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What are the macroeconomic objectives?
Reducing unemployment
Protect the environment
Balance of payments
Economic growth
Controlling inflation
Redistribution of income
Macroeconomics
Study or large economic system such as in a whole county or an area of the world
Microeconomics
Study or a small economic system in a nation or an international nation
What is economic growth?
It is the increase in the level output of a nation.
How is national income measured?
GDP (Gross Domestic Product)
GDP measures a country’s total output for a year.
What are the limitations of GDP as a measure of growth?
Inflation:
Prices increasing can mean growth rates are misleading.
Can be overcome by using real GDP which is adjusted for inflation
Population changes:
Population growth should be taken into account
Can be overcome by using GDP per capita
Statistical errors:
Gathering data can be hard and can require money. Information can also be entered incorrectly, inaccurately or left out
The value of produced goods:
Some goods and services are not traded and therefore economic activity is not recorded
This means that the value of national income is underreported
The Hidden Economy:
Sometimes paid work goes unrecorded
This transaction becomes part of the “black” or “informal” economy
GDP and living standards:
Just because GDP rises, it does not mean that living standards have also risen
GDP does not take into account
Amount of leisure time that people have
The way that extra income is shared between the population
Whether growth has resulted in pollution
The quality of goods and services
External costs:
GDP does not take into account external costs and how they impact society
What are the causes of economic growth
Productivity:
Labour productivity: workers’ efficiency
Capital efficiency: money working harder, Return on investment
Labour:
Quantity of workforce: investment in people
Internal migration: People with skills moving into the country
Improved healthcare and nutrition (in developing countries)
Capital:
Investment in new machinery
Research and development: new more efficient methods of production
What are the disadvantages of increase in capital?
Capital replaces labour, so if capital increases, demand for labour decreases. This causes a rise in unemployment.
Economic cycle:
What is the formula for aggregate demand?
AD = C + I + G + (X- M)
C= consumption
I= investments
G= government spending
X= exports
M= imports
What is the boom? (economic cycle)
It is the peak of the cycle where GDP is growing at its fastest
What is the downturn? (economic cycle)
It is the period where GDP grows but more slowly
What is the depression or slump? (economic cycle)
It is the bottom of the economic cycle where GDP starts to fall with significant increase in unemployment.
What is the recession? (economic cycle)
It is the period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in 2 successive quarters.
What is recovery? (economic cycle)
It si when the GDP starts to rise again
What is the impact of the boom on growth, employment and inflation?
GDP is growing fast as the economy is performing well
Firms will expand
New firms entering markets
Demand will rise (for both products and labour)
Wages and profit will rise
Prices will also rise
What is the impact of the downturn on growth, employment and inflation?
Economy is still growing but at a slower rate
Demand for goods and services will stop increasing and/or start to fall
Unemployment will start to rise
Wage increases will start to slow down
Firms will stop expanding
Profits may fall
Some firms will leave the market
Prices will rise more slowly
What is the impact of the recession or depression on growth, employment and inflation?
GDP may be flat
If GDP starts to fall → depression/slump
Dp/slump → widespread poverty
Demand will fall (for mostly non-essentials)
Unemployment will significantly rise
Business confidence is low
Prices may fall
Depression is more severe than recession
What is the impact of the recovery on growth, employment and inflation?
Business and consumer confidence is renewed
Economic activity will increase
Demand rises
Unemployment falls
Prices start to rise again
What is the impact of economic growth on employment?
Business generates more output
Resulting in the need for more labour
Employment levels raise
Reduces unemployment
Gov also spend more
Increased gov spending → more job opportunities
What is the impact of economic growth on living standards?
Average people have more income
More income → more disposable income
People buy better quality goods/services
As the economy grows, people spend less time working
Because of improved efficiency
What is the impact of economic growth on poverty?
Rapid economic growth helps reduce poverty
Economic growth → business creation + expansion → more jobs → reduced unemployment
Gov tax income increases → more spending on healthcare + education + infrastructure
What is the impact of economic growth on productive potential?
raises PP
The country can produce more goods/services
What is overheating in a economy?
It is when demand rises too fast, causing prices and imports to rise.
What is the impact of economic growth on inflation?
If economic growth is too fast → overheat
Overheat → inflation
What is unsustainable growth?
It is economic growth that is not possible to sustain without causing environmental problems
What is the impact of economic growth on the environment?
Growth can causes pollution
Can use non-renewable resources
Resources will eventually run out
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Flashcard (32)