macroeconomics (3.3, 3.4)

economic growth

economic growth

increase in real GDP over time (most commonly two consecutive quarters)

sustained increase in potential productive capacity of an economy

expressed as annual percentage change in the value of real national output

(East China's Jiangxi Province has seen rapid economic development spurred by progress in the agriculture, trade and digital industries- 4.7% GDP growth, record high of over 3 trillion yuan)

negative economic growth

decline in level of economic activity

(recession)

(UK economy contracted by 0.1%, with construction, retail and hospitality the worst-affected sectors)

consequences of economic growth

higher standards of living (higher real income per capita = spending more money)

• reduced/eliminated absolute poverty

• new jobs= less unemployment

• increased consumer spending

• increased tax revenues

• inflation

• decline in international competitiveness

economic growth impact on the environment

negative externalities (environmental costs)

• air pollution,

• road congestion,

• climate change,

• land erosion

• loss of biodiversity

market failure caused by resource depletion (overfishing/deforestation) and ecosystem damage

economic growth impact on income distribution

greater disparities in the distribution of income/wealth

increased gap between the rich and poor

unemployment rate

measure of joblessness in a country

% of people in the labor force who actively seeking employment, but are not working

=(# unemployed/# in labor force) x100

(South Africa’s unemployment has continuously fallen it still sits at 32.7%)

(Qatar has an impressive 0.1% unemployment rate)

who is in the labor force?

• Above 16 years old

• Able and willing to work

• Not institutionalized (jails, hospitals)

• Not in military, in school full time, or retired

cyclical unemployment

caused by recessions

people don’t buy goods (no demand) so workers are laid off

(1/5 Australian workers are either underemployed or out of work due to low economic growth)

frictional unemployment

people who are temporarily between jobs

their skills are in demand

(10.75 million youths graduated, with “sluggish demand” for workers by enterprises, unemployment rates in the youth labour force in China rose significantly from 16% in March 2022 to 20% in July 2022)

seasonal unemployment

(frictional unemployment)

people who due to weather, etc. are not currently working

(Buffalo Niagara unemployment rate rose from 3.4% in December 2022 to 4.4% in January 2023 after the end of temporary holiday jobs, leaving a total of about 23,600 people unemployed)

structural unemployment

mismatches between job seekers and job openings

people lack the skills needed

(7.8% unemployment rate in India, employers report difficulty in finding workers with the right skills and qualifications, particularly in sectors such as IT and healthcare)

natural rate of unemployment or full employment rate

lowest possible unemployment with the economy growing (max potential)

all unemployment except cyclical

~5%

criticisms of unemployment rate

misdiagnosing actual unemployment rate because of

• discouraged workers (given up)

• underemployed workers (want more hours)

• race/age inequalities (disparity for minorities/teenagers)

labor force participation rate

percent of population in labor force

if people leave the labor force, unemployment falls

personal costs of unemployment

• stress/depression

• low self-esteem

• poverty (hunger, malnutrition, poor health, bankruptcy, homelessness)

• family breakdowns (arguments, separation, divorce)

social costs of unemployment

• crime and anti-social behavior (theft, alcoholism and vandalism)

• indebtedness (lower income)

• social deprivation (absolute poverty, falling house prices, increased crime rates)

economic costs of unemployment

• loss of GDP (fall in international competitiveness)

• loss of income for individuals (lower household income)

• loss of tax revenues (lower income/expenditure)

• increased costs of unemployment benefits (govt. spending on unemployment/welfare benefits)

• greater disparities in income distribution

overall costs of unemployment

• psychological costs

• social problems

• loss of household income

• higher govt. borrowing

• slower economic growth

• rising income and wealth inequalities

inflation

a rise in the general level of prices

reduces purchasing power

measuring inflation

govt. tracks prices of the same goods/services each year

• CPI

• inflation rate % (change in prices in one year)

• compare prices to a given base year

inflation rate %

(price yr2 - price yr1)/price y1

x100

consumer price index

price of a market basket (~300 goods purchased by a household of 4)

• base year is given an index of 100

• to compare, each year is given an index #

CPI= (price of market basket/ price of market basket in base year) x100

problems with CPI

substitution bias (as prices increase for the fixed market basket, consumers actually buy less of these products and more substitutes)

new products not included

product quality (ignores improvements/declines in product quality)

causes of too much inflation

govts. print more money to pay debts and result in hyperinflation

there are more “rich” people, but they have the same amount of products

banks refuse to lend, and GDP falls

(Venezuela had a 193% CPI in 2022, several years of large budget deficits and declining oil revenues)

demand pull theory

the demand for goods exceeds the existing supply

too much money = more consumer spending = shortages = rising price levels

cost push theory

higher production costs increase prices

ex: negative supply shock increases the costs of production, forcing producers to increase prices

is inflation good or bad?

high inflation is usually bad because banks don’t lend and people don’t save (decrease in investment and GDP)

hurt by inflation

• lenders (at fixed interest rates)

• people with fixed incomes

• savers

helped by inflation

• people who owe/borrow money

• business where the price of the product increases faster than the price of resources

consequences of inflation

• reduced purchasing power (the dollar buys less)

• income reduced (if fixed)

• savers lose money (slow interest rate changes)

deflation

fall in general price level (opposite of inflation)

(China CPI dropped by 0.8%)

disinflation

slowdown of the rate of inflation

costs of inflation

• increased cost of living

• deferred consumption/investment

• reduces international competitiveness

• erodes savings

• uncertainty

• menu and shoe-leather costs (increased costs of transactions caused by inflation, ex: real cost of changing a listed price)

low unemployment and low inflation

more people are employed = inflationary pressures

people have more money to spend

(AD increases faster than AS)

+harder to attract skilled labor = wage inflation

equity

economic fairness in the distribution of resources

ex: those with higher qualifications, skills and experience being paid more

the existence of justified inequalities

equality

everyone is paid/ receives the same so there are no inequalities

unequal distribution of income

imbalance in income distribution

very few members of society account for a disproportionately high concentration of the national income

(10% of South Africa’s population owns more than 80% of its wealth)

unequal distribution of wealth

wealth gap

assets, saving and investments that are spread between the citizens of a country

the lorenz curve

imagine if you

• line up all the families in an economy according to annual income

• divide families into 5 equal groups

• compute the share of total income that each group of families has received

the size of the curve shows the degree of income inequality

gini coefficient of the lorenz curve

a measure of inequality of a distribution

(0= total equality)

= (curve (banana))/all under the line of equality

poverty

condition of an individual, household, community or country being extremely poor, not being able to meet their basic human needs

poverty cycle

a vicious cycle of poverty/deprivation casing even greater poverty, from one generation to the next

• no basic education

• low income

• low savings

• low investment

• low productivity

• repeat

absolute poverty

people are deprived of basic human needs of survival

living below the international poverty line

relative poverty

individuals/households who are not able to earn the minimum amount of income needed to maintain the average standard of living in a community/country

international poverty line

minimal threshold level of income that a person must earn to have access to basic human needs

minimum income standard

lowest amount of income needed for what members of the public of a country deem acceptable to be able to live in a socially appropriate way

multidimensional poverty index

identifies numerous deficiencies of households based on the three dimensions of poverty

1. heath

2. education

3. standard of living

difficulties in measuring poverty

• the nature of low income is often ignored

• relative poverty is a highly subjective issue

• limitations to the purchasing power parity figures

causes of economic inequality and poverty

• inequality of opportunity

• resource ownership

• human capital

• discrimination

• unequal status and power

• govt. tax and benefts policies

• globalization ad technological change

• market-based supply-side policies

positive impact of income and wealth inequality on economic growth

• prospect of earning higher income can encourage people to invest in education and skills, improving labor productivity

• entrepreneurial instincts are encouraged

• greater incentives and wealth creation can lead to a higher savings ratio

negative impact of income and wealth inequality on economic growth

• more social tension

• govts. spending more on transfer payments

• discourage workers from joining the labor force and entrepreneurs from investing

impact of income and wealth inequality on standards of living

increase in real disposable income = increase in overall consumption

rich people spend afford a disproportionately larger amount on education, health and luxury goods, leading to greater disparities

impact of income and wealth inequality on social stability

equal countries:

• people trust each other and govt.

• citizens are involved in communities

• mutual empathy, goodwill and respect

unequal countries

• political/social unrest

• unattractive investment opportunities

• higher rates of crime and homicide

taxes

mandatory payments to the govt. to cover the costs of governing

• finance govt. operations (public goods, funding programs)

• influence economic behavior of firms/individuals

progressive tax

takes a larger percent of income from higher income groups

proportional tax

flat rate

takes the same percent of income from all income groups

regressive tax

takes a larger percentage from low income groups

direct tax

taxes imposed on personal income/wealth, or the profits of a firm

imposed directly on the person or firm

reduce the impact of poverty and inequalities

personal income tax

direct tax on wages, salaries, dividends, interest, and other income a person earns

corporate income tax

direct tax imposed by national/local authority on the profits of a firm

wealth tax

direct tax based on the market value of assets owned

indirect tax

govt. tax on consumption

policies to reduce income/wealth inequality and poverty

• investment in human capital

• transfer payments

• targeted spending on goods and services

• universal basic income

• minimum wages

• policies to reduce discrimination

• tax reforms

(Brazil women typically earn from 21-32% less than men in the same positions, president has signed a law “guaranteeing equal pay and remuneration for women and men, policy that reduces discrimination)