Econ plus dal macro year 1 notes

Question 1

What are the macro objectives of an economy?

Answer 1

TIGERS
Trade - balanced exports and imports
Inflation - low and stable (2%)
Growth - strong, sustained and sustainable
Employment - Low employment and full employment
Redistribution of income - Fair
Stability

Question 2

What are the non core objectives?

Answer 2

Sound gov finances
Environmental sustainability
Productivity growth

Question 3

What are injections into the circular flow of ncome?

Answer 3

Investment
Gov spending
Exports

Question 4

What are leakages into the circular flow of income?

Answer 4

Savings
Taxation
Imports

Question 5

How does the circular flow of income work?

Answer 5

Households spend on goods and services. This money goes to firms and then firms reward their workers which they then take back to their own households
Households provide factors of production to firms in the form of labour and then these firms make goods and services for households

Question 6

What is the relationship between injections and leakages?

Answer 6

Injections > Leakages, economic growth increases
Injection < Leakages, economic growth decreases
Injection = Leakages, economic equilibrium

Question 7

How to calculate the index number?

Answer 7

Raw number / Base year raw number x 100

Question 8

What are different measures of economic growth and living standards?

Answer 8

GDP (real) :
- value of all final goods and services produced in an economy in a year
- measure of growth, measure of living standard

Issues as a method of growth?
Double counting - we include value of output in primary sector then include it again when it is being produced in the second sector.
Informal activity - black market activity, non registered business or DIY work
Errors given vast data collection

Issues as a measure of living standards:
Negative externalities of production (air pollution, deforestation aren’t included in GDP)
Income inequality isn’t mentioned
Type of output produced (capital goods benefits businesses not consumers)
Doesn’t measure other quality of life aspects

GDP/Capita:
Measure of individual incomes, slightly more accurate

Issues:
Same issues as above
Remittances aren’t factored in
Influence of FDI - when foreign businesses operate in your country - it increases the countries GDP but will be sent back home to their own country majority of the time

GNI:
Total income generated by a countries FOP’s regardless of where they are located
GNI = GDP + net income from abroad (Income earned by domestic workers - income earned by foreign workers)

Green GDP:
Counts environmental costs

Issues:
Hard to put a monetary value on environmental costs

Question 9

What is economic growth?

Answer 9

It is an increase in real GDP in an economy in a year caused by an increase in AD or an increase in LRAS

Question 10

When does short run growth occur?

Answer 10

This is when an increase in AD leads to economic growth - they are using spare capacity to increase real GDP
On a graph, Y1 moves to Yw which is getting closer to YFE (decreasing the negative output gap), using up spare capacity to produce more goods and services

Question 11

What can be some causes of economic growth?

Answer 11

Lower interest rates makes it cheaper for consumers to borrow to invest, so C and I will increase, but they can also lower the exchange rate which can boost the X-M.
Lower income/corporation tax allows for more disposable income and more retained profit which can be used to invest
Higher consumer/business confidence increases C and I
Higher gov spending increases G
Weaker exchange rate ( increases X-M)

Question 12

Long run growth (potential growth):

Answer 12

Occurs any time there is an increase in LRAS which means there is an increase in the productive capacity of an economy - has the potential to grow at a faster rate

Question 13

What are some reasons for an increase in LRAS?

Answer 13

Increase in the quantity and quality of FOPs. Increase in productive efficiency

Increase in labour productivity which means an increase in quality
Increase in workforce size ( immigration) which leads to an increase in quantity
Infrastructure improvements
Increase in competition which leads to an increase in productive efficiency
New resource discoveries

Question 14

What are the different stages of the economic cycle?

Answer 14

Boom: Growth faster than trend, High profits, Low unemployment, High consumer and business confidence, High demand for imports, rising tax revenues and demand-pull inflation

Recession/trough: Declining AD, high unemployment, sharp falls in confidence/investment, discounting, falling house prices, lower inflation, low demand for imports, loose policy

Recovery: Rising consumer confidence, higher house prices, rising business confidence, higher investment, increase in construction, Loose policy

Question 15

Costs and benefits of economic growth for living standards

Answer 15

Benefits:
Higher disposable income
Higher employment - more demand for a countries G and S so more employment
Higher profits for firms - can invest which can trigger more growth
Fiscal dividend for government - increase in tax revenue, income, VAT, corporation tax

Costs:
Higher inflation (demand pull) - erodes purchasing power
Income equality - One sector dominance, capital intensive (owners get more not workers), urban vs rural, poor quality jobs, lack of welfare state (no equal income distribution)
Environmental costs
Current account deficit - when incomes rise, more imports

Evaluation:
We want sustainable growth
Inclusive growth - everyone needs to benefit
Balanced growth - not just growth from 1 sector
role for private sector / government - tax revenues being used correctly, supply side policies in place to avoid potential conflicts

Question 16

How is unemployment measured?

Answer 16

Consists of those of working age who are willing and able to work, actively seeking work but don’t have a job

LFS:
employed
unemployed
economically inactive
40,000 households

Claimant count:
number of people claiming benefits
very difficult to compare between countries
Always below the LFS (people don’t or can’t claim)
could be subject to fraud

Unemployment rate = unemployed/economically active (employed and unemployed) x 100

The problems:
sampling errors (small sample)
cost
discouraged workers (tried to get work but keep getting rejected)
inactive groups (full time students, carers, relying on spouse income)
Under employed (part time workers) (0 hour workers)
Disparities ( youth or gender or race)

Question 17

What are the types of unemployments?

Answer 17

Cyclical (demand deficient) - lack of demand in the economy means less demand for labour

Structural - immobility whether that be occupational or geographical

Frictional - workers are between jobs

Seasonal

Question 18

What is the CPI inflation measure?

Answer 18

Inflation is the persistent increase of prices in an economy in a year

CPI:
It is when a consumer basket of most popular goods/services is formed with average prices attached. Prices of the goods are weighted based on the % of income (0-1). Weighted prices are added to give total weighted price of the basket

Index number = Raw number / Base year raw number x 100

BUT:
The average family, not everyone buys the same goods or services
Price fluctuations of certain goods (food, energy)
Housing costs
Basket updates too slow

Question 19

Causes of inflation - demand pull and cost push

Answer 19

Demand-pull:
AD shifts to the right. more pressure is being put on existing factors of production - prices will go up

The consequences of this will be:
A decrease in interest rates makes it cheaper to borrow and spend, can also weaken exchange rate and boost (x-m)
Income tax could increase
Higher consumer confidence
Higher gov spending

Cost push inflation:
SRAS shifts left - reasons are maybe an increase in raw material prices, increase in wages, increase in business taxes and price of imported raw materials due to a weaker exchange rate

Question 20

What are the costs and benefits of inflation

Answer 20

Benefits:
Workers can bargain for higher prices - good for morale and productivity
Consumption is natural
Firms encouraged to increase output as they can raise price and earn more revenue
Can keep unemployment low in a recession
Reduces real value of debt - easier to pay off debt if wages/revenue rise
Can improve gov finances - gov revenue from VAT, tax brackets, fuel duty. May not be spending as much on gov services

Costs:
Loss of consumer purchasing power (if wages don’t rise at same rate)
Erosion of savings (if IR aren’t rising at the same rate) - savings are losing value
Lower export competitiveness - less competitive compared to other countries
Wage/consumer price spirals - as inflation is high and workers anticipate, they ask for higher wages which increases costs of production (menu costs)
Fiscal drag - when inflation is rising, so pay of workers is rising in line with it, they can be dragged into higher tax brackets which makes them worse off
Inflationary noise - volatile rate which means signalling function loses its value

Evaluation:
Rate - Low and stable inflation leads to more benefits
Causes - demand pull is more favourable as you get growth and low unemployment but the opposite is cost psuh. Demand pull is easier to solve using contractionary demand side policies. Nothing you can do about cost pull
Duration - Long term has more costs/risking spirals
Anticipated vs unanticipated
Stability

Question 21

Deflation causes and consequences

Answer 21

Deflation is the persistent fall of prices in an economy in a year
Demand-side inflation is bad
Supply-side deflation is good

Demand side deflation comes with lower growth. It is long term which means it can be anticipated.

CONSEQUENCES are that Anticipated deflation is dangerous. It leads to delayed spending (why buy now when you can buy cheaper). Also it increases the real value of debt.

Supply side inflation comes with higher growth. It comes short term and unanticipated.

Consequences: falling prices for consumers, falling input prices for firms

Evaluation:
Anticipated/Unanticipated
Causes (demand or supply side)