AD&AS
Definition of AD&AS
AD: The total spending on an economy’s goods and services at a given price level in a given time period. AS:
The total output (real GDP) that producers in an economy are willing and able to supply at a given price level in a given time period
The formula for calculating unemployment rate
Unemployment people/labor force
Definition of inflation
Inflation is the sustained rise in price level over a period of time
Definition of economic growth
Inflation is the sustained rise in price level over a period of time
Definitions of closed and open economy
Open economy: an economy that is involved in trade with other economies. Closed economy: an economy that does not trade with other economies.
Components of aggregate demand
Consumption
Investment
Government spending
Net export
Types of unemployment
Frictional unemployment
Structural unemployment
Cyclical unemployment
How to calculate inflation
(CPI this year—CPI last year)/CPI last year x100%
How to calculate real GDP
(money GDP X price index in base year)/price index in current year
How to calculate GDP deflator
National GDP/Real GDPX100%
Specific measures of expansionary policies(monetary policy and fiscal policy.
Monetary:interest rate decrease,exchange rate depreciate
Natural rate of unemployment may fall as a result of
■ an improvement in the education and training levels of workers
■ a reduction in trade union restrictive practices
■ a reduction in state unemployment benefits
■ a cut in income tax.
Types of inflation
Mild/Creeping inflation
Deflation
Disinflation
Definition actual and potential economic growth
Actual:It can be achieved as the result of utilization of existing resources
Potential:An increase in the productive capacity of the economy
Components of injections and leakages
Injection:Investment + government spending+ export Leakages:saving + taxation+ import
The reasons of SRAS shift
Cost of production—raw materials/wage↑
Difficulties of measuring unemployment
Labor force survey
claimant count
Costs of inflation
Menu/Shoe-leather costs
redistribution of incomes
discouragement of investment
Benefits of economic growth
1. consumer/ labor - employment increase- higher income
2. producer- higher income to buy products- more revenue to invest in technology and innovation
3. government- tax revenue increase/ unemployment benefit decrease- government budget surplus
4. net export- high quality/ quantity to export- higher export revenue- current account surplus
5. deflation- cost of living decreases which is caused by increase AS
The ways of measuring real GDP
The output approach
The income approach
The expenditure approach
The reasons of LRAS shift
2. Specialization 3. Continuous increase in FOP (land/ labor) 4. Technology and innovation 5. Improvement of infrastructure
The consequences of unemployment
1.Workers who lose their jobs are likely to experience a fall in income.
2.They may also experience a decline in their physical and mental well-being
3.Firms may also benefit from workers not pressing for wage rises for fear of losing their jobs
Benefits of inflation
Stimulate outputs
reduces the burden of debt
Costs of economic growth
labor- long working hours- heavy pressure and anxiety
2. overexploitation of natural resources- pollution -negative externality
3. overproduction of demerit goods- negative externality
4. current account deficit- higher income -import expenditure increases
5. inflation- which is caused by increase AD - cost of living increase
How to calculate NNI and GNI
NNI=GNI-depreciation
GNI=GDP+net property income from board