Macroeconomics definitions

6 economic macro objectives

• Low and stable inflation

• Low unemployment

• Sustained economic growth

• Balance betqeen imports and exports

• Equitable distribution of income

• Environmental sustainability

Inflation

An increase in the average price level over a period of time

Deflation

A sustained reduction in the average price level over a period of time

Disinflation

A fall in the rate of inflation from one time period to the next

‘Real‘

When prices are put into real terms, so inflation is taken into account.

‘Nominal‘

The money value of an economic variable, before it has been adjusted to inflation

Unemployment

People of working age who are willing and able to work, are actively seeking work at current wage rates and are currently not working.

Labour force

People of working age who are either employed or seeking employment in a country

Structural unemployment

Unemployment caused by a change in the demand for skills as the nature of the economy changes, so there is a mismatch between the skills of the unemployed and available jobs.

Three types of structural unemployment

• Geographical

• Sectorial

• Technological

Geographical unemployment

There is work but not within commuting distance

Sectorial unemployment

When there is mismatch between the skills of labour force and the available jobs.

Techonlogical unemployment

When techonolical advancements reduce workforce and replace jobs.

Example of geographical unemployment

• Post war, North tends to be at full empoyment whereas the South has suffered unemployment

• Less job opportunities in Delemont compared to Basel

Example of sectorial unemployment

1973 deindustrialization leads to skilled workers unemployment, as they ned to retrain and adapt.

Example of techonological unemployment

Printers or bank cashiers

Frictional unemployment

Short term unemployment as a result of people in between jobs

Seasonal unemployment

Unemployment in industries where labour demand is lower at certain times of the year

Natural rate of unemployment

The unemployment that remains when equilibrium real output if at full employment

Cyclical unemployment

Unemployment which results when there is insufficient demand, so in recessions.

GDP

Gross Domestic Product is the value of all final goods and services produced in a country at a given time

GNI

Gross National Income is the market value of all goods and services produced by the labour and capital supplied by the residents of the country in a given time period.

GDP formula

GDP = C + I + G + X - M

GNI formula

GNI = GDP + net income from abroad

NNP

Net National Product is the market value of all products produced by the labour and capital supplied by the residents of the country without depriciation of capital good

NNP formula

NNP = GNI - depriciation

GVA

GDP minus indirect taxes, so at true value produced

GVA formula

GVA = GDP - indirect taxes

GDP deflator

It’s a measure of inflation, used to deflate GDP to real prices

Recession

Two consecutive quarters of falling ouput in the economy of a country

Boom

The peak of a business cycle, right before a recession

Recovery

It’s an increase in the GDP from a recessionary level to match the level of ouput produced before the recession.

Trend rate of growth

It measures the economic growth in relation to GDP from one period to another adjusted to inflation

Aggregate Demand

It’s the total demand for a nation’s goods and services from all sectors of an economy.

Aggregate demand formula

AD = C + I + G + X - M

Interest rates

The cost of borrowing money. It’s the percentage of money paid by borrowers for the use of money.

Forward indicators

Indicators that predict inflation in the future.

Leakages

Money that doesn’t re-enter the economy in terms of circular flow.

Full employment

Where increasing output beyond this point only results in inflation.

‘Sticky downards‘

Keynesian concept that prices are slow to fall in recessions because households do not easily accept lower factors of incomes

Monetary policy

A set of official policies governing intrest rates and money supply which are used by the central bank to affect AD.

Fiscal policy

A set of discretionary government policies relating to taxation rates and governemnt spending which are used to affect AD.

Time lags

The time it takes for a monetary policy to take effect. 6-18 months

Target inflation

2%

Disposable income

The remaining income of households after income tax has been collected

Discretionary income

Amount of income after income tax and spending on necessities that househlds can choose to spend how they want.

Supply side policies

Government policies that increase the amount of supply that is capable of being produced in the long run.

Morgtages

Loans secured against properties.

Interventionist supply side policies

When the government intervenes to create a shift in supply

Example of interventionist supply side policies

Worker training, education, investment in new technologies

Automatic stabilizers

Income taxes and welfare spending used to regulate fluctuations in real GDP.

CPI

Consumer Price Index measures the average prices of an economy and expresses them as an index number.

Financial crowding out

Economic theory arguing that rising public sector spending drives down private sector spending.

Hot money

Cash that foreign investors invest in short term to search for highest interest rates possible

Substitute effect

When the price of a good increases, consumers will switch to substitutes

Wealth effect

Rising wealth has a positive impact on consumer spending

Income effects

Increase in the price of a good decreases the consumer’s discretionary income, so spending decreases.

Price effect

Impact that an event has on the price of a good.

Money illusion

The belief that money has a fixed value

Productivity

The ration between the ouput volume and the volume of inputs

Deficit

When expenditures exceed revenue

Debt

The amount of money owed by a person, firm or government to a lender

Surplus

The oversupply of a good

CPI inflation

The sustained increase in CPI over time

Demand-pull inflation

When there is a sustained increase in prices caused by a an excess of aggregate demand over aggregate supply. (When AD shifts right)

Cost-push inflation

When there is a sustained price increase because production costs increase. (Supply shifts to the left)

Inflationary gap

When eq. RO > YF, causing inflationary pressure

Deflationary gap

When eq. RO < FY, causing deflationary pressure

Trough

The turning point in an economy between a recession and a recovery.

Market forward indicators

• Reduction in unemployment

• Rise in overtime working

• Rise in wages

Firms forward indicators

• Purchasing Managers index

• Inventory levels

• Stock levels

Households forward indicators

• Consumer Confidence Survey

• House prices

• Stock markets

5 sector model

Inflationary gap

Deflationary gap

Interest rate RWE

US 2024 5.5%

Fiscal policy RWE

• 2009 “Car scrappage scheme“ in Germany and UK. Gave 1000/2000£ to help purchase new car

• 2008 USA govt gives $152 billion in tax cuts to poor & middle income countries.