AS Macroeconomics

Nominal Value

based on current prices taking no account of changing prices through time (not adjusted to inflation)

Real Value

Value of an economic variable taking account of changing prices through time (adjusted for inflation)

Index Number

A device for comparing the value of a variable in one period or location with a base observation (e.g. measuring the average level of prices relative to a base period)

Consumer Price Index (CPI)

A measure of the general price level in the UK adopted as the UK's inflation target since December 2003

Inflation

A sustained rise in the general price level

Costs of Inflation

Reduced standard of living
Risk of hyperinflation
Menu Costs
Shoeleather Costs
Uncertainty

Retail Price Index (RPI)

A measure of the average level of prices in the UK. Measure the average level of prices relative to a previous (base) year

Cost-Push Inflation

Inflation initiated by an increase in the costs faced by firms arising on the supply side of the economy

Demand Pull Inflation

Inflation initiated by an increase in AD

Aggregate Demand

Total spending in an economy over a given period of time

Deflation

A sustained fall in the general price level

CPI

Measure of inflation. Used both in the UK and in other countries, useful for international comparisons. Seen as better at measuring the effectiveness of macroeconomic policy.

Menu costs

The cost of having to constantly having to reprint and change prices

Shoe Leather Costs

The cost/opportunity cost of time and effort in order to try and counter act inflation includes stuff like holding less money in cash (high inflation\=high interest rates), having to shop around for the best prices as they are always changing.

Economically Inactive

Those people of working age who are not looking for work, for a variety of reasons (e.g students/elderly)

Discouraged Workers

People who have been unable to find employment and who are no longer looking for work, seen as economically inactive.

Workforce

People who are economically active- either in employment or unemployed

Unemployed

People who are willing and able to work but do not have a job.

Full Employment

When people who are economically active are able to find work

Claimant Count

Number of people claiming job seekers allowance each month

The labour force survey (ILO)

Percentage of workforce who are available for work (willing and able) but are without jobs

Problems of Measuring the Claimant Count

Only finds those who are eligible for JSA. so excludes people with a valid excuse e.g. people returning from raising children or those on Government training schemes etc

Problems of Measuring Labour force survey

Based on sample evidence therefore not completely accurate doesn't show people who would be willing to work at their desired wage

Frictional Unemployment

Unemployment associated with the job search; people between jobs

Structural Unemployment

Unemployment arising because of the changes in the pattern of economic activity within an economy. unemployment due the loss/decline of entire industries e.g. coal mining

Cyclical Unemployment

Unemployment that arises from a lack of AD (for example, during the down turn of a economic cycle such as a recession)

Demand Deficient Unemployment

Unemployment arising because of a deficiency of aggregate demand in an economy, so that the equilibrium level of output is below full employment

Seasonal Unemployment

Unemployment that arises in seasons of the year when demand of the good/service is relatively low

Voluntary Unemployment

A situation that arises when a individual decides not to accept a job at the going wage rate

Involuntary Unemployment

Situation arising when an individual who would like to accept a job at the going wage rate cannot find employment- rely on social security payments

Long Run Economic Growth

An increase in the productive potential of an economy/increasing the quantity or quality of the factors of production

Short Run Economic Growth

An increase in real GDP/actual output/AD

Labour Productivity

Output per worker per period of time

Capital Productivity

Output per unit of capital per time period

Total Factor Productivity

The average productivity of all factors, measured as the total output divided by the total amount of inputs used

Investment

The addition to the capital stock of the economy through expenditure by firms

Capacity Output

When all factors of production are fully and efficiently optimised

Human Capital

The stock of skills and expertise that contribute to a workers productivity; can be increased through education and training

Economic Growth on PPC Curve

outward shift indicates economic growth in long run (increase in productive capacity curve). Short run economic indicated through a movement toward full capacity but not in the productive capacity curve itself.

Productivity

Output per input over a period of time

Economic Growth through Labour

Another key driver of Growth is the skilled labour needed to operate the high-tech equipment. Can increase supply of labour through immigration policies. Investment in Labour will also increase the productivity of the economy, education + training are merit goods.

GDP

measurement of economic output in an economy over a period of time. Not seen as a good assessment of standard of living in a country.
Expenditure \= Output \= Income

Advantages of measuring GDP

Straightforward/understood
Internationally used so comparable with other nations
However different countries have different sized populations which isn't taken into account

Importance of Economic Growth

Expanding the availability of resources (economic growth) in an economy enables the standard of living to increase. For any society economic growth is a fundamental objective perhaps the most important. Other policies may also be seen as subsidiary to it e.g. inflation control or full employment.

Economic Growth vs Basic needs provision

Growth objectives will eventually trickle down despite initial inequality of incomes and will tackle basic problems such as poverty. However people do still argue that basic needs should be catered for first, as people will gain human capital→can contribute to growth process.

3 measures of circular flow of income

Expenditure method \= Output method \= Income method

Average propensity to consume

calculated as C(household consumption)/Y(disposable income)

Marginal Propensity to Consume

calculated as Change in consumption( ∆C)/ Change in disposable income(∆Y).

The Multiplier

\= 1/MPW(Marginal Propensity to Withdraw)
Or 1/MPS(Save)+MPT(Tax)+MPI(Import)

Why the demand curve is downward sloping (ALL ASSUME CETERIS PARIBUS)

1) Real Income effect
2) Wealth effect: if the price level is low then peoples assets will be worth more meaning they have more wealth→more willing to spend
3) Interest rates: prices low→interest rates low→discourages saving→more consumption and investment

Factors affecting the Position of the AS curve

Quantity of inputs
Effective use of inputs: increase in skill of the workforce or efficiency of capital will lead to shift in AS
Costs faced by firms

Comparative Static Analysis

When something is changed to examine its effects on the equilibrium

Different shapes of LRAS

Position of AD/AS equilibrium determines whether the economy is in full employment→ classical view that economy will always return to full employment. Keynesian→possible for equilibrium to settle below full employment in a long-run recession

Disadvantages of GDP

Income inequality distribution
Informal sector and accuracy of data
Social indicators

Economic growth (diagrams)

Expressed in terms of an outward movement of PPC curve. Long run→ shift right in long run AS curve→may be because of an increase in quantity in the factors of production.
Short run growth→shift in AD curve

Macroeconomic Objectives

Price Stability (low inflation), Full employment, Balance of payments, Economic growth, redistribution of income, environmental protection

Price Stability (low inflation) example

Govt tries to control inflation→controlling money stock→rise in money stock→rise in AD→rise in price level

Full employment

Occurs when AD and AS meet at inelastic LRAS. AD/AS model seems to suggest that to restore full employment policy should be aimed at changing position of AD curve.

Current Account Deficit (Issues)

ownership of UK assets sold to foreigners→long run effects on AS. Needs to be funded by a financial/capital account surplus to continue

Economic growth (as a policy Objective)

Long term aim→ to increase countries productive capacity→ by shifting LRAS curve

Monetary policy

Government policy that attempts to manage Ad by controlling monetary tools (interest rates/money supply or QE/exchange rates)

Monetary policy committee

Body within the bank of England responsible for the conduct of the monetary policy

Fiscal policy

Taxation and government spending to influence AD

Direct tax

A tax levied directly on income

Indirect tax (definition)

Tax on expenditure (for example, VAT)

Indirect tax (examples)

VAT Customs duties levied on imports, excise duties on production, sales tax

Education and training

Investment in human capital to improve productivity by teaching new skills.

Competition policy

Aims to increase the amount of competition in the market

Benefits of unemployment

An influence on the labour supply people more likely to try and find employment if the benefits are lower. However the government will also need to find a balance between the size of the workforce and the need to protect those who are unable to find unemployment. The benefit can also not be reduced to a level at which workers are willing to leave their jobs in order to find better jobs.

Incentive effects of taxation

Dangers of making taxation system too progressive most people accept taxation should be progressive. However if marginal tax rates are too high then it may get to a point where additional income is taxed away, so there will be less incentives to supply more, could affect AS. Balance needs to be found

Issues of using government policies

Some policies are not mutually compliable. Fiscal policy will affect the interest rate which could cause a change in the hot money flows therefore changing exchange rates. Fiscal and monetary policy come into conflict.

The current account

Balance of trade in goods (tangible)
Balance of trade in services (intangible)
Net primary income (interest, profits, dividends and migrant remittances)
Net secondary income (contributions to EU, military aid, overseas aid)

Balance between imports and exports (of goods and services)

One of the 3 main parts of the current account. Imports are negative and exports are positive. Trade in goods normally negative for UK. Partly balance by a positive trade in services→ UK normally earns lots from financial services.

Primary Income

Employment income from abroad→ major item of income is made up of profits, dividends, and interest receipts from overseas UK assets.

Financial account

Transactions in financial assets e.g.
Balance of foreign direct investment flows (FDI)
Balance of portfolio flows (e.g. inflows and outflows of debt and equity)
Balance of banking flows (e.g. hot money flowing in/out of banking system)

Capital account

Transactions in capital e.g.
Sale/transfer of patents, copyrights, franchises, leases and other transferable contracts, and goodwill
Transfers of ownership of fixed assets

Exchange rate

the value of a currency in one country compared with the value in another

Inflation targeting

An approach to macroeconomic policy whereby the central bank is charged with meeting a target for inflation

Bank/Base rate

The interest rate that is set by the monetary committee of the bank of England in order to influence inflation

Quantitative Easing

A process by which the central bank purchases assets such as government and corporate bonds in order to release additional money into the financial system

Policies affecting AS

focus on affecting these determinants of AS→ shifting AS to the right.

Balance of Payments

Record of international transactions between one country and the rest of the world

Visible trade

Trade in goods

Invisible trade

Trade in services

Disinflation

A fall in the rate of inflation

Secondary income

Transfer payments made abroad and received from abroad

Current account balance

The difference in the value of total exports and total imports

GDP per capita

Income/expenditure/output of a country divided by population

Withdrawls from CFI

Taxation, savings, imports

Injections to CFI

Government expenditure, investment, exports

Circular flow

Continuous flow of income and expenditure

Income

total amount earnt in an economy, The flow of earnings (from wages, salaries and other sources) over a period of time

Output

the total amount of a good that is produced in an economy

Expenditure

Total of all spending in an economy

consumption

Total spending by households on goods and services (also known as consumer expenditure)

Government Spending

Money spent by government on public goods e.g. education and healthcare

Exports

Goods and services that are produced in a country and sold in another

Imports

Goods and services brought into a country after having been produced elsewhere

Aggregate Supply

The total amount of goods and services supplied in an economy over a period of time at any given price level

Aggregate supply and the price level in the short run

In the short run factor inputs are fairly fixed, but at higher prices firms would like to supply more, so the short run aggregate supply curve slopes upwards from left to right (change in price causes movement along the SRAS curve)