
Deflation<br />Persistent fall in the average level of prices in an economy<br />
Taxes<br />Direct taxation: imposed on people’s income or wealth, and on firms’ profit.<br />Indirect taxation: tax on expenditure, added to the selling price of a good or service.<br />Progressive taxation: system of direct taxation where tax is levied at an increasing rate for successive bands of income.<br />Regressive taxation: system of taxation in which tax is levied at a decreasing average rate as income rises.<br />
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