Macroeconomics (2+4)

What is economic growth?

Increase in the potential output of an economy or in the real value of goods & services produced, measured by the % change in real GDP

What is gross domestic product (GDP)?

Measures the value of real output of the economy over a period of time; a rise in GDP indicates economic growth

What is nominal GDP?

The monetary value of all goods and services produced in the economy (GDP at current prices)

What is real GDP?

The nominal value of GDP adjusted for inflation (GDP at constant prices)

How do you calculate the real GDP?

(Nominal GDP/inflation index) x 100

What does ‘real’ mean in economics?

Adjusted for inflation, to show the true purchasing power or volume.

What is real GDP per capita?

National income per person often used a proxy measure for the standard of living

What is the difference between value and volume

The value of goods and services shows what they are worth; the volume shows the number that are produced

What is GDP?

Value of national output produced in an economy

What is gross national product (GNP)?

GDP + net property income from abroad

What is gross national income (GNI)?

Similar to GNP = final value of income flowing to a country's owned factors of production in a given year GNI = Gross Domestic Product + net income from abroad of compensation of employees and property income

What is purchasing power parity (PPP)?

PPP is calculated by comparing the price of a basket of comparable goods and services in different countries

PPP measures the total amount of goods and services that a single unit of a country's currency can buy in another country

PPP is used when assessing relative living standards between countries

What is the standard of living?

A measure of economic welfare and wellbeing. While more income typically increases the standard of living the relationship is not exact

What is the difference between real and per capita?

Real - takes inflation into account

Per Capita - takes population change into account

What is subjective happiness?

Refers to 'self-reported' levels of happiness with one's life, usually determined using questionnaires which consider emotions, rather than asking about material wellbeing

What factors affect your happiness?

Your personality and genetics

Social influences (e.g. friends)

Income and wealth (to a smaller degree than you might expect)

Health, and leisure time

What is the Easterlin Paradox?

Life satisfaction; beyond action does rise with average incomes but only up to a point that the marginal gain in happiness declines

What does HDI look at?

Health - life expectancy at birth

Education - mean years of schooling of adults and expected years of schooling of children

Living standards - GNI per capita

What are the advantages of using HDI?

Broader measure; better measure of development; better measure of standard of living and wellbeing

What are the disadvantages of using HDI?

Still does not take all aspects of wellbeing into account; weighting of the three categories is arbitrary

What are other measures of living standards?

Happy Planet Index

The Social Progress Index

The ONS Well-being dashboard

OECD Better Life Index

What is inflation?

A sustained increase in the general price level

What is deflation?

A sustained decrease in the general price level

What is disinflation?

A reduction in the rate of inflation (the inflation rate falls but the price level is still rising, but at a slower rate)

What is cost-of-living?

A measure of changes in the average cost for a household of buying a basket of different goods and services

What is meant by the inflation target?

A target set by the government which the central bank should aim to achieve eg in UK it is CPI inflation = 2% +/- 1% point

What is CPIH?

Similar to CPI but also monitors owner occupier housing costs (OOH), in its basket. These are the costs associated with owning, maintaining and living in one's own home

What is RPI?

The basket of goods/services includes some items not in the CPI, such as council tax & mortgage interest payments; it is often used to calculate increases in welfare benefits, pensions, index-linked bonds and wage negotiations; in a period of rising interest rates it typically gives a higher rate of inflation than the CPI

What is 'core' inflation?

Sustained increase in prices of goods in the basket, excluding goods such as energy, food, alcohol and tobacco which can have volatile prices

What are the limitations of the CPI inflation measure?

CPI inflation is only calculated for an 'average' family It does not consider quality of goods/services

Needs regular updating to reflect changes in patterns of spending

International comparisons may not be accurate if other countries do not calculate inflation in the same way

What are the shoe leather costs?

Costs of shopping around when prices change rapidly

What are menu costs?

Costs of redoing menus, parking changes, price labels & lists

How does inflation affect real incomes?

If wages do not keep pace with prices, real income falls

How does inflation affect uncertainty?

Consumers and businesses may reduce their spending causing unemployment and weaker growth

How does inflation affect re distributional effects?

Savers get a lower real rate of return, those on fixed incomes lose out, workers in the gig economy may not be able to negotiate real wage increases; fiscal drag increase tax paid if thresholds are frozen

How does inflation affect international competitiveness?

There is a loss. Weaker current account on the Balance of Payments as exports become relatively more expensive and imports relatively cheaper

How does inflation affect expectations?

There is an increase in inflation expectations. People will aim for bigger pay rises if they expect higher inflation, which can add to business costs and prices

How does inflation affect wages?

There is the danger of a wage-price spiral if workers demand big pay rises

What are the benefits of a low rate of inflation.

A low but steady rate implies aggregate demand is running ahead of aggregate supply, incentivising business investment and growth

Reduces the real value of debt

Allows negative interest rates

Helps labour markets work more efficiently without a need to cut nominal wages because real wages can fall

Makes malign deflation less likely

What is demand-pull inflation?

Inflation caused by excess AD in the economy

What are some causes of demand-pull inflation?

Lower interest rates

Lower income tax

Rapid income growth

High consumer confidence

Positive wealth effects

Easy credit (cheap and accessible credit) Depreciation of the currency

What is cost-push inflation?

Inflation caused by increases in the costs of production in the economy

What are some causes of cost-push inflation?

Rapid wage rises/higher labour costs

Skill shortages

Increasing input costs (raw material, energy)

Higher commodity prices

Food price inflation

Indirect tax rises

Depreciation of currency (imported inflation)

What is demand-side deflation?

Deflation caused by a lack of AD in the economy?

What is supply-side deflation?

Deflation caused by an increase in short run aggregate supply

What are the costs of deflation?

Lower AD causes over supply

Lower prices for goods and services cuts cash flow and profits for businesses; consumers may delay their spending; businesses may cut investment

Businesses reduce production; cyclical unemployment rises

Rise in real value of debt

Real interest rates may rise reducing consumption and investment

What are some causes of 'malign' deflation?

Negative demand shock (eg credit crunch in global financial crisis 2008-9)

Global recession

Appreciation of currency causing fall in net exports Falling asset prices (negative wealth effect) Contractionary fiscal and/or monetary policy

What are some causes of 'benign' deflation?

Technological advances

Improvements in productivity

Falling price of commodity prices

Falling price of energy prices Globalisation/economies of scale

Cheaper/more skilled labour (perhaps from immigration)

What are some benefits of deflation?

Falling prices for consumers

Increase in real incomes

Increased spending power for those on fixed incomes

Improved international competitiveness

Falling asset prices make housing more affordable for first time buyers

What is the working population?

The total number of individuals who are of working age, typically considered to be those who are capable of and available for work. It includes both employed and unemployed individuals

What is the labour force?

Those who are either employed or actively seeking employment. It is a subset of the working population and represents the pool of people available for and actively engaged in productive work

What is economic inactivity?

Not being engaged in the labour force, includes pensioners, students, homemakers, discouraged workers and others who are neither employed nor actively seeking employment

What is the labour force participation rate?

Workers in the labour force compared to the number of people in the working population

What is the employment rate?

The proportion of people of working age who are in employment (employees, self-employed, full time & part time)

What is meant by unemployed?

Someone of working age, willing and able to work, Gig economy and actively seeking work, but cannot find a job

What is the unemployment rate?

The percentage of the labour force that are unemployed (NB the labour force includes those in work and the unemployed)

What is the Labour Force Survey?

This survey asks 60-70,000 UK households to selfclassify as being employed, unemployed or economically inactive

What is the Claimant Count?

This counts the total number of recipients of Job Seeker's Allowance (JSA) added to those looking for work to claim Universal Credit (UC)

What is regional unemployment?

Unemployment rate varies across regions

What is long term unemployment?

People unemployed for over 12 months

What is mass unemployment?

1 in 10 of the labour force are unemployed

What is youth unemployment?

Unemployment rate (the proportion of the economically active population who are unemployed) for all 16 to 24 year-olds

What are discouraged workers?

inactive work-seekers who have ceased to seek work because they believe there are no suitable available jobs

What is hidden unemployment?

People who do not work but who are not counted in government reports, for example, people who have stopped looking for a job and people who work less than they want to

What is underemployment?

Where individuals are employed, but their employment is insufficient in terms of hours worked, skill utilisation, or income to fully meet their economic needs or potential

What is the gig economy?

A work arrangement where people perform short-term, flexible, and often freelance work, typically through online platforms or apps. It is linked to zero-hour contracts

What is technological unemployment?

The displacement of human workers by machines, automation, and technology

What is frictional unemployment?

Short-term unemployment caused by people moving between jobs, moving to a new location, or re-entering the workforce after a break

What is cyclical unemployment?

The unemployment rate rises during an economic downturn; it is caused by fluctuations in the business cycle. Sometimes called demand-deficient unemployment

What is structural unemployment?

Caused by changes in the economy, like the decline of certain industries or the rise of automation. It happens when there's a mismatch between the skills & location of workers and the needs of employers. A lack of geographical and occupational mobility of labour contributes

What is seasonal unemployment?

Seasonal workers, such as construction workers, retail assistants, might be without paid jobs due to the time of year when there is less need for their work

What is real wage unemployment?

Caused by wages being too high relative to the productivity of workers; minimum wages and trade union activity can push the wage above its market equilibrium

How is full employment achieved?

An absence of cyclical unemployment (the output gap is closed)

Number of job vacancies = number of people actively seeking work

What are some benefits of unemployment?

Reduced risk of inflation - lower wage demands & price discounts

Pool of unemployed available for growing businesses

Increase in self-employment start-ups, more entrepreneurs/innovation

What is the balance of payments?

A record of all the flows of money between the residents of one country and the rest of the world

What are imports?

An overseas produced good/service purchased by UK citizens resulting in an outflow of income from the UK

What are exports?

A UK produced good/service sold overseas resulting in an inflow of income into the UK

What is the current account on the balance of payments?

The section of the balance of payments that records international trade in goods, services, primary income & secondary income

What is the balance of trade in goods and services?

The value of exports of goods & services minus the value of imports of goods and services. If this is positive, there is a trade surplus, if it is negative there is a trade deficit

What are some examples of trade in goods?

Oil, energy, raw materials, food, manufactures, semi manufactures, components, capital goods etc

What are some examples of trade in services?

Finance, insurance, business services, consulting, travel/tourism, telecommunication and information etc

What are some examples of primary income?

The inflow of interest, profits and dividends on UK assets held abroad, less the outflow of interest, profits and dividends of foreign-owned assets in the UK

What are some examples of secondary income?

Net current transfers between countries such as foreign aid, gifts, payments to and from EU (due as part of the TCA)

What is the current account balanace?

The value of exports less the value of imports for goods, services, primary and secondary income

What are some cyclical causes of a current account deficit?

Overvalued exchange rate

Boom in domestic demand

Recession in key export industries

Slump in global prices of exports

Increased demand for imported technology

Increase in global energy/commodity prices (for net importers)

What are some structural causes of a current account deficit?

Under-investment

Relatively low productivity

Persistently high relative inflation

Inadequate R&D, innovation

Emergence of low-cost competition (emerging markets)

Increase in global energy/commodity prices (for net exporter)

What does it mean if a country is running a current account deficit?

Suggests a lack of international competitiveness/supply-side weakness

Withdrawal from the circular flow (X

What is aggregate demand?

C+I+G+(X-M)

What is C?

Consumer spending on real output; spending on non durables, durables & services; the largest component of AD, usually about 60%

What is I?

Spending on capital goods; spending on plant, equipment etc. That help produce more consumer goods in future; investment demand comes from both private and public sector

What is G?

Spending by the government on its current day-to-day provision of public services such as healthcare, education, defence and transport. Does not include transfer payments (pensions and welfare benefits)

What is X-M?

Exports X are an inflow of demand from citizens abroad (inflow); imports M refers to domestic demand for foreign-produced goods (outflow)

Which factors influence C?

Income

Wealth effect

Consumer confidence

Job security

Interest rates

Demography: a growing population (e.g. immigration) spending more

What are the benefits of rising C?

Rising AD

Faster short run economic growth

Less spare capacity

Falling unemployment

Gives businesses confidence to invest

What are the costs of rising C?

Inflation pressure

Current account deficit (more imports sucked in)

Unbalanced growth

More household debt

Could be bad for environment

What is the savings ratio?

Total household savings / Total household disposable income

What is the Keynesian Paradox of Thrift?

Economic theory which states that an increase in saving can lead to a decrease in economic activity and, ironically, a decrease in overall saving

What is the formula for average propensity to consume?

C/Y - y is national income

What is the formula for marginal propensity to consume?

ΔC/ΔY - y is national income

What is the formula for average propensity to save?

S/Y - y is national income