Economics 4.0-4.8 Macro

Local government role

• Public activities- provide g/s eg. public libraries, housing, public parks, hospitals, schools

• Collect taxes, toll charges, financial grants for budget

• Implement local budget- spent on welfare of local area

National government role

• Employs workers- Macro aim: increase employment levels

• Price controls and wages

• Training and pension schemes- increase productivity

• Essential public services where huge input costs are involved

• Provide merit goods- demand g/s from private sector.

Natural monopoly

Single firms that can produce for the entire market (rather than two or more smaller firms)

eg. utilities like water and electricity, railroads

Strategic industries

An industry needed to protect or feed the country.

eg military, agriculture

International government role

• International trade- economic growth and development

• Tariffs and quotas (trade restrictions)

• Trading bloc (Free trade policies to increase mobility of FoP)

5 macro aims of the government

1. Price stability - low and stable inflation

2. Low Unemployment

3. Economic growth- raise living standards and increase PP

4. Trade- balance of payments stability

5. Public Welfare - redistribution of income

Aggregate demand and how to measure it

Total quantity of goods and services that are demanded in an economy over a period of time at a given price level.

Increases whenever any one of the components increase, shifting to the right.

Aggregate supply

Total amount of goods and services produced in an economy over a period of time at a given price level.  

Long term causes of economic growth

• Discovery of natural resources

• Technological advancements - Increased productivity

• Population growth- expand labour force and increase AD

• Training and up-skilling - increase efficiency, more output with same inputs due to more skilled workforce

Productive capacity

the maximum potential output of goods and services an economy can produce when all its resources are fully employed

Short Term causes of economic growth

(Policies to promote economic growth)

• Expansionary Monetary policy: lower interest rates,

• Expansionary Fiscal policy: lower taxes, increase gov spending

• More infrastructure will lower costs for businesses and increase economic activity and efficiency

Limitations of demand side policy and

• Only effective if the economy has spare capacity.

• If taxes and interest rates are already low in the economy, there may be no room to reduce them further, impacting tax revenues.

• Recession: Consumer and business confidence is low

Spare capacity

Physical capital that businesses have which is not used in production; the unemployment of resources.

When the economy is not working at full potential and all factors of production are not fully employed.

Benefits of economic growth

• Increase in employment as demand and output increases (derived demand)

• Increased income—> more tax revenue —> government provide public goods eg healthcare and education—> increased life expectancy

• Increased tax revenue—> gov help redistribute income—> reduced poverty levels

• Stable price levels as increased output can match increased demand created in economy

• Increase in exports as more businesses are attracted to invest in high EG countries, bringing more export revenue

Costs of economic growth

• Destroys environment by depleting natural resources - deforestation, pollution decreases non-material SOL

• Higher income inequality- skilled workers have higher demand but low skilled will not.

• Inflation: more employment—> increases AD for g/s—> prices of g/s increasing in the market—> if no increase in AS—> demand pull inflation

• Gov in debt: lower tax and higher spending (fiscal) causes budget deficit.

Causes of recession: Demand side shocks

Sudden changes that increase or decrease demand for goods or services in the economy in the short term. 

Falling consumer and business confidence: not optimistic about the future

Higher interest rates: disincentive to firms and consumers to borrow money

Increased rates of unemployment: low profits lead to businesses cutting wages or laying off workers.

Causes of recession: Supply side shocks

Sudden and unexpected changes in the cost of factor inputs, such as oil prices, commodity prices or wages.

Bad weather: poor harvest, more exp to buy raw materials

Worker strikes: lower productivity and industrial halts

Consequences of recession

• High unemployment: increased gov spending to provide unemployment benefits

• Lower wages

• Reduced tax revenue

• Reduced investment and consumption

Types of inflation

1. Demand pull

2. Cost push

3. Imported

4. Monetary

Inflation definition

The sustained increase in the general/average price level in an economy over a period of time

CPI and its purpose (idk this bru)

Measures inflation: weighted average of prices for a "basket" of goods and services that an average household purchases.

Purposes:

• Economic indicator: measures price inflation and changes in cost of living

• Adjusting Incomes: adjusts wages, pensions, and benefits to ensure purchasing power is maintained

• Calculating Real Values: It is used to calculate "real" economic data, such as real wages or real GDP, by stripping out the effects of price changes.

Deflation- negative inflation

Sustained decrease in general price level in an economy over a given period of time

Disinflation

Fall in the rate of inflation.

It simply means that prices are still rising in the economy but at a slower pace than the year before.

Hyper inflation

Occurs when the prices of goods and services rise at a very high rate and are out of control.

Decreases purchasing power of currency

Demand pull inflation

Persistent increase in AD (due to CIGX-M factors), rising faster than the AS of g/s

• Depreciation of domestic currency→ reduced price of exports→ increased demand from foreign countries→ exports>imports

• More expensive for locals to buy imported goods→ reduced demand for imports→ rising exports, lower imports→ increased AD for domestic products

Cost push inflation

Causes:

• Rising wages (trade unions bargaining)

• Higher cost of production due to shortage of FoP

• Supply chain disruptions (trade routes closures)

Imported inflation

Causes:

• Trading partner experiences inflation and overheating in economy

• Domestic currency of foreign country appreciates

Locals have to pay a higher price for imported goods

Monetary inflation

Causes:

• Excessive printing of money

How to reduce demand pull inflation

• Contractionary fiscal policy

• Contractionary monetary policy

Limitations of policies to reduce demand pull inflation

• Reduces GDP and economic growth

• Increases unemployment

• Unpopular

How to reduce cost push inflation

• Supply side policies

- Retraining and upskilling workers

- Switch to technology

-Get rid of trade unions

-Reduce wastage

-Provide subsidies and tax cuts

-Reduce trade barriers: sign agreements w countries abundant in FoP

Limitations of policies to reduce cost push inflation

• Takes a long time to retrain workers

• Requires a lot of resources (high opp cost)

• Uncertain

• Expensive

• Switching to tech causes unemployment

• Getting rid of trade unions causes strikes and worker exploitation

• Subsidies may lead to budget deficit and gov debt

• Agreements take a long time

How to reduce imported inflation

• Appreciate domestic currency to make it cheaper to buy foreign goods

• Find alternative trading partners

Limitations of policies to reduce imported inflation

• Takes a long time to find partners

• Lower exports and higher imports decreases AD, decreases real GDP and increases unemployment

How to reduce monetary inflation

• Contractionary monetary policy: reduce supply of money and increase interest rates

• Strengthen exchange rates

Unemployment rate and formula

Those who are not employed but are willing and able to work

Expressed as a percentage of country labour force

Labour force

The total number of workers available for employment. Includes unemployed who are actively seeking work.

Participation rate

Labour force as a proportion of total working age population

Employment status

Whether people are fully employed, part time or temporarily

Cyclical unemployment

Causes:

• Recession: falling consumer demand for g/s→firms lose profits→ reduce output→lay off workers or cut wages→unemployment

Policies:

• Expansionary fiscal policy

• Expansionary monetary policy

Structural unemployment

Cause:

• Changes in industrial structure: decline or closure due to permanent fall in demand for g/s

• When an industry relocates to another country and people cannot move with it due to commitments usually family.

Policies:

• Supply side policies

Frictional unemployment

Cause:

• Short lived unemployment when people quit jobs or move to higher paid jobs or move homes

• eg. grad students

Policies: (no exact)

• Career guidance

• Improve job information services

• Job matching platforms

Seasonal unemployment

Cause:

• Consumer demand changes according to seasons

• eg. ski instructor

Policies:

• Supply side: training and improve geographical mobility

Technological unemployment

Cause:

• Labour is replaced by technology

Policies:

• Supply side: Training and education

Labour market reforms to increase efficiency of workforce (gov role)

• Decrease unemployment benefits: encourages people to work

• End minimum wage: businesses will be incentivised to hire more workers

• Weaken trade unions: less strikes and industrial halts that reduce output

• Privatisation: transfer of ownership from the public sector to the private sector to increase the efficiency of resources employed and total supply of g/s demanded by consumers. (profit motivated)

How to measure unemployment (Claimant method)

• Claimant count: measure of the number of people who are out of work and eligible to claim unemployment benefits.

Limitation:

Does not count those people who cannot apply for benefits eg students, high savings, under government training schemes, part timers

A few people claim unemployment benefits by fraud

How to measure unemployment (Labour Force Survey method)

Collect information on the no. of people employed in a household. Employment status, educational qualifications and government training opportunities.

Limitations:

• It is difficult for the government to decide whether a person is sick or whether he/she is actively looking for work.

• It takes time to get info and analyse it

• Sampling errors can occur. Results may not truly represent the entire population.

Consequences of unemployment

• will not contribute to a nation’s GDP and consumption (loss of income)

• tax revenues for the government will fall

• more people claiming unemployment benefits

• Stress, debt, homelessness, increased crime

Limitations of CPI

Over time, the typical household and basket of g/s will change

• change tastes

• Introduction of new g/s

• change in population

• change in quality of g/s

• international comparisons are difficult

How can be alleviate limitations of CPI

Updating basket of goods, weighting, base year but this can make more comparisons difficult over longer periods of time and internationally.

What is the difference between Real GDP and Nominal GDP

Nominal GDP measures the value of all g/s produced within an economy at current market prices without adjusting for inflation.

Real GDP adjusts this value for inflation, providing a more accurate reflection of actual output growth over time.