Econ Macro

Economic Growth

Increase in the level of output by a nation

National Income

Value of income, output or expenditure over period of time

Gross Domestic Product (GDP)

Market value of all final goods produced in a period of time

Limitations of GDP being used as a measurement of growth

1. Inflation: Price rise, more expensive; more income needed

2. Population changes: A nation with small population can not produce large amount of output

3. Statistical errors: Millions of documents, hard

4. Value of home produced goods: some goods are not registered as they are not sold anywhere despite making up a large portion of GDP

5. Hidden economy: transactions that are not registered (e.g giving homeless money)

Boom

Peak of economic growth, GDP is growing at its fastest rate.

Downturn

Period of economic cycle where GDP continues to grow but at a slower pace.

Recession

GDP is falling, unemployment is rising

Recovery

GDP begins to rise again, confidence is up

Impact of Economic Growth

1. Employment: more output, more workers, less unemployment

2. Standard of living: people have more income as GDP rises, work less as more efficient

3. Poverty: more jobs, more income, less poverty

4. Inflation: increase is growing too fast as prices are rising

Overheat

Demand rises too fast, causing prices to rise; combated by raising taxes and interest rates

Unsustainable Growth

Economic growth that is not sustainable without environmental problems

Aggregate Demand (AD)

• Total Demand in an economy

AD = C + I + G + (x-m)

Aggregate Demand = Consumer Spending + Investment + Government Spending + (Exports-Imports)

Deflation

Period where aggregate demand is falling

Inflation

Rate at which prices rise, a general continuing rise in prices

Consumer Price Index (CPI)

Measure of general price level excluding housing costs

Retail Price Index

Measure of general price level including housing costs and council tax

Demand Pull Inflation

Excess demand causing price rise, more demand than supply

Cost Push Inflation

Inflation caused by rising business costs

Interest Rate

Price of money

Monetarists

Economists who believe that rate of growth in money supply = inflation rate

Why does inflation happen in interest rates?

Low interest rate —> Higher rate of borrowing —> More money —> More Demand —> Higher prices; This wouldn’t happen with high interest rates

Purchasing power of money

Amount of goods and services that can be bought with fixed amount of money

Impact of inflation on price

Price —> Increase, higher demand —→ higher price —→purchasing power lowered

Impact of inflation on wages

Wages —→ Price rise, wage rise, cycle

Impact of inflation on exports

Harder to sell overseas due to higher prices

Impact of inflation on unemployment

Inflation rises, aggregate demand rise, more output, more workers, less unemployment

Impact of inflation on menu costs

Menu costs rise as prices change frequently new menus are needed

Impact of inflation on shoe leather costs

Shoe leather costs increase, more time spent looking for good deals

Impact of inflation on uncertainty

If high inflation, hard to predict future prices, uncertainty increases.

Impact of inflation on business and consumer confidence

Consumers borrow less so they spend less, business postpone plans

Hyperinflation

Very high levels of inflation, rising prices out of control

How does hyperinflation impact investment

You hope for returns in investment, but if prices rise a lot your profit will not matter.

Unemployment

When those able and willing to work, are seeking a job and are unable to find one.

Cyclical or Demand deficient unemployment

Unemployment caused by downturn, less demand for employment

Structural unemployment

Unemployment caused by change of structure in an economy such as sector declining.

Structural unemployment: sectorial unemployment

Unemployment caused by decline in industry.

Structural unemployment: technological unemployment

Work can now be done by machines.

Structural unemployment: regional unemployment

Different regions have different levels of unemployment in a nation.

Type of unemployment: seasonal

Employees only required to work during certain times of the year.

Type of unemployment: Voluntary unemployment

Chooses not to work.

Type of unemployment: frictional unemployment

Time unemployed whiles switching from one job to another.

Impact of unemployment on output

Output decreases, cause less workers (unless replaced by technology).

Impact of unemployment on scarce resources

People that are out of work do not contribute to production which is a waste of resources.

Impact of unemployment on poverty

Less work —→ government benefits pay less —→ lower income —→ higher poverty

Impact of unemployment on government spending on beenfits

Less people working —→ more benefits needed —-→ more payouts needed

Impact of unemployment on tax revenue

Less people working —→ less income —→ less income tax —→ less tax revenue

Impact of unemployment on consumer confidence

Higher unemployment —→ people suffer hardship from being unemployed —→ people who are still employed are scared —→ Lose confidence

Impact of unemployment on business confidence

Have to lay off workers but still pay redundancy money —→ sales fall —→ less revenue —→ postpone growth plans as the goal is to survive

Impact of unemployment on society

Large portion of community employed to same company —→ if business closes down, large portion of people lose their jobs

Balance of payments

Record of all transactions relating to international trade

Capital and Financial account

Flow of savings, investment, currencies are recorded, part of balance of payment

Current account

Part of balance of payments where exports and imports are recorded

Exports

Goods and services sold overseas

Imports

Goods and services brought from overseas

Current account deficit

Value of imports exceeds value of exports

Current balance

Different between total exports and total imports (x-m)

Primary Income

Money received from the loan of production factors abroad

Secondary Income

Government transfers to and from overseas such as EU (e.g financial aid)

Reasons for deficit

1. Quality of domestic goods —→ low quality —→ no one buys —→ low exports

2. Quality of foreign goods —→ high quality abroad —→ better than local —→ high imports

3. Price of domestic goods

4. Price of foreign goods

5. Exchange rate —→ weak currency —→ cheaper —→ more demand —→ more exports

Impact of deficit on current account

1. Leakage from economy —→ money leaves —→ economy falls —→ economy under threat

2. Low demand for exports —> no one wants to buy goods —→ exports fall

3. Funding the deficit —→ have to use foreign currency —→ reserve is low —→ have to borrow —→ risk

Business activities that damage the environment

1. Mining: crushing rocks which release harmful chemicals + loss of habit for animals and scarring terrain

2. Power generation: releases harmful gasses, visually damages view

3. Agriculture: release harmful chemicals into water after rainfall and causes erosion and pesticides can be unhealthy to humans

4. Construction: Dust is harmful, view is harmful, water pollution

What ways businesses damage the environment

1. Visual pollution: ugly\

2. Noise pollution

3. Air pollution

4. Water pollution

Government intervention methods to protect environment

1. Pollution permit: permits businesses to pollute a fixed amount, you can buy and if you’re good you can sell

2. Park provision: parks that are illegal to be built on since they preserve natural beauty

3. Taxation

4. Fines

5. Subsidies

6. Regulation

Income inequality

Unequal distribution of income

Lorenz Curve

Curve that illustrates income or wealth distribution

Absolute poverty

Not enough resources to meet basic human needs

Relative poverty

Poverty that is relative to existing living standards for the average individual

Reasons to reduce poverty

1. Meet basic human needs: avoid loss of life, help children grow healthy

2. Raise living standards: more educated people —→ more economic growth —→ more income tax —→ less unemployment —→ more revenue for government

3. Ethical reasons: moral duty of government and people to help others

Government intervention to reduce poverty

1. Progressive tax —→ more income —→ more tax

2. Redistribution of income through benefits payments: use tax revenue and give to those with less income

3. Invest into education —→ well educated —→ higher employment

Fiscal policy

Decisions made by government on its spending, tax, and borrowing that affect aggregate demand.

Direct tax

Tax an individual pays directly to the government

Indirect tax

Tax on goods and services rather than on an individual (e.g VAT)

Value Added Tax (VAT)

Tax on goods and services

Government revenue

1. Indirect tax

2. Direct tax

3. Environment tax —→ land fill —→ tax on littering

Indirect tax examples

1. Duties: heavy tax on alcohol, smoking etc.

2. Stamp duties: houses

3. Council tax: pay for local services

Fiscal deficit

Government spending exceeds government revenue

Fiscal surplus

Revenue exceeds government spending

Impact of fiscal deficit and surplus

Fiscal deficit —→ debt is bigger, have to spend bigger portion of revenue, instead of on infrastructure development/health care etc. and also future generation is burdened by todays debt.

Fiscal surplus —→ lower tax on public services

Impact of fiscal policy on macroeconomic objectives

Inflation —→ contractionary will reduce inflation by increasing tax or cut its own spending.

Economic growth —→ Expansionary will boost economic growth, lower taxes will increase profits and more spending will happen

Unemployment —→ expansionary will boost economic growth, more demand, more supply, more workers to help produce

Monetary policy

Government policy to manage economy through money supply and interest rates

Expansionary fiscal policy

Stimulate demand in economy

Contractionary policy

Reduce demand in economy

Base rate

Ratees of interest sate by government/regional banks which influences all other interest rates

Mortgage

Loan to buy land or house, payed back in years, if stop making payments property is seized

Rate of interest

Price of borrowing money

Impact of interest rate on macroeconomic objectives

1. Inflation —→ raise interest rates so less money supply

2. Unemployment —→ lower interest rates means more demand, so more workers —→ higher unemployment

3. Economic growth —→ help get out of a recession

4. Current balance —→ if imports are elastic then higher interest rates would reduce them, exchange rate can become strong however and imports will be cheaper and exports more expensive

• Have to consider price elasticity of exports and imports, strength of link between exchange rate and interest rates

Quantitative easing

Buy government bonds to increase aggregate demand, like printing money

Aggregate supply

Total amount of goods and services in an economy at given price at given time

Supply side policies

Government measures to increase supply in an economy

Impact of supply side policy on productivity

1. Improve flexibility: adapt more easily to new technology and practices

2. Training and education —→ more education and training —→ more productivity, it’s good when there is competition and you need to lower costs

Impact of supply side policies on total output

Try to increase PPC

Impact of supply side policies on macroeconomic objectives

1. Privatization: improve quality and pricing due to competition but there is risk of private monopoly so less quality and more pricing

2. Deregulation: Reduce paperwork, unnecessary licenses to increase competition and have more quality and pricing however this can cause a recession

3. Education and training —→ more productive as there is more knowledge, well prepared but changes takes years to show

Lower business & income tax

High interest rates downsides

Discourage customer and business from borrowing —→ less spending —→ lower AD —→ more unemployment

Globalization

Growing interconnection and interdependence between economies

Reasons for globalization

1. Less tariffs and quotas

2. Reduced cost of transport

3. Reduced cost of communication

Impact of globalization

1. Countries: bring wealth to country of origin, increasing GDP to country that provides sites

2. Government: increased tax revenue

Impact of globalization on producers

1. More customer base: more sales

2. Lower costs —→ grow quicker —→ exploit economies of scale

   1. Access to labour —→ get labour from anywhere in the world

Impact of globalization on consumers

Cheaper goods —→ higher living standards

Impact of globalization on workers

Freedom of movement —→ people are able to find jobs easier —→ less labour shortages

BUT

Companies find extremely cheap offshore labour and original workers lose their jobs