Macro year 1 Flashcards
what are the macroeconomic objectives
- strong, sustained, sustainable economic growth
- low unemployment, full employment
- low and stable inflation (2% ±1%)
- Balanced trade
- Fair distribution of income
remebreing macro obj
what does TIGERS stand for
- trade
- Inflation
- Growth
- Employment
- redistribution of income
- stability
What are the non-core macro objectives
- sound goverment finanices (making sure the economy can pay its way in the future)
- Environmental sustainability
- Productivity growth (making sure its rising in the long-run)
draw the full circular flow of income diagram
What are the 2 fundimental economic agents found in the circular flow of income model
- Households & firms
what do households provide to firms in the ciruclar flow of income model
- Factors of production (CELL)
- Consumer expenditure
What do firms provide households within the ciruclar flow of income
- Factor incomes (wages, salary, rent, profit, intrest)
- goods/services (made from combination of factors of production)
- define leakages in the circular flow of income model
- give examples
- Leakages are withdrawals of incomes from the economy
- Examples of these could be savings, taxation, import spending
What are injections in the circular flow of income, what are some examples
- external economic activities that introduce money into the economy
- investment (spending by firms on capital goods), goverment spending, exports
How can we determine if the economy is growing or not from the circular flow of income model
comparing the value of leakages and injections
what are the 3 outcomes that are possible in terms of economic growth for the circular flow of income model
I+G+X > S+T+M (increasing growth)
I+G+X < S+T+M (decreasing growth)
I+G+V = S+T+M (macroeneconomic equilibirum)
I= investment
G= goverment spending
X= export spending
S= savings
T= taxation
M= import speing
What are the 3 methods of measuring GDP from the circular flow of income model
- output method
- income method
- expenditure method
How is the output method calculated
- it adds up the final value of all goods/services produced in an economy in a year
How is the income method measure of GDP calculated
- by adding up all the factor incomes earned in an economy in a year
How is the expenditure method calculated
- adding up the total expenditure on a countries goods/services in a year
- ^C+I+G(X-M)
How are the output, income and expenditure methods linked
- outcome = income = expenditure
- as they are all trying to indicate the same number
- your spending on a good/service is going to be equal to the value of that good/service which is going to be equal to the price of the good/service and so therefore equal to the income of the shop owner
Why do we use index numbers
- to simplfy hard numbers in to easier numbers
- to allow for quick and easy data comparison
what is the formula for potential difference
difference/original x 100
what is the formula for index numbers
raw number / raw number of base year x 100
What are the different measures of economic growth
- GDP
- GDP/per capita
- GNI (per capita)
- Green GDP
Why are national income statistics so useful for a goverment
- allows the goverment to see how their economies are doing,
- measure of economic performance (in both the SR & LR)
- Allows goverments to see wether they are meeting their objectives for economic growth
- Allows goverments to evaluate policys
- It allows econonmic agents to ‘forecast’ expected demand or growth going forward
- can act as a measure of living standards
- Allows for a comparison of domestic anf foreign economies
What is real GDP
GDP adjusted for inflation
What is the definition of GDP
The value of all final goods/services produced in an economy in a year
What is the benfits of using GDP/real GDP
- gives a measure of growth
- Gives a measure of living standards
What are the key issues of using GDP/real GDP as a measure of economic growth
- there is a risk of double counting (especially if output method used)
- informal activity (black markets, unregisted shops, DIY work, subsistence agriculture)
- Errors given vast data collection
What is meant by double couting in reference to GDP
we include the value of output in the primary sector and then we include it again when that primary commodity has been manufactured into something in the secondary sector
What are the key issues of using GDP/real GDP as a measure of living standards
- the neg externalities of production have not been included
- Income inequality (distribution is of income is ont taken into account)
- The kind of output produced (if capital is produced, not immeditantly good for consumers)
- There are many other quality of life aspects that it does not take into account
what are the benefits of using real GDP per capita
- it gives us an average measure of individual incomes in the economy
What are the issues with GDP per capita
- not take into account factors incomes (e.g. remittances) earned abroad
- takes into account remittances that are sent home to foreign countries
- takes into account repatriated FDI profits
what are remittances
domestic workers leave the country and work abroad to earn higher incomes, this income is then sent back to their home country
what is GNI
defined as the total income generated by a countries factors of production regardless of where those factors of production are located
what are the benefits of using GNI
- factor incomes (as long as its domestic factors of production) will be included in the GNI figure
- ^remittances are more likely to be taken into account giving a truer reflection of living standards (especially in developing countries)
- Will not be influenced by FDI repatriated profits
what is the formula for GNI
GNI=GDP + net factor incomes
What are some issues with using GNI
- FDI income will not be account for
What is the formula for net factor income
income earned by domestic workers/firms - remittances+repatriated profits
what is economic growth
- an increase in real GDP in an economy in a year caused by an increase in AD or LRAS
what is short-run/actual growth
- an increase in AD
- ^caused by using spare capacity to increase real GDP
what is the formula for aggregate demand
C(consumer spending) + I(investment spending) + G(goverment spending) + (X(export spending)-M(import spending)
what graphs can you use to show an increase in short run growth
- a PPF cruve with the point of production moving further towards the frontier
- a AS AD diagram (keynesian or classical) and show a shift to the right for AD
what are some causes of short run/actual economic growth
- lower intrest rates (C↑, I↑, X-M↑)
- lower income/corporation tax (C↑, I↑)
- higher consumer/business confidence (C↑, I↑ more likely to spend or invest)
- higher goverment spending (G↑)
- weaker exchange rate (X-M↑)
↑
how do lower intrest rates increase short run economic growth
- makes it cheaper for consumers to borrow and spend
- makes it cheaper for firms to borrow and invest
- low intrest rates can weaken the exchange rate and so boost X-M
^gonna take their money out of UK and so supply is gonna sky rocket and make £ worth less hence weakend exchange rate
what is long-run/potential economic growth
- an increase in LRAS
- ^increase in the productive capacity of the economy
what graphs can you use to show an increase in long run growth
- a PPF with a shift of the curve to the right to show an increase in productive potential
- a AD AS diagram (classical or keynesian) with a shift of LRAS to the right
what are the causes of long run economic growth
- increase in quantity in FoP’s
- increase in quality of FoP’s
- increase in productive efficency (a reduction in long run cost of production for firms)
what are some examples of things that could cause an increase in long run growth
- increase labour productivity (↑quality of FoP)
- increase in workforce size (immigration) (↑ quantity of FoP)
- investment (depending on type could be ↑ quality and quantity of FoP and ↑ in labour productivity)
- infrastructure improvements (↑productivity of labour)
- increase in competition (force costs to be lower to become more competitve so ↑ productive efficency)
- new resource discoveries (↑quantity of FoP)
what causes the economic cycle
- fluxuations in GDP caused by shocks
What are the 4 stages/phases of the economic cycle
- boom, when actual growth is at its peak
- recession, when growth starts to fall after a boom
- trough, worst positino from a recessin
- recovery, when growth starts to rise after a trough
definition of recession
2 successive quarters of falling growth
when does a positive output gap occur
when actual growth is greater than potential/trend growth
when does a negative output gap occur
when actual growth is less than potential/trend growth
characteristics of economy in a boom
- positive output gap in the economy
- firms making high profits
- low unemployment
- high consumer and business confidence as economy is doing well
- high demand for imports as incomes rise
- rising tax revenues
- demand pull inflation
characteristics of a recession and trough
- increasing negative output gap
- high unemployment ( e.g. getting rid of workers to maintain profit margins)
- sharp fall in consumer/business confidence
- fall in house prices and construction
- lower demand pull inflation
- macro policys to stimulate growth
^lower intrest rates
^higher goverment spending
^ lower taxation - falling incomes
^low demand for imports
charcteristic of recovery
- rising consumer/business confidence
- higher house prices
- higher consumer spending and investment spending
- increase in construction
- macro policys to stimulate growth
- employment rises
- increase in demand pull inflation
what are the types of shocks that cause the economic cycle
demand side and supply side shocks
what is a negative demand side shock
what are examples
- shocks to aggregate demand that reduce it
E.g.
- a sudden increase in intrest rates
- sudden cut in goverment spending
- sudden strengthening of the exchange rate
- sudden housing market crash
- sudden banking sector/financial market crash (like what happened in 2008-10) caused less consumption and investment
- sidden increase in income and corporation tax
- define supply side shock
- give examples
shocks that affect LRAS
E.g.
- natural disasters
- wars
- sudden increase in raw material price
- sudden increase in wages
- sudden increase in businesses taxes (VAT)
- sudden weakening of exchang rate (imports of raw materials more expensive)
what are the benefits of economic growth
- higher disposable income (potentially higher wages and salaries,promotions, more productive demand higher income)
^higher living standards for those households - higher employment
- higher profits for firms
- fiscal dividend for goverment
^increase in tax revenue, can spend on country to improve it
what are the costs of economic growth
- higher demand pull inflation
^ erode purchasing power - income inequality depending on type of growth
- environmental costs
- current account deficit
^as incomes rise suck in imports
^macro obj conflict
- how could economic growth lead to income inequality
- how can it be worsened
- one sector dominance
^high incomes might be contained to that sector - capital intensive production
^higher incomes going to be contained to owners of capital not whole population - if growth is coming from urban areas instead of rural areas there is going to be an income divide
- could be worsened if lack of welfare state
^ no income redistrubuting policy will not fix problem
what are some points for judgement/evaluation for economic growth
- is it sustainable growth
- is it inclusive growth
^between different groups of people - is it diverse growth
^growth from multiple different sources - will private sector use growth moraly
^pay workers well, look after environment, good investing - will goverment use growth morally
^make sure tax rev used correctly, ensure policys and regulations to minimise costs
what is meant by unemployed
those of working age who are willing and able to work, actively seeking out work but do not have a job
what are the 2 main methods of measuring unemployment
- Labour force survey (LFS)
- claimant count
what is the labour force survery
- conducted by ONS in uk (office for national statistics)
- around 100,000 people given questionnaire
- from data ONS work out no. of employed, unemployed and economically inactive
formula for unemployment rate
unemployed / economically active (x100)
what is the claimant count
measure of the total number of people claiming unemployment benefits
what are some issues with the claimant count
- difficult to compare between countries
^some countries might not have these benefits, could have different conditions to claim benefits - not everyone eligible for them will claim them
^embarrased or no need - not everyone is eligible for them
^large amount of savings, assests not eligible - could be subject to fraud
what are some issues with the labour force survey
- sampling size
^tiny fraction of population - sampling errors
- disparities
^regional unemployment, youth vs age, racial rates - under-employed
^only need to work an hour a week to be ‘fully employed’ in UK, - discouraged workers
^people that have working potential but no longer want to work (hidden unemployed) - expensive to conduct
^high admin costs, calculating, interpreting - inactive groups
^full time student, early retired, rich partners, still have working potential
what are the types of unemployment
- cyclical/demand deficent unemployment
- structural unemployment
- frictional/search unemployment
- seasonal unemployment
- casual unemployment
what is cyclical unemployment
What can cause it
- when there is a lack of demand there is less derived demand for labour
- any thing that can shift AD to the left would increase this unemployment
what is structural unemployment
give all details
- the immobility of labour
- ^ocupational immobility & geographical immobility
- ocupational immobility is when workers dont have skills (loss of skills or skills are worthlesso can’t transfer jobs)
- geographical immobility is when workers are not willing to move to find work
what is frictional unemployment
- unemployment that occurs when workers are between jobs
^when searching for a new job
what is casual unemployment
- when workers like actors and builders that have contracts that end at random times
- they are casually unemployed until they find a new contract
what is inflation
persistent increase of prices in an econonmy in a year
what is disinflation
- when prices are still rising but at a slower rate than before
- e.g. year 1 inflation rate is 5% then year 2 rate is 2%
^inflation is still positive but the inflation rate has decreased
what is deflation
- when prices in the economy are actually falling
- the inflation rate is negative
what is the main method to measure inflation
- A CPI/CPIH
- ^consumer price index/housing
- calculates annual rates of inflation
why is the consumer price index a good method of measuring inflation
- the inflation rates we get will tell us about rising in prices of goods/services that consumers are buying
- inflation rate we get is applicable to households
how do you carry out a consumer price index
1) expenditure survey carried out
2) A ‘consumer basket’ of most popular goods/services is formed with average prices attached
3) Prices of these goods/services are weighted based on % of income (0-1) (if take 10% of income 0.1)
4) weighted prices are added to give total weighted price of the basket
5) Base year selected with index value 100
6) weighted basket prices converted into index numbers
7) % △ calculations done to work out annual inflation rates
8) Basket is updated yearly
what is the expenditure survey
- issued by ONS (office of national statistics)
- record of what is bought, its price, quantity, where bought from and % of income spent on G/S of housholds over 2 weeks
what is RPI
- retail price index
- its the same as the consumer price index but includes housing costs
- also due to differents in calculating, the RPI would give a higher rate
what are some issues with CPI
- personal inflation rates differ (there is not a unifrom average family, low income vs high income households)
- price fluctuations of certain goods (could distort rate, food,energy often demand/supply inelastic goods/services)
- Housing costs are not included (rent, mortage intrest payments, these take up a lot of income %)
- basket updates too slow (consumption habits change faster, not perhaps not be representive of current consumption habits)
what is core CPI and what problems can it over come with CPI
- its the CPI minius goods/services likely to experience heavy price fluctuations such as gas, electricity and fuel
- overcomes problem of these good distorting inflation rates
CPI= consumer price index
What is the PPI
whe do we use it
- producer price index
- we go to this if we think changes in energy prices will effect CPI in the future
- measures increase in the price of goods as they leave the factory gate
- ^if these goods go up in price it means costs of production is increasing
What is CPIH
what problem does it overcome with CPI
- consumer price index housing
- all housing costs are in the basket
What are the 2 major types of inflation
- demand pull inflation
- cost push inflation
when & how does demand pull inflation occur
- when aggregate demand shifts to the right (increase)
- there is greater pressure on existing factors of production to produce more
- ^existing FoP are becoming scarcer, when more pressure is put on a scare resource it come up in price
^(wages↑, price of capital↑, price of land↑, ↑↑↑cost of production) - firms pass on higher costs via higher prices
when & how does cost push inflation occur
- when SRAS shifts to the left (SRAS decreases)
- if firms are suffering from higher costs of production they are going to be passing on higher costs via higher prices
what are the costs of high inflation
- lower purchasing power (if wages are not risinig in line with inflation)
- erosion of savings (if intrest rates are not rising in line with inflation, puts people off saving and so could increase inflation)
- lower export competativeness (lead to worsening of CA deficit, harming economic growth)
- wage/price, consumer spirals
- fiscal drag inflationary noise
what are shoe leather costs
- oppurttunity costs of the time and effort put into searching for a bank with higher intrest rates
^(to try and battle erosion of savings due to high inflation)
what are the problems with erosin of savings due to high inflation
- puts people off saving and so could increase inflation
- savings losing real value
- bad news for those who rely on savings such as unemployed, ecnomically inactive, old age pensioners
- harder to make large purchaes that require savings
what are the problems with wages/consumer spending spirals due to high inflation
- if high inflation becomes anticipated and then spiralling occurs it creates risk of further inflation and hyper inflation
How does wage/price inflation spirals occur
wage/price spirals:
- as inflation is high and workers anticipated it they bargin for higher wages
- ^this increases COP for firms and pass on higher prices to consumers which increases inflation and so leads workers to ask for even higher wages
How does consumer inflation spirals come about
- if consumers anticipate high inflation the rational thing to do is bring forward your consumption
- ^this would increase consumption, increasing AD and increase demand pull inflation
what are menu costs
- if inflation is high and prices and rising, firms have to continuously update prices which is costly
^past on via higher price
what is fiscal drag
- if a worker is receiving a pay rise in line with inflation over time it could drag them into a higher tax band in a progressive income tax system, which could result in them being worse off
- ^good for gov bad for consumers
this only occurs if they tax bands themselves dont rise with inflation
what is inflationary noise
- when the inflation rate is volatile
- ^price signalling function of markets looses its value
- ^creates uncertainty, consumers put off their consumption and firms put off long term investment plans
- ^can hold back economic growth (decreases C + I)
what are the benefits of low, stable inflation
- workers with higher wages
- consumption is natural (no delaying or bring forward of spending, reduce shocks)
- firms encouraged to increase output
- can keep unemployment low in a recession
- reduces real value of debt
- improvement of goverment financies
How can low, stable inflation help to keep unemployment low in a recession
- in a recession its normal for firms to sack workers to lower costs and maintain profit margins, firms dont really want to do this tho
- ^its hard to get skilled workers so dont want to let them go
- if there is some inflation e.g. 5% firms can raise there prices by 5% and hopefully get an increase in rev
- if they give their workers a 1 % pay rise (costs increase by 1%)
- ^so hopefully revenue is increasing more than costs and so can still remain relatively profitable while retaining workers
evaluation of costs and benefits of inflation
- if inflation is low and stable we get more benefits than costs vice versa
- demand pull inflation is more favourable as we get higher growth and lower unemployment, cost push we get lower growth and higher unemployment
- ^demand pull inflation is easier to solve, if cost push gets out of control nothing u can do
- long term high rates of inflation could result in more spiraling and hyperinflation concerns
- the more volatile it is the more inflationary noise
what are the 2 types of deflation
- demand side deflation (bad/malignant deflation)
- supply side deflation (good/benign)
why is demand side deflation reffered to as bad/malignant deflation
- comes with lower economic growth
- it can be long-term and anticipated
not always, could be short term and unanticipated
why is supply side deflation reffered to as good/benign deflation
- comes with higher economic growth
- short-term and unanticipated
not always, could be long term and anticipated but less likely
Why is short term unanticipated deflation good news
- falling prices for consumers
- falling cost of production for firms