Chapter - 3 Macro Environment Flashcards
(16 cards)
Macroeconomics
Macroeconomics is the study of the aggregated effects of the decisions of individual economic units (such as households or businesses). It looks at a complete national economy , or the international economic system as a whole
Macroeconomics policy’s objective
- Economic growth
- Full employment
- Inflation
- Balance of payments ( import = export)
Causes of inflation
-Demand pull factors
-Cost push factors
-Expectations
-Excessive growth in the money supply
-Import cost factors
Inflation gaps
Increase in demand will cause price changes.
Demand > supply
Deflation gaps
In a situation where there is unemployment of resources, there is said to be a deflation gap. Prices are fairly constant and real output changes as aggregate demand varies.
Constant prices
Supply > Demand
Stagflation
A combination of unacceptably high unemployment, unacceptably high inflation and low/ negative economic growth.
Phases in the Business Cycle
-Recession
-Depression
-Recovery
-Boom
Recession tends to occur quickly , while recovery is typically a slower process.
Types of unemployment
- Real wage unemployment
- Frictional
- Seasonal
- Structural
- Technological
- Cyclical or Demand deficient
- Long term - cyclical, structural, technological
- Short term - seasonal, frictional
GNP & GDP
GNP - gross national product
GDP - gross domestic product
Economic growth can be measured by increased in GNP or GDP
Actual growth
Actual growth in the long run is determined by two factors.
- The growth in potential output
- The growth in aggregate demand (AD)
Looks both demand & supply
Potential growth
The causes of growths in potential output are the determinants of the capacity of the economy (the supply side) rather than actual spending (the demand side).
- There may be increased in the amount of resources available
- Land and raw materials
- Labour (the size of working population)
- Capital (Eg machinery)
- Increases in the productivity of resources may result from technological progress or changed
Looks supply rather than demand
Fiscal policy
- Fiscal policy provides a method of managing aggregate demand in the economy.
- Fiscal policy : government policy on taxation, public borrowing and public spending.
Direct Tax & Indirect Tax
- A direct tax is paid direct by a person to the Revenue authority.
- An indirect tax is collected by the Revenue authority from an intermediary (a supplier) who then attempts to pass on the tax to consumers in the price of goods they sell.
Tax and Income levels
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A regressive tax takes a higher proportion of a poor person’s salary than of a rich person’s.
Television licences and road tax are examples of regressive taxes since they are the same for all people. - A proportional tax takes the same proportion of income in tax from all levels of income.
- A progressive tax takes a higher proportion of income in tax as income rises.
Functions of taxation
- To raise revenues for the Government as well as for local authorities and similar public bodies
- To cause certain products to be priced to take into account their social costs. (For example, smoking entails certain social costs, such as hospital care.)
- To redistribute income and wealth.
- To protect industries from foreign competition. If the Government levies a duty on all imported
Monetary policy
Monetary policy uses money supply, interest rates or credit controls to influence aggregate demand.
Monetary policy : government policy on the money supply, the monetary system, interest rates, exchange rates and the availability of credit.
