5 macroeconomic objectives
stable prices (2% +/- 1% inflation) steady economic growth (2.25% pa.) full employment, favorable balance of payments fairer distribution of wealth and income
aggregate demand
total spending in an economy
policy conflicts between the macroeconomic objectives
economic growth vs 2%inflation, unemployment vs 2%inflation, economic growth vs fairer distribution of income and wealth, economic growth vs balance of payments
total spending=
total income=total output
inflation
a general increase in the average price level from one year to the next
unemployment
when not all those who are willing and able to work are employed
balance of payments
a record of all the currency flows into and out of a country in a given time period
economic growth
the increase in the potential level of real output the economy can produce over a period of time
3 ways to calculate national income
income method: wages+rent+interest+profits/dividends, expenditure method: C+I+G+(X-M) output method: primary+secondary+tertiary+Quaternary
national income
measures the total value of goods and services produced within the economy over a period of time
GDP
the total output (goods and services) in an economy in on year
GDP per capita
the total output (goods and services) in an economy in on year divided by polultaion
nominal economic growth
% increase in GDP from one year to the next
real economic growth
% increase in GDP from one year to the next adjusted for inflation
injections and withdrawals in the circular flow of inocome
injections: exports(x), government spending(G), investment(I). Withdrawals: imports(M), savings(S), taxation(T)
macroeconomic consumption function
AD=C+I+G(X-M)
the demand for labor…
is derived from the demand for the goods and services that labor produces
aggregate demand
total level of planned real expenditure on domestically produced goods and servides
aggregate demand curve
shows the level of planned demand for real output consistent with a particular price level
money government spends comes from
taxes but is mostly borrowed creates a deficit and opportunity cost
austerity
policy that tries to reduce deficit -> creates a neutral/ balanced budget
factors that affect consumption
tax rates, consumer confidence, inflation expectations, interest rates, stage of economic cycle
factors that affect investment
availability of spare capacity, stage of economic cycle, business confidence, interest rates
factors that affect government spending
tax revenue, stage of economic cycle, size of public sector, government priorities
factors that affect exports
import tariffs overseas, exchange rates, stage of economic cycle overseas, international competitiveness, subsidies to uk producers
factors that affect imports
stage of economic cycle here, foreign government regulations, import tariffs, subsidies to uk producers
economic cycle stages
peak/boom, downturn, trough/slump/depression, recovery
labor intensive
industries that need humans to produce goods
capital intensive
industries that don’t need humans to produce goods
downsides to a boom
use of finite resources, increase in pollution, things get more expensive
upsides to a boom
more tax revenue, less spent on benefits(less opportunity cost for government cost)
competitiveness
ability to outsell other substitute goods
slump overseas->
rise in unemployment overseas-> fall in disposable income overseas-> fall in C overseas-> fall in uk exports
duties
tax on a specific product
boom
occurs when real national output is rising at a faster rate than the trend rate of growth
characteristics of a boom
fast growth of consumption, pick up in demand for capital goods, more jobs created, falling unemployment, high demand for imports, increase in government tax revenue, increase in inflationary pressures
PO gap
positive output gap- output is over the 2.25 rate of growth target
NO gap
negative output gap-output is under the 2.25 rate of growth target
sellers market
when potential buyers fight to outbid each other, supply is low, demand is high
SRAS
the relationship between real GDP and the price level, shows how much output the economy can generate in the short run at each price level
why does SRAS slope upward
at higher price levels less efficient firms can enter the market and firms are incentiveised to produce more
determinants of SRAS
costs of production, wage costs, impact or migration of workers on wages, length of working week, raw material and component prices, taxes that businesses have to pay (VAT, import tariffs and other protectionist measures), labor productivity, factor mobility, changes in exchange rates, external economic shocks, changes in tech, labor migration, commodity prices
base year
year an index number is first introduced
index number
number used to represent a group of numbers
mothball
to set a factory/production line aside waiting to start again for when AD picks up again
why is LRAS generally assumed to be vertical
in the long run productive capacity dictates supply rather than price level
LRAS
The economy’s productive cpacity
Yfe
full employment level of national income
determinants of LRAS
changes in pollution size, increase/decrease in partial equipment, innovation in technology, policies to increase workforce, education and training, factor mobility, improvements in production processes, improved attitudes of entrepreneurs,
factors that shift AD
changes in C+I+G+(X-M)
shape of Keynesian LRAS curve
inverted L
factors that shift SRAS
changes in costs of production, changes in productivity, changes in taxes and subsidies
short run economic growth
rise in GDP (RNO) from one year to the next
quantitative easing
a process by which the ban of England puts money in to the banking system so they can loan money to customers
accelerator effect
when an increase in national income leads to a proportionately larger increase in capital investment
multiplier effect
the idea that the final impact o national income of an injection will be larger that the size of the original injection
MPC
marginal propensity to consume, the fraction of an increase in disposable income spent on domestically produced goods
why MPC would stop (/multiplier)
people choose to save all, people spend it on imports, taxation
frictional unemployment
unemployment related to the process of switching jobs which may involve a period out of work
cyclical unemployment
unemployment who’s number varies with the trade/economic cycle AKA demand deficient unemployment
negative multiplier effect
a withdrawal from the circular flow of income can be magnified resulting in a final impact larger than the original withdrawal
wealth effect
if people feel wealthier they spend more
structural unemployment
when there is a mismatch between the skills of those unemployed and the skilled required by the new jobs
2 main reasons for structural unemployment
geographical immobility occupational/industrial immobility
hidden unemployment
you are employed by your skills are not e.g. engineer working at McD
hysteresis
a rise in unemployment leading to a recession so ling and prolonged that workers become deskilled and demotivated. the economy never quite makes it back to its original trend rate of growth
fiscal policy
the use of government income and expenditure to influence AD and so to help achieve macroeconomic aims
monetary policies
the use of interest rates the exchange rates and money supply to influence AD and so help achieve macroeconomic aims
demand management policies
fiscal and monetary policies that deal with cyclical unemployment and AD
supply side polices
policies that aim to increase the quantity and improve the quality off the factors of production
supply side policies examples
education and training, cut welfare benefits, reduce income tax, privatisation, free child care, flexible labour market, encourage entrepreneurs
Income effect
Ceteris paribas if prices go up you can’t afford as much of a good
Substitution effect
If the price of a good rises people will switch to substitutes
Cost push inflation
Inflation attributed to a rise in the costs of production
Demand pull inflation
Inflation attributed to a rise in AD (too much money chasing too few goods)
HICP
Harmonised index of consumer prices
Negatives of inflation
People on fixed incomes loose out , businesses find it difficult to plan, lenders loose out , menu costs, shoe leather costs , loss of international competitiveness
Triple lock
A guarantee that pensions will rise by whichever measure of inflation rises the most : CPI, RPI, average wages
Real wage unemployment
When a min wage is imposed above the market clearing wage more labour is supplied than is demanded
Investment
Spending money on capital equipment e.g. Machinery
Why we have taxes
To fund public services, redistribute income, to correct for market failure, to influence ad
Money for deficit comes from
Borrowing , previous surpluses, sell gov assets
Demand side polices
Aimed at changing AD
Supply side polices
Aimed at increasing the quality or quantity of labour
