1
Q
Economics =
A
The allocation of scarce resources
2
Q
Micro economics
A
- Individuals and firms
- Demand, supply, markets
- Firms, employers, employees, individuals
3
Q
Macro economics:
A
- the whole economy
- inflation, unemployment, economic growth
- government
4
Q
Macro economics is made up of:
A
Production
Consumption
Income
5
Q
Circular Flow of Money
A
- Housholds spend income with businesses
- businesses provide income to households
- households provide labour to businesses
- businesses provide goods and services to households
6
Q
Aggregate Demand
A
Is the total size of the economy = the total spending of all households in a period of time
7
Q
Withdrawals in the circular flow on money:
(Make the economy smaller)
A
- savings
- profits
- taxes
- imports
Money being taken out of the economic flow of funds
8
Q
Injections into the circular flow of funds (makes the economy bigger)
A
- Borrowing
- government spending
- exports
9
Q
Grow the economy:
A
- increase injections (eg government spending)
- reduce withdrawals (eg savings)
10
Q
Slow economic growth
A
- reduce injections
- increase withdrawals (eg increase taxation)
11
Q
Saving
A
Is a withdrawal
Any amount or money that is not being spent
12
Q
6 factors affecting savings:
A
- interest rate
- job security
- availability of credit (eg. access to credit cards)
- contractual saving (eg. Pension scheme)
- tax relief
- inflation
13
Q
2 Types of investments
A
This is an injection:
1. Capital items
2. Increase in inventory
14
Q
5 factors affecting investments:
A
- new or replacement investment
- expected future returns
- business confidence
- interest rates (low interest rates means saving is not interesting, so will encourage investment)
- government policy
15
Q
Net investment =
A
New investment - replacement investment
16
Q
Factors that help grow the economy:
A
- encourage borrowing
- reduce interest rates
- reduce government regulation on borrowing
- make it easier for banks to lend
17
Q
Slowing economic growth:
A
- increase interest rates, to encourage people to save
- make borrowing more difficult, high rates
18
Q
Savings - factors affecting saving
A
- type of withdrawal
Factors:
- interest rates
- income
- job security - confidence
- availability of credit
- contractual saving
- tax relief
- inflation
19
Q
Inflation
A
When you can buy fewer goods than before.
20
Q
Real value of your money
A
It means that inflation causes prices to go up.
So you can buy less with your money.
21
Q
Investment - examples
A
- it’s an injection
Examples:
- increase in inventory or capital items
22
Q
Factors affecting investment:
A
- Government policy
- new or replacement investment
- expected future returns
- business confidence
- interest rates
23
Q
Net investment =
A
New investment - replacement investment
24
Q
Grow the economy:
A
- Increase injections
- encourage borrowing
- discourage savings
- encourage spending
- reduce interest rates
25
Slow economic growth
- increase withdrawals
- discourage investments
- discourage borrowing
- increase interest rates
- encourage savings
26
Monetary policy =
One approach to managing an economy by a government:
- increase or reduce interest rates
- make lending easier or harder
- buying and selling currencies to change FX rates.
- imposing or removing trade barriers
27
If interest rates increase:
- decreased investment
- borrowing more expensive and decreases
- attraction of foreign funds
- effects on the exchange rate
- inflow of foreign funds, leads to increased demand for the currency
- lead to decreased inflation rate
- decrease in asset value
- affect on sales; sales for which the consumer needs to borrow will fall
28
Import leads to the payment:
- leaving the country
- withdrawal
29
Export leads to payment:
- coming into the economy
- it’s an injection
30
Balance of payments:
- Imports and exports go through this.
= difference between the value of imports and exports
31
3 types of accounts on balance of payment:
- current account
- capital account
- financial account
32
What’s included on the current account of the balance of payment:
- visible trade: goods
- invisible trade: services, overseas income, transfer of money from abroad
33
What’s included on the Capital Account on the Balance of Payments:
- buying and selling of fixed assets (for example buying machinery abroad)
34
What’s included on the Financial Account on the Balance of Payment:
- overseas investment (buying shares overseas, setting up a factory abroad)
- Reserve assets (gold and foreign currencies held by the government)
- A balancing item
35
Balancing item on the balance of payments:
Current account + capital account + financial account = ZERO
36
When exports > imports
Surplus on the balance of payments
37
When imports > exports
Outflow if funds; deficit on the balance of payments
38
Imbalance in the current account of the balance of payments:
- import penetration
- export performance
39
Reasons for import penetration:
- exchange rate makes overseas products appear cheaper
- imports are more competitive on price
- imports being more competitive on non-price factors
40
Reasons for export performance:
- the exchange rate
- price and non-price competitiveness against exports
- willingness and ability of domestic producers to export
41
How does a government manage the Imbalance in the current account on the balance of payments
- do nothing
- actively affect exchange rates
- introduce trade barriers
42
When a government does nothing to change the imbalance on the current account on the balance of payments:
- exports are smaller, imports are bigger
- more payments leaving the country
- demand for the currency falls
- price of the currency falls
- imports will start to appear dearer
- exports start to appear cheaper
Leads to an Equilibrium
43
How governments affect the exchange rate of their currency:
- buying foreign currency:
For example:
- China bought lots of USD to keep their own currency cheap, this increased their exports, which lead to money coming into the country and growing the economy.
44
Examples of trade barriers:
- High tariffs to import goods
- introduce quotas
45
Narrow money =
M0 - notes and coins in use and amounts within accounts held at the central bank
46
Broad money =
M4 - Notes and coins within circulations and all private sector bank accounts
47
Consumption =
The amount of goods and services demanded in the economy
48
Factors affecting consumption =
- income
- previous or future pay; some people start consuming more when they know their income is going to increase.
- windfall gains or losses (winnings, gifts, inheritance v. Fraud and burglary)
- Government policy, like monetary policy and fiscal policy
49
MPC =
Marginal Propensity to Consume =
Change in consumption / change in income
50
Wealth =
Market value of all assets - any money owed
CIMA - BA1
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