Macroeconomics

3.2.2 & 3.2.4

Economic Growth

Increase in % of real gdp

GDP

total value of output being produced in a country in a given time

Nominal GDP

Total vaue output produced

Real GDP

Nominal GDP adjusted for inflation

Economic boom

real GDP growing at an unsustainable rate

recession

2 consequetive quaters (6 months) of -ve gdp growth

slump

sharp decline in real GDP

Causes of economic growth

short-run growth : increase in demand
long-run growth : increase in factors of production

consequence of boom

more jobs readily available
higher inflation rates

consequences of recession

higher unemployment
lower wages

rate of growth

(change in gdp / original gdp) x 100

Benefits of economic growth

- innovation
- higher output and productivity

Drawbacks of economic growth

- inflation risk
- market failure

Unemployment

willing and able to work at the going wage rate but can't find a job despite an active search

unemployment rate

(number of unemployed / work force) x 100

Claimant count

Those claiming job seekers allowance

labour force survey

sample of population used to analyse labour markets, etc.

Why control unemployment?

- impact on demand
- reduction in tax revenues

Seasonal

only unemployed for certain parts of the year eg. agriculture

Structural

Demand for labour is less than supply of labour in an individual labour market

Fricitional

In between jobs

Cyclical

Demand deficient unemployment (caused by recession)

consequences of unemployment for producers

loss of job security -> lower productivity
less spending by consumers -> fall in demand

consequences of unemployment for governments

less revenue in income tax and vat
more money put towards benefits

policies to reduce unemployment

Lower taxes
lower benefits
education

inflation

a persistent increase in the level of prices in an economy

CPI

measures changes in the cost of living of a typical household

Inflation rate

Annual percentage change in the CPI

Price stability

Low and stable inflation

What are the problems with the CPI ?

Changes in quality not taken into account
Changes in sending patterns (new product trends)
Special offers

Causes of inflation

Demand - pull (where demand increases)
Cost - push (when production costs are higher)

Costs of Inflation

Prices of g&s increases
Erodes wealth in cash & savings
G&s become more expensive therefore less internationally competitive

Menu cost

firms constantly changing prices

Balance of payments

record of the transactions between once country and the rest of the world over one year

Export

products sold to foreign market (inflow)

Import

products bought from foreign firms (outflow)

Current account

record of trade in g&s investment income and transfers

Deficit

imports > exports

surplus

imports < exports

Consequences of a current account deficit

Aggregate demand decreases
profit for uk firms decreases
government finances are affected

Benefits of current account deficit

More consumer choice
may help keep the inflation rate low

Consequences of a current account surplus

Could be a sign of low domestic spending
Higher share of output is exported than consumed

Benefits of a current account surplus

Accumulation of foreign assets
Job creation in the export sector

How to reduce Current Account deficit

Expenditure - switching more spending on domestic g&s (depreciation in exchange rates)
Supply - side businesses need to become more competitive (raise productivity)

Benefits of international trade

Opportunity to specialise
Decreased competition with other countries

Consequences of international trade

Economic dependence
Danger to International peace

Free trade

Countries and businesses can trade without any restrictions

Free trade agreements

No import tariffs on one country to another

Advantages of Free trade

Increase in output and Economic growth
specialisation

Disadvantages of free trade

Unemployment
Trade diversions (away from other countries outside the agreement)

Globalisation

Increasing interdependence of business and countries on each other

Main features of globalisation

Increase in transfers of capital (expansion of foreign direct investment by transactional companies)

Benefits of Globalisation
(developing)

Foreign imports allow cheaper products and more choice
FDI injection of money into the economy

Drawbacks of Globalisation
(developing)

Competition from the foreign imports
Exploiting the lack of regulation

Benefits of Globalisation
(developed)

Opportunities to sell abroad & business growth
Cheaper products

Drawbacks of globalisation
(developed)

More competition from abroad
Environmental damage

Moral considerations

Child labour
Materials used

Ethical consideration

Less regulation of environment

Sustainability considerations

Transport
Pollution and negative externalities linked to production

MNC

Multinational corporations that have business operations in at least one other country than its home

Exchange rates

shows the value of one currency in terms of another

Selling to customers (Exporting)

Exporters want the value to be weaker so the product is cheaper

Buying from producers (Importing)

Importers want the value to be stronger so that people will buy more

Causes for change in exchange rates

Demand (comes from those that want to buy UK goods so price increases)
Supply (comes from UK groups that want to exchange money for another currency to buy g&s)

Factors that influence demand and supply of £

Inflation
international competitiveness terms of trade

Income distribution

measure of how many people earn different levels of income in the economy

Causes for income inequality

difference in skills
technological advancements

wealth

stock of assets that have market value (Property, Shares)

income

flow of earnings (Salary, Interests)

Causes of Inequality

falling relative incomes for those that depend on benefits
type of work

Consequences of inequality

Unemployment
Strain on government services
Increase in poverty

Poverty trap

affects people with low income and creates a disincentive to find work

Advantages of income inequality

incentive
promotes efficient resource allocation

Disadvantages of income inequality

trickle down affect doesn't occur - money doesn't go to workers
increase in crime rate

overcoming income inequality

progressive taxation (more income you earn, the more tax you pay)
reducing unemployment (focusing on improving skills)

Fiscal policy

How the government influences the levels of economic activity through manipulation of government income and expenditure

4 biggest sectors of government spending

Other spending

Health and social care

Other public services

State pensions

Different sources of government income

Income tax

National insurance

VAT

Budget defecit

Government spending > total tax revenues

Government spending < total tax revenues

Other objectives of fiscal policy

Government spending can act as a supply side policy

Improve living standards

Microeconomic impacts

Government Income

Tax revenue

Sale of government services

Selling assets & reserves

Progressive taxation

The average rate of tax rises with income

Regressive taxation

Those on low incomes will pay a higher proportion of their income on tax

Proportional taxation

Tax rate will stay at the same proportion regardless of income levels

Net pay

gross pay - deductions

Direct taxes

Paid directly by the individual taxpayer

Tax liability

total amount of tax debt owed to the government by an individual

Indirect taxes

Tax imposed on goods and services rather than on income or profits

Advantages of Direct taxes

Promotes equality (everyone has to pay)

Promotes certainty (finalised before even paid)

Promotes elasticity (when taxes fluctuate, earnings fluctuate)

Advantages of using Indirect taxes

Correcting externalities

Less negative effect on work incentives

Less easy to avoid

Disadvantages of using Indirect taxes

Changing the pattern of demand

More unequal

Cost-push inflation

Boot-legging

General government expendinture

Capital and current spending of the central government including debt interests payments

General government final consumption

Spending on current goods and services excluding transfer payments

Transfer payments

From taxpayers to benefit claimants through the social security system

Advantages of a budget deficit

Could spend more on specific areas of economy

Could be a tool of management where it could increase demand in the economy

Disadvantages of a budget deficit

Financing a deficit (rapidly increasing interest)

Could lead to debt trap

Crowds out private financing

Advantages of budget surplus

Reduces levels of national debt

Reduces amount of debt interest payments future generations have to pay

Disadvantages of a budget surplus

Could mean excessive taxation

Reduces amount of money circulating throughout the economy

Disadvantages of using fiscal policy

Different types of lags (Response and imperfect information)

May end up decreasing aggregate demand because of the crowding out effect

Interest Rates

Effectively the rice or cost of borrowing money and the reward for saving