CIE IGCSE ECONOMICS CHAPTER 4 Government and the Macroeconomy

CIE IGCSE CHAPTER 4

What are the 6 macroeconomic aims of government?

Economic growth-Increased GDP and long-term growth of economic stability

Low Unemployment-Leads to higher GDP and Product Possibility

Stable Prices-Measured in CPI; overall change in costs

Balance of Payment Stability-A stable export and import ratio

Redistribution of Income-through taxes/ progressive taxes

Environmental Stability-Keeping resources intact for the future

What are the 4 conflicts of interest in Government economic aims?

Full employment vs. Stable Prices

• Wage inflation

• Demand can increase faster than supply

• Firms may not be able to attract skilled labor

Economic Growth vs. Environmental Stability

Economic Growth vs. Stable Prices

Full Employment vs. Balance of Payment Stability

• Wages tend to increase leading higher import inflation and costs for trading partners making the nation less competitive in international trade

What is a governmental budget?

A government’s budget is the financial plans in terms of revenue and expenditure

What is a budget surplus’s effect?

A large boom in the economy

Able to pay off debts

What does a budget deficit mean?

Recession

Gain Debts

What are the reasons for government spending?

-Essential services

-Welfare

-Intervening in Market failure

Reasons for Taxation

Raising revenue

Discouraging demerit goods

reducing imports

redistributing income

influencing total demand

encouraging environmental stability

What are tax burdens for countries, firms, and households?

Country=Total tax revenue/GDP

Firms=Total Value of Tax

Households=Total value of tax

What is the difference between direct and indirect taxes

Direct-paid from income, wealth, or profit

Indirect-imposed on goods and services

What are the three different types of taxation?

Proportional, Regressive, and Progressive

What are the 7 things taxes influences and how?

Price and Quantity for Consumer

• lower supply

• more expensive

Impact on Economic Growth

• tax cuts grow economy and create growth

• lower incentives to work

Impact on Inflation

• lower spending=lower inflation

Business Location

• multinational corporations choose the best for them

Behavior

• tax against harmful actions

Tax avoidance/evasion

• evasion illegal

• avoidance legal

• more tax more tax avoidance/ evasion

redistribution of wealth

• used to redistribute income

What are fiscal policies?

-Taxation and government expenditure policies used to influence the economy to achieve macroeconomic aims

What are the two types of fiscal policies?

Expansionary policies

• increase spending and lowering taxation to stimulate economy

• used in recessions

Contractionary policies

• slow down growth through more taxes

• Used to control markets and slow down economy

• stop rising prices and inflation

How are fiscal policies used to achieve macroeconomic aims?

-Economic Growth

• attracting foreign investment, boosting economy through infrastructure

-Low inflation

• stable prices

-Employment

• can be used as incentive

-Balance of payments

• can lower tax rates to be competitive

-Redistribution

-Environment

What is money supply?

An amount of money in an economy at a certain time

What are the 3 main monetary measures that governments can take?

Interest rates

money supply

exchange rates

What are characteristics of monetary policies?

-Most nations rely on manipulating interest rates because they control the central banks

What are the two types of monetary policies?

Expansionary policies-reduce interest rates

Contractionary polices-increase interest rates

What are the effects on Macroeconomics?

-Economic Growth-more spending less interest more spending and borrowing

-Low unemployment-More spending creates jobs

-Stable Prices-High interest rates slow down inflation

-Balance of Payments-Lower rates improve competition

What are the inefficiencies of monetary policies?

Lags

Other factors

Conflicts with other interests

What are supply side policies?

-Long-term strategies aimed at increasing productive capacity in an economy through quality and quantity increases

-Creates an outward shift in PPC

What are supply side policies examples?

Education and Training

• Improves quality

• Often funded by governments

Labor Market Reform

• unemployment benefits

• minimum wages

• Trade Union

• Boosts employment in the long run

Lower Direct Taxes

• incentives to work

Deregulation

• increase in competition

Incentives to Invest

• Subsidies

• Enterprise zones

• lower corporate tax

Privatization

• state owned to private owned

• increased efficiency

• changes in spending infrastructure

Effects on the macroeconomy through supply-side policies?

Increase PPC

Increased Jobs

Prevents inflation from rising too high

Improved competition

Investment in education and training redistribution

Environment-subsidies and incentives

Define Economic Growth

Annual Increase in national output/change in GDP

Long-term productive shifts

Measurements of Economic Growth?

-Real GDP or GDP per Capita

-Nominal GDP-monetary values produced in a year

What are the factors of Nominal GDP?

C-Consumption expenditure
I-Investment expenditure
G-Government Spending
X-Export Earnings
M-Import Expenditures

How to calculate Net exports?

x-m

How to calculate GDP

C+I+G+(X-M)

What’s the difference between Real GDP and GDP per Capita?

GDP per Head/Capita is GDP/Population

Real GDP is GDP adjusted for inflation

What are business cycles made of; draw a graph?

Cycles of Peaks, Recessions, Slumps, Booms, and recoveries

What are causes of business cycles?

Any GDP factor

Changes in quality/quantity

Total Demand may cause economic growth

What are the factors of economic growth?

Factor endowment-quality and quantity of a country’s factors of production

The Labor Force-the size, skill, and mobility of country’s labor force

Labor Productivity-Output per worker/ GDP/Labor Force

Investment expenditure-Helps country’s productive capacity, helps improve, Labor productivity, and is a measure of overall demand

Positive consequences of economic growth

Standards of living

Employment

tax revenues

Negative consequences of economic growth

-environment

inflation

inequality

resource depletion

What is a recession?

A fall in GDP for 2 quatres in succession

What are causes of recession?

unemployment

high interest

low investments

falling population

low government expenditure

decline in export demand

low confidence

demand for imports

wars, natural disasters

higher income tax

corporate tax

decline in resource quality

What are consequences of recession?

Consumers-closed shops, loss of savings, less spending

Workers-wages not increasing, lack of job security, unemployment

Producers-closed firms

Government-decrease tax revenue, more welfare costs, worse deficits

What are policies to grow the economy?

Monetary, supply side, and Fiscal

-tariffs

What is the definition of unemployment?

when willing, able, working aged people cannot find a job

What is a minimum working age?

15

What is employment?

Economic use of labor as a factor of production

What factors determine unemployment?

Willing and Able

able to start in 2 weeks

waiting to start work in the next 2 weeks

actively looking for work within 4 weeks

How to calculate unemployment?

Number of unemployment/Work Force x 100

What are the 4 types of unemployment?

Frictional Employment-between jobs

Seasonal unemployment-seasonal changes

structural-continual fall in demand from producers

cyclical-lack of demand, fall in national income

What are the consequences of employment?

Personal Costs

• emotional

• low income

Social costs

• economic shutdown

Economic consequences

• lower levels of consumer spending

• more welfare

• loss for taxpayers

• less competitive in the international market

GRAPH UNEMPLOYMENT

Why reduce unemployment?

raise living standards

promotes growth

less financial burden

less brain drain

lower wealth inequality

How to rectify unemployment?

monetary, fiscal supply side, and protectionism

What are characteristics of inflation?

Sustained rise in general price level

2-3 percent is healthy

causes money to be worth less

Hyperinflation-insanely high rates without control

deflation persistent fall

Disinflation= fall in inflation rate

How to measure inflation?

CPI

• Measures the changes in price representative of an average household

• base year

• collecting data

• assigning weights

• %2-%1/%1 × 100

What are the different types and causes of inflation?

Cost-Push

• firms raise price to maintain margin of profit after rising costs of production

Demand Pull

• Rise in demand causes rise in spending

Other causes

• Monetary issues

• Imported inflation

What are the consequences of inflation

Consumers

• fall in real income and spending power

Workers

• Higher PED

• Weaker bargaining power

• Lowers spending power

• more real wages and real increases

Wage Price Spiral

• higher demand for a rise in wages causes inflation

Firms

• wages rise

• competition falls

• lower growth

• lower purchasing power

Savers

• money worth less

Lenders and borrowers

• repay worthless (better)

• lose out on repayments

Economy

• worsens

Policies to rectify inflation

-monetary

• tighten economy

Fiscal

• manipulate interest rates to increase costs of borrowing

Supply side

• subsidies

• innovation