Aggregate Economic Activity – Flashcards

The total value of the output of any economy can be obtained by measuring the incomes earned in the production of goods or the spending on the same production. If we assume that all goods and services produced are consumption goods, and that all income is spent on consumption goods, then the value of spending on national output must always equal the value of income earned (national income).

Private Final Consumption + Government Final Consumption + Gross Fixed Capital Formation + Changes in Inventories + Exports – Imports + Statistical Discrepancy

Covers services provided by government which are not sold on the market e.g. defence, police and education. It does not include transfer payments or investment spending.

Investment in fixed assets by firms (e.g. on factories or new equipment) and government (e.g. building of dams and universities).

Gross Operating Surplus + Compensation of Employees + Taxes on Production and Imports – Subsidies

Operating Surplus + Consumption of fixed capital

Profit before deducting taxes, dividends, it can be taken to be net profit.

Financial compensation for labour supplied, e.g. wages, salaries and taxable allowances.

Measures the decline in value of fixed assets used in production, as a result of physical deterioration and normal obsolescence It is a cost of production, valued at replacement cost.

The value of output at current market prices.

Refers to nominal GDP adjusted for changes in the price relative to a base year. The changes in real GDP allow us to measure growth in real terms or increases in the standard of living.

Insufficient information – illegal activities or payments with no records kept which form part of the black/illegal market are excluded. Non-market activities have no value attached to them because they do not pass through a market so are excluded such as DIY work, barter.

A phase of the business cycle characterised by a peak in economic activity with unemployment falling and possible inflationary pressures.

A falling-off in economic activity characterised by decreasing levels of investment and output and rising levels of unemployment.

A phase of the business cycle characterised by a severe decline in the level of economic activity. Output and investment will be at very low levels and there is a high rate of unemployment.

Total demand in the economy, equivalent to national income. C+I+G+(X-M)

Total production of all firms in the economy

As the price level increases all goods and services become more expensive. Individual’s monetary assets (transaction account deposits and cash) lose their purchasing power, which results in reduced consumption spending and subsequently to a fall in aggregate demand.

As the price level increases, AD for all goods/services will decrease. LOOK FOR ANOTHER DEFINITION IN PINK BOOK.

Especially nominal wages, imported raw materials, e.g. oil, sales tax/GST or company tax. new technology and levels of productivity the level of capital stock and the level of labour force.

Shows each firm is producing its capacity output and there is full employment. New technology or the discovery of new resources will cause the YF curve to shift outwards.

Exporters’ incomes are likely to fall because they are more expensive and less competitive on the world market, and sell less or they exchange their foreign currency for fewer NZ dollars, so their incomes decrease. The overall results is less demand-pull inflation. Imports will also be cheaper as the NZ dollar appreciates, so there will be less cost-push inflation.

A fall in interest rates will encourage households to borrow and increase the level of consumption and businesses are more likely to carry out their investment plans. Overall economic activity is likely to increase and put pressure on price levels to increase.

Action taken by the reserve bank to influence interest rates, the money supply and the availability of credit. Influences the level of economic activity in order to achieve price stability.

Used when the level of economic activity is too great and there is inflationary pressure in the economy e.g. increasing the OCR.

Is the main monetary policy used by the Reserve Bank. The OCR is is the interest rate set by the Reserve Bank, it will pay interest at 0.25% lower than the OCR to registered banks for their settlement cash deposits and the and the Reserve Bank is prepared to lend to registered banks at 0.25% above the OCR if registered banks borrow from the Reserve Bank to fund their settlement cash deposits. Therefore, the OCR will influence the level of interest rates and is the current key tool used by the Reserve Bank to maintain price stability.

Higher interest rates affect private sector consumption because they mean individuals pay more on mortgages and credit cards. People have less to spend. AD will shift inwards. Private sector investment is when firms buy capital goods, often requiring a loan. When interest rates rise these increased costs will mean less investment spending on new capital by firms. AD will shift inwards.

Prices of competitors’ products, quality of NZ product, price of overseas substitutes, level of overseas countries’ income, overseas consumers’ tastes and preferences.

The expanded production leads to higher employment and incomes; there will be growth in the economy. The growth in the economy can lead to higher spending on imports, worsening our current account balance.

Includes dividends, interest, profit transmitted between countries.

Balance on goods, services, income, and current transfers.

Inflow of capital minus outflow of capital

Foreign investment in New Zealand minus New Zealand investment abroad.

Ratio of export price index to import price index, expressed as an index relative to a base year.

Export price index over import price index times 1000

Depends on relative movements of export prices to import prices. A numerical increase is deemed favourable. A numerical decrease is deemed unfavourable.

Recognising that the terms of trade is concerned with the price of exports and imports, while the balance on the current account is concerned with the value of and volumes e.g. terms of may be improving, but, if export receipts are less than import payments the balance on the current account may deteriorate.

Price at which one currency exchanges for another

A measure of the value of New Zealand dollar in terms of a weighted average of the currencies of our major trading partners.

Price of the New Zealand Dollar rises in terms of another currency.

Price of the New Zealand Dollar falls in terms of another currency.

The New Zealand dollar is worth more so that New Zealand made goods and services cost more and become less competitive overseas. Exports are likely to decrease. Imports will cost less so are likely to increase.

Tourists coming to New Zealand, Foreign firms investing in New Zealand or buying New Zealand made goods and services.

New Zealanders travelling overseas, New Zealand firms seeking to invest overseas or buying foreign made goods and services

When interest rates are relatively high in New Zealand then overseas investors will see New Zealand as an attractive place to invest The demand for the New Zealand dollar increases and the dollar will appreciate. New Zealand investors will see New Zealand as a good place to keep their funds. The supply of the New Zealand dollar will decrease, causing the dollar to appreciate. Both result in greater quantity of capital flowing into New Zealand rather than out, compared with previously.

Involves changes in government spending and income (taxes) in order to influence the level of economic activity.

Budget Surplus – Government income is greater than its spending. It will involve increasing direct and indirect tax or reducing government spending and/or reducing transfer payment. AD will shift to the left and the level of economic activity will decrease.

Budget Deficit – Government spending is more then its income. It will involve decreasing direct and indirect payments and/or increasing transfer payments. AD will shift to the right and the level of economic activity will increase.

Once debt is at prudent levels government must maintain, on average and operating balance. The government is required to achieve and maintain levels of net worth as a buffer against possible future adverse events such as demographic changes or economic events.

A public document that outlines the acceptable boundaries of inflation which is currently between 1% and 3% on average over the medium term.