2.1 Macroeconomics

what are the four main objectives

High sustainable economic growth

low unemployment

low inflation

balanced current account

High sustainable economic growth

ideal is 2/2.5%

higher living standards

improved government finances

Low inflaton

Bank of England target is 2%

firms more likely to invest / makes firms competitive

price stability in the UK

Low unemployment

around 4% menas full capacity in the uk

less crime , less mental health issues

increased spending power for individuals

Balanced current account

for the uk this means reducing its current account deficit

country can afford to pay for the imports , a deficit means there is an outflow of money

Reduce Budget Deficit

Was a key objective of the conservative party 2010-2016

balance between tax revenues + government expenditure

Reduce inequality

Reduce child poverty wasa key pledge of Tony Blairs labour party from 1997

Environmental concerns

sustainable growth

preserving the planet

not causinga climate catastrophe

define economic growth

economic growth is a measure of an increase in real gross domestic product (GDP)

how is economic growth measured

it is measured by a percentage change in real GDP per annum, it can be shown by a shift on a ppf

Distinguish between real and nominal

Nominal GDP is the money value of all goods and services provided in one year

Real GDP is the nominal GDP adjusted for inflation

Distinguish between total and per capita

Total GDP represents overall GDp for a country whilst GDP per capita is total GDP is divided by the number of people in a country

Distinguish between value and volume

Value-GDP adjusted for inflation it is the size of the basket of goods and real level of GDP

volume of output measures the number / amount of goods produced

distinguish between GNI and GDP

GNI (gross national income) received by a country both domestically and via net incomes overseas

How can GDP measure living standards

as it gives information about the size of an economy and how well it is performing

Problems using GDP to measure living standards

-risk of double counting

-informal activity black markets , illegal activity

-errors via data collection

-negative externalities are not included ( cost of air pollution , loss of biodiversity )

Define the term purchasing power parities

take into account the exchange rate and cost of living in each country

what is the purpose of purchasing power parities

to make meaningful comparisons about other countries living standards

How does the UK measure national wellbeing

by asking 4 questions

overall , how satisfied are you with your life

to what extent do you feel your life is worthwhile

how happy were you yesterday

how anxious were you yesterday

Inflation

is a sustained rise in the general price level , the persistent increase of prices in a economy in one year

deflation

is a sustained fall in the general price level , often a sign of stagnation in a economy - INFLATION RATE NEGATIVE

disinflation

is a fall in the rate at which the general price level is rising

3% to 2% still increasing just less rapidly

How is the rate of inflation measured using the Consumer Prices Index

The living costs and food survey collects data from 7000 households in the UK

a price survey is undertaken once a month about changes in price of the most commonly used goods and services

weights are assigned to each item the average household buys the weights reflect the proportion of income spent on each item in the average shopping basket

the price changes are multiplied by the weights to give a price index

the rate of inflation can be measured by calculating the percentage change over the consecutive years

Limitations of using the CPI to measure the rate of inflation

It does not include housing costs

Basket updates are too slow “once a year”

sampling issues inaccurate responses

some households may not reply

differences between the CPI and RPI

the RPI includes housing costs whereas the CPI does not it is also not as reliable as the CPI

how is demand pull inflation caused

occurs when aggregate demand (total demand) in the economy increases at a faster rate than aggregate supply

-decrease in interest rates

-increased government spending

-a rise in business and consumer confidence

how is cost push inflation caused

aggregate supply decreases , ie total costs of production increase

a rise in taxes on businesses

increased minimum wage

Unemployment is counted as

people of working age that are able to work and actively seeking work but do not have a job

Unemployment rate

unemployed / economically active (employed + unemployed) x 100

Labour force survery

40k households are surveyed

they record who is unemployed,employed and economically active

what are the issues with the labour force survey

sampling errors

disparity between unemployment

inactive groups

discouraged workers

Claimant count

who is claiming unemployment benefits

what are the issues with the claimant count

difficult to compare between countries

not all claim and not all can

subject to fraud

the 4 components of the current account on the balance of payments

the trade in goods balance

the trade in services balance

the primary balance

the secondary balance

explain what is meant by current account surpluses and current account deficits

surplus - implies that a country’s current account is positive more money is flowing in than out

deficit - implies that a country’s current account is negative,more money is flowing out than in

what is meant by the current account

the current account records payments for transactions between countries in the present year

real income

Real income is the income of an individual or group after adjusting for inflation, reflecting the actual purchasing power.

causes of current account deficit

High rate of inflation relative to other countries

there is a high rate of economic growth in a country , people have higher incomes and tend to buy more imports from abroad

causes of a current account surplus

there is a low rate of inflation relative to other countries

there are low wage costs relative to other countries

the currency is too weak relative to other countries

Why might GDP per capita not reflect living standards?

GDP per capita doesn’t account for income inequality, non-market activity (like unpaid work), or quality of life (e.g. health, education, environment).
💡 Even if GDP is high, most people could still be poor if wealth is unevenly distributed.

how can real incomes influence a current account balance

1. Increased Imports: Higher incomes lead to more spending on imports, which can worsen the current account balance.

2. Export Competitiveness: Better income can boost domestic production, improving export quality and potentially enhancing the balance.

3. Investment Flows: Rising incomes may lead to more investments abroad, affecting the balance negatively.

4. Tourism Spending: Higher incomes can increase spending on foreign travel, which can also impact the current account negatively.

how can exchange rates influence a current account

1. Import Costs: Weaker currency raises import prices, reducing demand.

2. Export Competitiveness: Weaker currency lowers export prices, boosting demand.

3. Capital Flows: Exchange rate changes can affect foreign investment.

state of world economy how does it influence current account

1. Global Demand: Strong global growth increases demand for exports, improving the current account.

2. Commodity Prices: Changes in commodity prices can affect export revenues and import costs.

3. Investment Flows: Economic conditions can impact foreign investment, affecting income flows in the current account

how can protectionism influence the current account

1. Reducing Imports: Tariffs and quotas limit foreign goods, potentially improving the current account.

2. Encouraging Domestic Production: Protectionist measures can boost local industries, increasing exports.

3. Retaliation Risks: Other countries may respond with their own tariffs, which could harm exports.

how do non price factors influence the current account

1. Quality of Goods: High-quality products can boost exports regardless of price.

2. Consumer Preferences: Brand loyalty and trends can affect demand for imports and exports.

3. Trade Agreements: Favorable trade deals can enhance export opportunities and reduce import barriers.

real gdp

- Real GDP measures the value of all goods and services produced in a country.

- It is adjusted for inflation, providing a more accurate reflection of economic output.

- Allows for comparisons over time by removing the effects of price changes.

define the term gross domestic product

- GDP is the total value of goods and services produced in a country.

- It measures economic activity.

- Calculated using production, income, or expenditure approaches.

- Used for comparing economic performance.

gross national income

- Gross National Income (GNI) is the total income of a country's residents and businesses.

- It includes income earned abroad.

- GNI equals GDP plus net income from abroad.

real gross domestic product

- Real GDP is the value of goods and services produced, adjusted for inflation.

cause of inflation

- Increased demand

- Rising production costs

- Expansionary monetary policy

- Supply chain disruptions

- Expectations of future inflation

economic effects of inflation

- Less purchasing power: Money buys less.

- Higher living costs: Essentials become more expensive.

- Economic uncertainty: Businesses hesitate to invest.

- Rising interest rates: Central banks may increase rates.

- Wage demands: Workers ask for higher pay.

Demand pull inflation

Demand-pull inflation is caused by more…

more spending:

• Consumer spending

• Business investment

• Government spending

• Net exports (spending by foreign consumers)

Cost push inflation