Economics IGCSE 9-1 Edexcel (macroeconomics)

What is economic growth?

Increase in the level of output by a nation.

What are the macroeconomic objectives?

Redistribution of income

Reducing unemployment

Environmental protection

Balance of Payments

Economic growth

Controlling inflation

What is GDP?

The market value of all final goods and services produced within a country in a given period of time.

What are the limitations of GDP? (any 3)

- Inflation

- Population changes

- Statistical errors

- The value of home produced goods

- The hidden economy (unrecorded paid work)

- GDP =/= living standards

- External costs

What is the effect of boom on growth, employment and inflation?

- GDP growing fast

-Existing firms expanding, new firms entering market

-Demand will be rising, jobs created, wages rising, profits for firms increasing.

-However, prices may also be rising.

What is the effect of Downturn on growth, employment and inflation?

- Economy growing at a slower rate

- Demand for goods and services will stop increasing or begin to fall

- Profits fall, Firms stop expanding and unemployment begins to rise.

- Some firms say leave the market

- Prices rise more slowly.

What is the effect of Depression on growth, employment and inflation?

- If GDP begins to fall the bottom of the cycle is a depression.

- Demand will start to fall for many goods and services, especially non-essentials

- Unemplyment rises sharply, business confidence is very low, bankruptcies rise.

- prices become flat.

What is the effect of recovery on growth, employment and inflation?

- GDP starts to rise again

- Businesses regain confidence and economic activity goes on the rise.

- Demand starts to rise, unemplyment falls nad prices start to rise again.

What are the impacts of economic growth (5)

- Employment is increased. (More production, needs more workers, less unemployment. Govt spend more, creates jobs in public sector)

-Standards of living increase (High avg income, more disposable income, can buy more goods and services

- Reduce poverty (New jobs taken by poor, and more tax revenue means more govt spending on tackling poverty.)

- Raise productive potential, PPC shifts outwards.

- Harm to the environment

What is inflation?

A sustained increase in the general price level of goods and services in an economy over a period of time.

What are the two types of inflation

Demand Pull and cost push

What is demand-pull inflation?

When demand outpaces the economy's ability to produce goods & services.

What is cost-push inflation?

A rise in the general price level resulting from an increase in the cost of production

What is the relationship between inflation and interest rates?

LOW INTERTEST: When borrowing funds leads to extra spending, increasing demand and causing prices to rise.

HIGH INTEREST: Less borrwoing leads to less spending, lower demand so less inflation.

Impact of inflation (5)

Reduces purchasing power of money, lowers living standard.

Wages worth less. (workers negotiate for higher wages, then price of goods will increase.)

Prices of exports rise, demand overseas will fall. Worsen C/A.

Unemployment decreases as firms want to sell more goods for higher prices

Business and consumer confidence more saving from consumers, businesses may postpone growth plans and not take risks

What is unemployment?

When those actively seeking work are unable to find a job.

What are the 5 types of unemployment

cyclical - boom to downturn = business activity slows down

structural - changes in the structure of economy (e.g. decline in industry)

frictional - short term, moving between jobs

seasonal - certain times of year (holiday resorts)

voluntary - people choosing not to work

What is the impact of unemployment

-Less output, (PPC not not fully used. National income and living standards will be lower.)

-Poverty increases

-Government spending on benefits - unemployment benefits

-Tax revenue falls - taxes linked to income and spending

-Less consumer confidence

What is the balance of payments

The record of all transactions relating to international trade.

What is the current account?

Part of the BOP where exports and imports are recorded.

What is the capital/financial account?

Record of the flows of money in and out of a country resulting from transactions in relation to saving, investments and speculation.

What is a current account deficit?

When the value of imports is greater than exports.

What is invisible and visible trade.

Invisible - Trade in services

Visible - Trade in goods

What is the relationship between the current account and exchange rates.

Strong exchange rate - exports expensive imports cheap, worsens C/A

Weak exchange rate, exports become cheap and imports expensive, benefits C/A

Reasons for deficits and surpluses on the C/A.

Quality and price of domestic goods - good quality means rising sales from overseas - improve CA balance

Quality and price of foreign goods - if better than domestic goods, demand for imports increase - higher CA deficit

Exchange rates between countries - pound fall in UK - more holidays - boost invisible imports, good for CA

What is the impact of a C/A deficit

Inflationary pressures - if imports become more expensive then general price level will rise.

Funding the deficit - foreign currency will have to be purchased to pay for imports

Examples of business activity that damages the environemt

Mining - crushing rocks release harmful material such as radioactive elements, asbestos-like minerals and metallic dust

Agriculture - pesticides and fertilisers end up in the sea, killing aquatic life

What are ways that businesses damage the environment

- visual pollution, including litter

- noise pollution - traffic, construction sites, music in pubs

- air pollution - factories, machines release emissions

- water pollution - industrial waste (chemical processing), sewerage (some untreated goes into the sea)

Government intervention to protect the environment

Taxation

Subsidies

Regulation

Fines

Pollution Permits

Park provision

What is absolute poverty?

Not enough resources to meet all of their basic human needs.

What is relative poverty

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

What are reasons to reduce poverty and inequality?

Meet basic needs - undernutrition worsens affect of disease

Raise living standards

Ethical reasons - moral duty of both ppl and government

What are methods of government intervention to reduce poverty and income inequality? (3)

Progressive taxation - proportion of income paid in tax rises as the income of the taxpayer rises

Redistribution through benefit payments - gov payments for the disabled, sick, single parents and elderly

Investment in education and healthcare

What is fiscal policy?

Decisions about government spending, taxation, and levels of borrowing that affects aggregate demand in the economy.

What are direct taxes

Taxes levied on the income earned by firms and individuals e.g. income tax

What are indirect taxes?

taxes levied on spending, such as VAT e.g. duties (petrol), council, stamp duties (certain assets such as houses and shares)

What are areas of government expenditure?

Health care

Education

Defence

Public order

What is a fiscal deficit and a fiscal surplus?

Deficit: Amount that government spending exceeds revenue

Surplus: Amount that revenue exceeds government spending.

What is the impact of a fiscal deficit?

- Government will have to borrow money to fund the deficit.

- National debt gets larger.

- Revenue spent on paying debt.

- High opportunity cost of paying interest payments.

- Less spending on healthcare, education ect

Eval - consider size of deficit in relation to GDP.

What is the impact of a fiscal surplus?

- Allows for more government spending

- Allow for lower taxes, or provision of public services.

- Can be used to pay off national debt

- Reduce future interest payments and strengthen the nation's finances.

How does fiscal policy have an impact on macroeconomic objectives?

Influences aggregate demand in the economy.

What are the two types of fiscal policy?

Expansionary, contractionary

What is the impact of fiscal policy on inflation

- Contractionary fiscal policy can be used to reduce inflation

- by reducing aggregate demand

- by cutting government spending and increasing taxation

- Which relieves inflationary pressures.

What is the impact of fiscal policy on economic growth?

- Expansionary fiscal policy can stimulate economic growth.

- Increasing in government spending

- More civil servants employed

- More demand for goods and services as people were previously unemployed.

- Cuts in taxes increase demand as houseolds and firms have more money to spend.

What is the impact of fiscal policy on unemployment?

- Expansionary fiscal policy can reduce unemployment.

- Increases in government expenditure and tax cuts help stimulate demand.

- To meet this demand firms produce more

- Requiring more staff

- Reducing unemployment

-Also extra spending could be used on construction projects, which are labour intensive.

What is the impact of fiscal policy on the current account deficit?

-Contractionary fiscal policy may be used in order to reduce demand.

-The government could increase taxes, which will mean households and firms will have less money to spend,

- Aggregate demand is reduced so

- so there will be less demand for exports, which will reduce the current account deficit.

What is monetary policy?

The use of interest rates and the money supply to control aggregate demand in the econonmy.

What are interest rates?

The price paid to lenders for borrowed money. It is the price of money.

What is the role of central banks on interest rates and the economy?

- Central banks implement monetary policy.

- Central banks set interest rates

- Central banks control inflation

What is the impact of changes in interest rates on Inflation?

- Caused by money supply growing too quickly

- By raising interest rates, money supply grows slower

- Agg. demand falls

- Lowers inflationary pressures

What is the impact of changes in interest rates on unemployment?

- Lower interest rates increase loans, which raises aggregate demand.

- Firms will produce more, requiring more staff, lowering unemployment.

What is the impact of changes in interest rates on economic growth?

- Monetary policy can smooth variations in the economic cycle.

- Can be used to get out of recession

- Low interest rates can stimulate economic growth.

What is the impact of changes in interest rates on the current account balance?

- To reduce a deficit the government could tighten monetary policy.

- Increase interest rates, Less loans taken

- Less aggregate demand

- Less imports, lower C/A deficit.

However, if interest rates are raised, then the exchange rate may increase, making imports cheap and exports expensive. This may worsen the current account.

Overall effect depends on:

- Income elasticity of imports

- The strength of the link between interest rates and exchange rates.

the mechanism by which a change in interest rates affects consumers

- Interest rates fall

- More loans

- Can purchase more

- Increase Agg. Demand

- Less reward for saving money

- More incentive to spend

The mechanism by which a change in interest rates affects businesses

- Firms using borrowed money respond to changes in the interest rate

- When interest rates fall, the interest payments on current borrowings will also fall.

- This boosts profits because costs are lower.

- Lower interest rates also increase business confidence and make investment more likely.

The mechanism by which a change in interest rates affects exports. (for firms)

Interest rate increases

- This will increase the exchange rate

- Imports become cheaper

- Exports become expensive

- Worsen C/A

If interest rate decreases

- Exchange rate falls

- Imports expensive exports cheap

- Improve the balance on the c/A

What is asset purchasing by central banks? (Quantitative easing)

Central banks buying financial assets such as government bonds from commercial banks, in order for money to flow to commercial banks to use for making loans.

When more loans are granted, aggregate demand increases.

What is a supply side policy?

Government measures designed to increase aggregate supply in the economy

What is the impact of supply side policies on productivity and total output

- Supply side policies generally improve the productivity of production factors.

Supply side policies work on:

- Improving flexiblity eg reducing power of uniions to disrupt, allowing labour markets to work more freely.

- Training and education

Quality of workforce improves

Improves labour productivity, increasing aggregate supply

What is the impact of supply side policies on total output

- Increase productive potential of the economy.

- With increase volumes of output, national income increases and living standards increase.

- If supply can be increased there is less dmenad pull inflation and more jobs would be created, lowing unemployment.

Impact of supply side policies on macroeconomic objectives.

Privatisation - Breaks up state monopolies and promotes competition. Competitive pressure means more quality and lower prices. However state monopolies may become private monopolies and exploit consumers.

-Deregulation

- Education and training -Improve quality of human capital, workers more productive, more employable workers, government can invest more in schools, universities, However, very expensive, long time to pay off

-Policies can be targeted or used selectively in regions of high unemployment.

-Infrastructure spending - expands productive potential

- Lower taxes to stimulate investment - more profit to reinvest

- Lower income taxes to encourage working

What are policies to reduce inflation

- (monetary policy) Higher interest rates.

discourages borrwoing

Fall in consumption and investment

Agg demand falls, less demand pull inflation

less economic growth

Unemplyment likely to rise

- Fiscal

Less govt spending more taxes

Less AD

Less demand pul inflation

BUT unemployment

What are Policies to promote growth?

-Expansionary fiscal policy, lower taxes or more govt spending.

(lower taxes) More money, more AD, firms encouraged to produce more. If output rises, economy will grow.

(more spending) More employment of civil servants, unemployed now employed, more AD, firms produce more and economy grows.

-Expansionary monetary policy

- Lower interest rate

- Cheaper loans, less incentive to save

- more AD

BUT if too expansionary inflation can take place as demand outstrips supply

Economic growth and environmental protection.

Economic growth is associated with environmental damage, so a trade off must be made

How does inflation link to the current account

(monetary) When trying to reduce inflation by raising interest rates, the current account may worsen for a period of time, as exports become expensive and imports become cheaper.

Fiscal policy can be used to avoid this as it does not effect the exchange rate.

What is globalization?

The growing interconnection of the world's economies.

Reasons for globalisation

Fewer tariffs and quotas

Reduced cost of transport

Reduced cost of communication

Increased significance of MNCs

What is the impact of globablisation for countries?

Where MNCs find sites will benefit

Higher GDP. Extra output and employment will result. More economic growth and living standards should be raised.

Countries where MNCs originate will benefit as some of the profit will be repatriated.

Globalisation will mean that economic events in one countries can affect others.

What are the benefits of globalisation for MNCs

Access to huge markets

Lower costs

Access to labour

Reduced taxation

What are the benefits of globalisation for governments

Profits made are taxed by the host nation

Can be spend to improve government services or lower taxes

What are the benefits of globalisation for consumers

Cheaper goods

Wider range of goods e.g new tourist desinations

What are the benefits of globalisation for workers

Globalistation creates new jobs, especially in developing nations.

Freedom of movement allows workers to migrate in search of work, can find work and help to make up for labour shortages.

What is the effect of globalisation on the environment

Global economic growth usually means more environmental damage. Some MNCs are criticized for how much environmental damage they cause.

What is FDI

When a firm invests directly in a foreign country.

What are reasons for the emergence of FDI/ MNCs?

Economies of scale

Acess to natural rescources/ cheap materials

Lower transport and communication costs

Access the consumers in different regions.

What are advnatages of FDI/MNCs

Job creation

Investment in infrastructure

Developing skills

Developing capitial

Taxation revenue.

Disadvantages of FDI/MNCs

Tax avoidance

Environmental damage

Moving profits abroad (repatriation)

What are reasons for free trade?

Obtaining goods that cannot be produced domestically

Obtaining goods that can be bought more cheaply from overseas.

Selling unwanted commodities

Advantages of free trade

Lower prices and increased choice for consumers

Lower input prices for firms. Can find cheapest raw materials

Wider markets to sell to.

Disadvantages of free trade

Competition for domestic businesses

Unemployment due to cheap imports

What is protectionism?

Approach used by the governemnt to protect domestic firms

Reasons for protectionism

Preventing dumping

Protecting employment

Protecting infant industries

Tariff revenue

Preventing entry of harmful or unwanted goods

Reduce C/A deficits

Retaliation

Disadvantages of protectionism

Consumers end up paying more, and have limited choice

No competition, quality may go down

Retaliaton

What are the methods of protectionism?

Tariffs

Quotas

Subsidies

What are advantages of trading blocs

Invites FDI'

More consumer choice and faster economic growth

Promotes cooperations

What are disadvantages of trading blocs

Membership fee

Can merge and become too powerful.

Rely too heavily on trade bloc trade.

What are disadvantages of trading blocs for non members,

Trade barriers

May be forced to find a new market.

What is the role of the WTO

Trade negotiations

Implementation and monitoring

Settling trade disputes

Building membership

What are WTO criticisms?

it is undemocratic

Favours corporations over workers

Destroying the environment.

Favours wealthy nations

What are the factors affecting supply for a currency?

Interest rates in other countries - People sell their currency to move money where interest rates are higher.

Currency speculators - Traders sell a currency if they think its value will fall.

The demand for imports - More imports mean people sell their currency to buy foreign money.

What are the factors affecting demand for a currency?

Interest rates

Currency speculators

The demand for exports

What is the impact of exchange rate appreciation?

Exports become more expensive, less demand

Imports become cheaper, more demand

Worsen C/A

What is the impact of exchange rate depreciation?

Exports become cheaper, more demand

Imports become more expensive, less demand

Benefit C/A