11 economic performance

short run economic growth

• an increase in the production of goods and services that occurs without an economy acquiring additional FOP

• productivity increase

• cost reductions (SRAS)

• AD increasing

long run economic growth

an increase ion an economies productive capacity from better quality or quantities of FOP

economic growth an living standards

living standards will increase as long as the population does not increase at a faster rate than the rate of growth

supply side growth

• causes by changes in LRAS or SRAS

• costs falling, productivity increasing, better FOP

demand side growth

• improvements in C + I + G + (X - M)

• demand side growth will be inflationary if supply does not increase, unless the economy is operating below full capacity

economic cycle

• boom

• recession

• slump

• recovery

characteristics of a recovery

• output and employment begin to increase

• consumption increases - multiplier

• firms begin to utilise space capacity

• business confidence increases - accelerator

• rise in consumer spending due to confidence

• inflation creeps up

characteristics of arecession

• increases FOP costs from boom eat into profits - less investment - AD falls

• income and output falls as firms cant employee as many workers

• business and consumer confidence falls

• spare capacity rises

• inflationary pressure falls - negative multiplier

• less imports

• firms search for new markets aboard

characteristics of a boom

• high levels of business and consumer confidence

• high levels of demand

• increase level of production

• high investment

• skilled workers become scarce - wages increase - costs increase

• goods and services become scarce - inflation - high IR - PP is lower, UK goods not as competitive, wage price spiral

• high imports

• skills shortages

characteristics of a slump

• disposable income is low

• main objective of firms is to survive

• large gov budget deficit

• high unemployment

• deflation

• reduced demand

• low price of capital aids recovery

• goods become more competitive internationally

output gap

• the difference between actual output and potential output of an economy in GDP

• positive output gap - when actual output exceeds potential output

• negative output gap when actual output is below potential output

factors moving an economy from one stage to another

• replacement investment and technology advancements

• economic shock

• optimisation - animal spirits - accelerator

• government policy

• IR change

• asset bubbles burst

• credit crunch

• strong multiplier

• stock pilling

herding - factors that can change the economic cycle

where individuals in a market mimic the actions of a larger group, often leading to trends in investment behaviour increasing AD

asset bubble bursting - factors that can change the economic cycle

occurs when the prices of assets rise rapidly and then suddenly decline, often leading to significant economic downturns

stock pilling - factors that can change the economic cycle

the practice of holding large quantities of inventory to meet anticipated demand - stops firms investing and reduces AD

negative equity - factors that can change the economic cycle

a situation where the value of an asset falls below the amount owed on it - house prices fall but mortgage stays the same

political cycle - factors that can change the economic cycle

a change in government may increase or decrease government spending

replacement investment - factors that can change the economic cycle

investment to replace worn-out or obsolete capital goods, thereby maintaining the productive capacity of an economy - bank loan taken out

economic performance of other countries - factors that can change the economic cycle

if other countries the UK exports to are doing well, they are likely to purchase more exports and so AD rises - could happen in reverse

credit crunch - factors that can change the economic cycle

banks stop lending as they have less loanable funds available - could be a result of overlanding to poorer households who cant pa it back

animal spirits - factors that can change the economic cycle

optimisation about how the economy will preform in the future can increase investment via the accelerator and also have a strong multiplier effect - increase in AD

changes in technology - factors that can change the economic cycle

firms will invest to keep up with other firms - increasing AD and AS as costs of production fall and capacity increases

interest rates - factors that can change the economic cycle

higher rates generally dampen spending, while lower rates can stimulate economic activity as there is a lower opportunity cost to saving and borrowing is cheaper, encouraging consumer and business loans

economic shocks - factors that can change the economic cycle

unexpected events that can disrupt economic stability, affecting aggregate demand and supply

advantages of economic growth

• increase SOL

• increased employment

• lower absolute poverty

• increased tax revenue

• multiplier

• accelerator

• larger business profits - investment - spending on CSR

• high business and consumer confidence

disadvantages of economic growth

• inflation - macro conflict

• increase imports - worsen BOP

• increased prices on exports - worsens BOP and current account - macro conflict

• environmental concerns

• increased inequality

• increased relative poverty

factors that limit economic growth

• infrastructure

• dependence on exports

• vulnerability to shocks

• low levels of savings to invest

• declining / ageing population

• inflation

unemployment

people who are able, available and willing to work but cant find a job despite searching for work

underemployment

when individuals are working in jobs that do not fully utilize their skills or education

unemployment rate

unemployed individuals / total labour force X 100

voluntary unemployment

workers choose to remain unemployed and refuse job offers at the current market wage, they are not attempting to relocate or retrain to make themselves employable

involuntary unbemployment

when individuals are willing and able to work at the current market wage but there are no jobs on offer - recession

structural unemployment

results from the decline/changes in industries in an economy

cyclical unemployment

occurs due to fluctuations in the business cycle, particularly during recessions, when overall demand for goods and services decreases, leading to job losses

frictional

unemployment occurs when individuals are temporarily between jobs, often due to voluntary transitions in employment

casual unemployment

refers to temporary unemployment that occurs when individuals are not consistently employed, often due to seasonal or contract work

demand deficient unemployment

arising from a decrease in AD

technological unemployment

caused by an introduction of labour saving technology

classical unemployment

occurs when wages are set above the market equilibrium, leading to a surplus of labour

seasonal unemployment

occurs when people are unemployed at certain times of the year due to seasonal variations in demand for certain jobs

causes of unemployment

• demand side factors

  • lack of AD firms dont need labour (derived demand)

• supply side factors

  • imperfections in the labour market

geographical immobility of labour

refers to the inability or unwillingness of workers to move to different locations for employment, often due to factors like housing costs, family ties, or lack of information

occupational immobility of labour

refers to the inability or unwillingness of workers to change occupations or professions, often due to a lack of transferable skills, experience, or education

natural rate of unemployment

• classical def - unemployment when LRAS and AD are in equilibrium

• Keynesian def - unemployment at YFE

NRU includes

• people who are frictionally unemployed

• people who are structurally unemployed

• disaffected workers

• benefit lifestylists - unemployment trap

determinants of NRU

• availability of job information - how quickly the unemployed find a job

• level pf benefits - generous may increase unemployment

• cost of living in different regions

• skills and education

• savings/wealth

hysteresis

• if workers are unemployed for a long time they may become de-skilled and less employable, leading to a permanent increase in the natural rate of unemployment

• where a variable doesn’t return to its original state

consequences of unemployment on inidivduals

• fall in living standards

• social costs

• less financial security

• can become deskilled

consequences of unemployment on the economy

• reduced consumption

• reduced investment

• reduced consumer and business confidence

• lower tax revenue - worsens budget deficit

• hysterisis

advantages of unemployment

• falling rate of inflation - no wage price spiral

• easier for businesses to recruit - better quality of labour - better productivity - LRAS right

• may lead to increased competition for jobs, encouraging businesses to innovate

sunrise and sunset indistries

• sunrise industry - developing

• sunset industry - declining

the replacement ratio

• measures the amount of money a person would get in employment compared to unemployment

• disposable income out of work / disposable income in work

unemployment trap

where a person is better off financially from not working due to government benefits or support than by taking a job, leading to disincentives for seeking employment

poverty trap

when someone stays in a lower paid job as they are not better off gaining a promotion

positive impacts of globalisation on employment

• Job Creation in Emerging Markets

  • developing countries have benefited from increased FDI, leading to the growth of manufacturing and service sectors

  • Example: Countries like India and Vietnam have seen growth in IT and manufacturing jobs due to outsourcing

• Access to Global Job Markets

  • workers can now apply for remote jobs in other countries, increasing employment opportunities

• Skill Development and Technological Transfer

  • Exposure to international companies has increased skill levels, especially in countries integrated into global supply chains

• Entrepreneurial Opportunities

  • Global markets give entrepreneurs access to new customers, suppliers, and partners, encouraging job creation

negative impacts of globalisation on employment

• Job Losses in Developed Countries

  • Offshoring and outsourcing have led to the decline of manufacturing jobs in some developed economies, like the U.S. and parts of Europe.

• Wage Pressure and Job Insecurity

  • Increased competition can suppress wages and lead to more precarious employment, including temporary or gig jobs.

• Widening Inequality

  • Benefits of globalisation are often unevenly distributed, leading to income inequality between high-skilled and low-skilled workers.

• Exploitation of Labor

  • In some developing countries, globalisation has led to poor working conditions, low wages, and child labor, especially in informal or unregulated sectors.

factors that determine real wage unemployment

• mismatch between wage levels and market equilibrium

• strength and influence of trade unions

• existence of minimum wage laws above equilibrium wage

• efficiency wage policies by employers

• inflexible labor market institutions or regulations

• low labor mobility (geographic or occupational)

• high unemployment benefits reducing incentive to accept lower wages

• weak demand for labor in specific sectors

• labor productivity not matching wage expectations

• technological change reducing demand for certain job roles

real wage unemployment

unemployment that occurs when real wages are set above the market equilibrium, leading to a surplus of labour supply due to factors like trade union influence, minimum wage laws, and inflexible labour market regulations.

inflation

a sustained increase in the general price level

measuring inflation

• retail price index - average price of basket of goods that reflects consumer buying habits

• consumer price index

core inflation rate

the rate of inflation excluding volatile items such as food and energy prices, providing a clearer view of the underlying inflation trend

limitations of measuring inflation

• different people experience different rates of inflation

• CPI doesn’t include housing costs

• doesn’t take quality of goods into account'

• lad in data collection

problems with inflation

• international competitiveness - less demand for exports - worsens current deficit

• negative effect on investment

• reduced living standards

• reduction in value of savings

• fiscal drag - people dragged into next tax bracket while real incomes remain the same

• hyperinflation

• costs of production increase for businesses

• labour may be substituted for capital

advantages of inflation

• workers moral increase due to pay rise even if its just the money illusion - real income stays the same

• decrease in the real value of debt

• increase in tax revenue through fiscal drag

• increase in business profits depending on costs

demand pull inflation

• inflation occurs as AD shifts right (C + I + G + (X - M)

  • greater pressure on existing FOP to produce more output as firms try to satisfy demand - closer to YFE - resources become scarcer - FOP increase in price

• lower IR

• quantitative easing

• depreciation of ER

• increase in government spending

• tax cuts

• confidence

• exports

cost push inflation

• SRAS shift left due to an increase in costs of production which get passed onto consumers as higher prices

• rising wages

• high raw material prices

• interest rates increase

• exchange rate weakens - imports more expensive

wage price spiral

• increase in AD - demand pull inflation

• price level rises as there is a profit incentive

• workers demand higher wages as their incomes are being eroded

• firms put prices up to maintain margins after an increase in wage costs - cost push inflation

• workers demand higher wages - wage price spiral

quantity theory of money

• increases in the money supple will lead to an increase in the PL

• M x V = P x T(Q)

• expenditure = output

• M = money supply

• V velocity of circulation - how many times money is used in a year

• Increasing money supply leads to higher price levels. p = price level

• T(Q) = transactions , real GDP - output of foods available

• V and T are fixed so there is a direct relationship between the growth of the money supply and inflation

disinflation

prices are increasing but at a slower rate

deflation

sustained decrease in the general price level, real value of money increases

malevolent (malign) deflation

• bad deflation

• caused by a decrease in AD

benign deflation

• good deflation

• caused by a decrease in costs or production or an increase in productivity so SRAS moves right

disadvantages of deflation

• gives consumers the expectation that prices will fall further so they hold off on spending

  • further fall in AD

• firms may have to reduce prices - less investment

• value of debt increases

• value of savings rise which encourages people to save more consumption falls

• firms dont give pay rises, lowers motivation and productivity

• falling asset prices cause a further decrease in AD

• if cause by lack of demand, confidence falls

advantages of deflation

• cost of living falls while wages remain the same as Keynesian said they are sticky downwards - higher PP

• income inequality falls

• MPC increases long run growth

• exports increase as they are more price competitive

wage settlements

• if people, expect prices to rise - employees and trade unions will bargain for higher wages

• causes the wage price spiral

adaptive expectations

theory that suggests firms and households use past information as an indicator for the future

rational expectations

theory where individuals use all available information to forecast future economic variables, leading to more accurate predictions than adaptive expectations

positive output gap effect on inflation and unemployment

• Inflationary Pressure

  • High demand pushes up prices.

  • Firms raise wages to attract scarce labour, leading to demand-pull and cost-push inflation.

• Low Unemployment

  • Firms hire more workers to meet increased demand.

  • Unemployment falls below the natural rate (may cause labour shortages)

negative output gap effect on inflation and unemployment

• Deflationary/Disinflationary Pressure

  • Weak demand keeps prices low.

  • Firms may freeze or cut wages

• High Unemployment

  • Reduced production means fewer jobs.

  • Unemployment rises above the natural rate due to slack in the economy

how can changes incommodity prices effect inflation

• higher input costs

• wage price spiral

• when input costs fall there is less pressure on prices, leading to lower inflation

stagflation

high unemployment, and high inflation occurring simultaneously

short run Phillips curve

• as unemployment falls, inflation increases

• when unemployment is low, workers are scare meaning they have ore bargaining power to increase wages - cost push inflation

• more income generates more consumption, increasing demand - demand pull inflation

• macro conflict - if you want low unemployment you have to sacrifice the low inflation objective

long run Phillips curve

• A = unemployment is at NRU with 0% inflation, some workers are voluntarily unemployed

• B = an increase in AD reduces unemployment

  • firms have to increase wages to attract new workers

  • worker face a money illusion

  • firms increase prices so inflation increase to 2%

• C = workers realise they are no better off

  • workers leave the labour market

  • unemployment returns to 8% (NRU)

  • however inflation is still ta 2%

• D = workers will only enter the labour market again if wages raise above 2%

  • increases firms costs

  • prices increase

  • wages now need to be raised in excess of @% to attract new workers

NAIRU

non-accelerating inflation rate of unemployment, where inflation remains stable, reflecting the lowest level of unemployment an economy can sustain without causing inflation to rise

what can shift the long run Phillips curve

• change in NRU

  • if it falls the curve moves left

  • if it rise the curve shifts right

• what type of unemployment is at the NRU