Macroeconomics Flashcards
What are the main objectives of economic policy?
Price stability Sustained Growth of Real GDP Low unemployment/Rising employment Higher average Living standards Balanced Trade on the current account Equitable distribution of income and wealth Balancing the budget/Controlling debt Improving well being Better regional economic balance Improved public services Improved competitiveness Environmental sustainability
What are index numbers?
Index numbers are a useful way of showing economic data more easily and then comparing or contrasting key information. It always has a index base of 100.
What is the difference between income and wealth?
Income is a flow of money going to factors of production.
Wealth is the value of a stock of assets owned by someone.
What is gross income?
Gross income is the original income received in addition to cash welfare benefits.
What is disposable income?
Gross income minus direct taxes
What is post tax income?
Disposable income minus indirect taxes.
What is economic growth?
Economic growth is the increase in the real value of goods and services produced as measured by the annual percentage change in real gross domestic product.
What is real GDP?
Real gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year, expressed in base-year prices, and is often referred to as “ “inflation-corrected” GDP.
Unlike nominal GDP, real GDP can account for changes in price level and provide a more accurate figure of economic growth
What is Purchasing power parity?
Purchasing power parity measures how many units of one country’s currency are needed to buy exactly the same basket of goods and services as can be bought with a given amount of another currency.
What is GNI?
Gross national income is the sum of value added by all resident producers plus any product taxes (minus subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad
What are the limitations with using GDP for measuring welfare?
GDP is subject to errors in measurement, it tends to understate real national income per capita due to the shadow and also the value of unpaid work by volunteers and people caring for their family.
What is the “shadow economy”?
The shadow economy includes illegal activities such as drug production and distribution, prostitution, theft, fraud and concealed legal activities such as tax evasion.
What is economic growth?
Economic growth means an increase in real GDP – which means an increase in the value of national output/national expenditure.
Why is economic growth important?
Because it enables increased living standards, improved tax revenues and helps to create new jobs
What are the two ways to improve economic growth?
an increase in aggregate demand (AD)
an increase in aggregate supply (productive capacity)
What are ways to increase Aggregate demand in an economy?
Higher real wages Tax cuts Devaluation of goods Increased government spending Lower interest rates
What Is aggregate demand equal to?
Ad=Consumption+Investment+Governement spending+Imports-Exports
AD=C+I+G+X-M
Whats are ways to increase the supply in the economy?
Increased investment Increased productivity Discover raw materials Increased labour force Improved technology
How does Economic growth occur?
Sustained growth of real GDP over time.
What are the benefits of having an growing economy?
Contributes to rising average living standards and as a result a higher GNI per capita.
Long run increase in country’s productive capacity.
What is economic well-being?
It is effectively our living standards, our quality of life. Are we happy?
What is generally used to calculate national wellbeing?
Rate of Unemployment – especially higher weighting for long term and youth unemployment.
Economic Inactivity – due to sickness or discouragement.
Income distribution – What is the level of inequality
Level of reported crime – Does higher GDP encourage more crime?
Rates of accidental deaths – Premature deaths, e.g. over 2,300 die on British roads every year.
Rates of suicide
Life Expectancy – health standards
Divorce Rates
Consumer Confidence
What is the Big Mac index?
The big index compares the US dollar price of Big Macs across countries to help assess how under/overvalued a local currency is against the US dollar.
It is an indicator for the purchasing power of a country.
Why is the Big mac used as a point of comparison for the big mac index?
Because it is a product available in almost every country and manufactured in a largely standardized size composition and quality.
What are examples of injections in the circular flow of income?
Investment in capital goods
Exports of Goods and services
Government Spending
What are examples of Leakages in the circular flow of income?
Savings out of disposable income
Imports of goods and services
Taxation
What is GDP?
Gross domestic product measures the total value of national output of goods and services produced in a given time period.
What is Gross national income?
Gross national income is GDP plus net property income from overseas assets.
What are examples of overseas assets that are included in gross national income?
Investment in factories, shops and other businesses in another country.
What are remittances?
Remittances are transfers of money across national boundaries by migrant workers.
How do remittances help reduce extreme poverty?
Countries with strong net inflows of remittances will see their gross national income rise- this helps to reduce extreme poverty by lifting GNI per capita.
What is the difference between real income and income?
Income is money received as payment for work.
Real income show the value of income adjusted for inflation. Real income are a guide to how living standards have changed and the true purchasing power of someone’s income.
What is the definition of Aggregate demand?
Total level of planned real spending on goods and services produced within a country in a given time period.
What is the real balance effect?
As the price levels falls, the real value of income rises and therefore consumers are more able to buy what they want or need.
What can cause a negative shift in aggregate demand?
Fall in net exports
Cuts in real level of government spending
Higher interest rates
Fall in the supply of credit
Decline household wealth and confidence
What can cause a positive shift in aggregate demand?
Depreciation in the value of exchange rate
Cuts in the rate of direct and indirect taxes
Increase in average house prices and share prices
Expansion of supply of credit
Lower interest rates.
What are exports?
Exports are good and services traded from one country to another.
They are an injection into the circular flow of income.
What factors can affect the demand for a nations exports?
Relative prices of export in world markets
The exchange rate
Non price demand factors, e.g. design and branding
Strength of AD in a nations key export markets.
Estimate the percentage of the UK’s gdp exports were worth in 2016?
28%
What is a trade surplus?
A trade surplus means that exports are greater than imports.
What is a trade deficit?
A trade deficit means that imports are greater than exports.
What is a net trade balance?
A net trade balance is the total value of exported goods and services minus the total value of imported products.
What are the key factors affecting consumption in an economy?
Real Disposable income
Employment and Job security
Household wealth
Expectations and Sentiment
Interest rates
What is consumer confidence?
Consumer confidence is the outlook that consumers have towards the economy and their own personal financial situation and also their views on making major purchases such as a new car or financing desired home improvements.
What is disposable income?
Income after the deduction of direct taxes and the addition of state welfare benefits.
What is the FTSE-100 index?
The FTSE-100 tracks share prices of the 100 largest companies listed on the London stock exchange.
What is household debt?
Money borrowed by individuals, usually from banks or financial institutions. This includes mortgages, personal loans, student loans and credit card balances.
What is average propensity to save?
The ratio of personal saving to household disposable income.
What must marginal propensity to save and marginal propensity to consume equal to?
1
What is Marginal propensity to consume?
The marginal propensity to consume (MPC) measures the proportion of extra income that is spent on consumption.
What is marginal propensity save?
Marginal propensity to save (MPS) refers to the proportion of any extra income that is saved by consumers.
What is savings ratio?
The percentage of disposable income that is saved.
What is Real interest rate?
The real interest rate is the nominal interest rate – inflation rate.
What are price expectations?
Consumers expectations on where they believe prices will go.
What is investment?
Spending on capital goods including plant and machinery, computer hardware and infrastructure.
What are capital goods?
Capital goods are fixed assets which are used in the productive process in order to produce a finished ‘consumer’ good.
Capital goods are not bought for their own utility; they are bought in order to be used in the productive process.
What are examples of capital goods?
Factories Offices Machines Printing press Combine harvester Assembly line
What is Gross investment?
It is the total amount that economy spends on new capital goods
What is net investment?
Gross investment minus capital consumption e.g. depreciation.
What factors affect the level of private sector investment?
Actual and expected demand- when expected demand is high planned capital investments tends to rise
Cost of capital, the rate of interest on a loan or the opportunity cost of using retained profits
Businesses taxes, such as corporation tax which affects the post tax returns on investment projects
Business confidence
Pace of change of technology.
What are the macroeconomic advantages of a higher level of capital investment?
Injection into the circular flow of income
New capital can increase productivity and creates additional capacity to supply
Creates extra demand in capital goods and industries
Can lead to strong multiplier effects on the level of GDP
Investment will support a country’s competitiveness and therefore improve the trade balance in goods and services.
What is accelerator effect?
The accelerator effect happens when an increase in GDP results in a proportionately larger rise in capital investment spending.
In other words, we often see a surge in capital spending by businesses when an economy is growing quite strongly.
Why does the accelerator affect occur?
If firms see a rise in demand and expect this demand to be maintained, then they will soon start to reach full capacity.
Therefore, to meet the future demand, they will respond by investing now. To meet a growth in demand may require considerable investment outlay.
Because of economies of scale in investment, it is more efficient to make a significant investment (e.g. increase capacity 20%) – rather than small annual increases in investment of 2%.
Therefore, firms will wait for promising economic conditions, before embarking on investment decisions.
What is the significance of infrastructure investment to the economy?
Potentially high multiplier effects from multi-billion investment projects- can result in increases in AD and create new jobs.
Lack of infrastructure may discourage foreign direct investment
Increases the capital stock per worker/ adds to a country’s long run productive potential
What is infrastructure investment?
Spending on new sewers, roads, wind farms, telecommunication networks and ports by both the private and public sector.
They tend to have high upfront costs and benefits that add up over many years.
What is aggregate supply?
Is the quantity of goods and services that producers in an economy are willing and able to supply at a given level of prices in a given time period.
What is short run aggregate supply?
SRAS is the relationship between planned national output and the general price level.
What is the profit motive?
If prices rises in the economy, producers should produce more as there is more chance to make profit.
What is an output gap?
The output gap is a measure of the difference between actual output (Y) and potential output (Yf). A positive output gap means growth is above the trend rate and is inflationary. A negative output gap means an economic downturn with unemployment
If wages rise in line with productivity will the cost of production increase?
The unit labour costs will not increase as the increase in the cost of labour is matched by the increase in output per laborer.
What changes can cause shifts in short run aggregate supply?
Wage costs changes Labour productivity Raw material and component prices Energy costs Vat Employment taxes Government subsidy Cost of meeting Business regulations Exchange rate Unexpected supply shocks
What external factors could affect aggregate supply?
World Energy Prices
World prices for food
Import tariffs/Quotas-(BREXIT)
What does a rightward shifting LRAS show?
A rise in a country’s productive potential capacity.
What can cause changes in a nation’s potential GDP?
Changes in labour supply available for production
Changes in labour mobility
Changes in the stock of capital inputs (gross capital investment)
Changes in the efficiency of allocation of factor inputs
Improvements in quality of inputs/productivity
Advances in the state of technology/innovation
What is productivity?
Productivity measures the efficiency of the production process.
How does an increase in productivity affect inflation?
Lowers inflation as unit costs falling causing an outward shift of supply if productivity is rising faster than wages.
How does an increase in productivity affect Economic growth?
Increased productivity results in higher economic growth as there gains in aggregate supply and expansion in AD.
Improvements in labour productivity enable firms to produce more for lower costs.
How does an increase in productivity affect unemployment?
Reduces unemployment as in the long run creates new jobs.
How does an increase in productivity affect the balance of trade?
Improved balance of trade as exports are more competitive, meaning there is an injection of aggregate demand into the circular flow.
How does an increase in productivity affect business investment in the economy?
Higher business investment as business profits will have increased giving them more resources to fund capital spending.
How does an increase in productivity affect the Government fiscal balance?
Productivity gains in government will help reduce state spending thus increased value for money.
What are the benefits of inward labour migration?
Skills shortages eased
Increased labour supply
Higher tax revenues
Innovation and enterprise
What are downsides to inward labour migration?
Social tensions
Pressure on public services
Risk to domestic jobs and wages
Higher house prices and rent.
What causes an inward shift of LRAS?
Damaging effects of a natural disasters
Loss of factor inputs caused by conflict
Large scale net outward labour migration
Trend decline in productivity
If short run aggregate supply is elastic is highly elastic, what would be the effect of an increase in demand?
No change in general price level as output is not close to full capacity.
If short run aggregate supply is inelastic what would be the effect of an increase in demand?
A sharp increase in the general price level because AS is now inelastic.
Where is equilibrium established?
When AD intersects with AS.
What is a positive multiplier?
A positive multiplier is a when an initial increase in an injection or a decrease in a leakage leads to a greater final increase in real GDP.
What is a negative multiplier?
When an initial decrease in an injection or an increase in a leakage leads to a greater final decrease in real GDP.
What is a the multiplier effect?
An initial change in an injection or leakage can have a greater final impact on equilibrium national income.
How does the multiplier effect come about?
Injections of new demand for goods and services into the circular flow of income stimulate further rounds of spending- because “one person’s spending is another’s income”.
This leads to a bigger final effect on the level of national output and also employment in the labour market.
What is the formal calculation for the value of the multiplier?
1/(sum of propensities to save+tax+important)
What is an example of expansionary fiscal policy?
The government injecting £200m in a project to build thousands of affordable houses.
Give an example of the multiplier process with all the steps starting from the injection.
E.g
New house building project injects £200m of extra demand and output into the economy.
Many businesses benefit directly including building supplies industries, architects.
Constructing new houses generates a new flow of factor income- including wages and profits.
Creating a multiplier effect.
What is the size of multiplier effect dependent on?
Will the extra incomes stay inside the circular flow of income and spending.
When is the multiplier value high?
When the economy has plenty of spare capacity to meet higher aggregate demand
Marginal propensity to import and tax is low
When there is a higher propensity to consume any extra income
When is there a low multiplier value?
When the economy is close to it’s capacity limits (During a boom phase of the economic cycle)
Propensity to import goods and services is high- this means extra demand leaks from circular flow.
Higher inflation causes rising interest rates which can then dampens the other components of aggregate demand.
When AS is highly elastic what is the multiplier effect likely to be?
High
When AS is inelastic what is the multiplier effect likely to be?
Low, it is harder for AS to expand to meet rising demand.
What is Marginal propensity to consume?
The change in consumption following a change in gross income.
How is Marginal propensity to consume calculated?
Change in total consumption/Change in gross income.
If gross income increases by £5000 and spending rises by £4000 what is the Marginal propensity to consume?
£4000/£5000=0.8
Change in total consumption/Change in gross income.
What is Marginal propensity to save?
A change in savings following a change in gross income.
How is Marginal propensity to save calculated?
Change in total savings / Change in gross income
If a rise in Gross income is £5000 and there a rise in consumption by £4000,
What is the change in savings?
What is the Marginal propensity to save?
Change in savings £1000
Marginal propensity to save= £1000 / £5000=0.2
What is a simple multiplier?
Where an assumption is made when calculating the multiplier that there are no tax or imports, savings is the only leakage.
Calculate the simple multiplier coefficient when there is a marginal propensity to consume of 0.8?
Simple multiplier= 1/(1-0.8)= 1/0..2
=5
What is a complex multiplier?
A multiplier with three leakages,, savings, imports and taxation.
Calculate the complex multiplier, if the sum of the marginal rate of leakage is 0.7?
1/(0.7)= 1.43
What is the sum of the marginal rate of leakage?
The sum of the MPS+ MRT+MRM
What is Economic growth?
It is a sustained rise in a country’s productive potential and real national output.
What can cause economic growth?
Expanding the capital stock.
Increasing the active labour supply
Extracting and selling natural resources
Improving factor productivity
Driving innovation and enterprise.
What are the main drivers of long run growth of an economy?
Higher productivity
Gains from innovation
Rising real incomes for households.
What does Economic growth do to a PPF?
A rise in a country’s productive capacity cases the PPF to shift outwards.
This allows both increases supply of consumer and capital goods.
What are causes of economic growth in the short run?
Low interest rates set by a nation’s central bank.
Government spending and taxation rates
Commodity prices such as oil gas and food
Exchange rates
Economic cycles in other countries
Confidence of businesses and households
What causes economic growth in the long run?
Capital investment
Improved productivity
Growing labour supply
Research and development
Innovation
Enterprise.
What is an output gap?
An output gap is the difference between the actual level of GDP and its estimated potential level.
It is usually expressed as a percentage of the level of potential output.
What is a positive output gap?
Where actual GDP is above potential GDP a sign pf possible excess aggregate demand.
What is a negative output gap?
Where the economy has a large margin of spare capacity of factor resources.
Is aggregate supply elastic or inelastic when an economy is operating at a low level of GDP?
Elastic
Is there is a low level of GDP, plenty of spare capacity and aggregate supply is elastic.
Will an increase in output cause an acceleration in the rate of inflation?
No, real output can expand without the risk of an acceleration in the rate of inflation.
When actual GDP is reaching potential output, is aggregate supply elastic or inelastic?
Inelastic
What are examples of an economy experiencing capacity constraints?
Some capacity constraints can be supply bottlenecks in industries supply components and raw materials.
When there is a positive output gap, is the aggregate supply elastic or inelastic?
Inelastic.
What are the 5 stages of an economic cycle?
Boom Slowdown Recession Recovery Depression
What is a Boom in the context of the economic cycle?
A period when the rate of growth of real GDP is fast and higher than the long term trend.
What is a Slowdown in the context of the economic cycle ?
A weakening of the rate of growth, real GDP is still rising but increasing at a slower rate.
What is a recession in the context of the economic cycle?
A period of at least six months when an economy suffers a fall in aggregate output, employment, investment and confidence.
What is a recovery in the context of the economic cycle?
A phase after a recession, during which real GDP starts to increase and unemployment begins to fall.
What is depression in the context of the economic cycle?
A prolonged downturn in the economy and and where a nation’s GDP falls by at least 10 per cent.
What are the two external shocks to an Economy?
Demand side shocks
Supply side shocks
What are examples of Demand side shocks?
Economic downturn in a major trading partner
Unexpected tax increases or cuts to welfare benefits
Financial crisis causing bank lending/credit to fall
Bigger than expected rise in unemployment rates.
What are examples of supply side shocks?
Steep rise in oil and gas prices or other commodities
Political turmoil or strikes
Natural disasters causing sharp fall in production
Unexpected breakthroughs in production technology.
What are causes of a recession?
External events or shocks
Tightening of macro policy
Fall in asset prices or supply of credit
Drop in businesses and consumer confidence
What are examples of external events or shocks that can cause a recession?
A recession in a major trading partner e.g. the EU or USA
A sharp rise in global commodity prices e.g. rising oil and gas prices
What are examples of tightening macro policy that can cause a recession?
Higher interest rates leading to more expensive loans
A rise in taxation or a cut in government spending
What are examples of a fall in asset prices or supply of credit that can cause a recession?
Steep decline in the level of share or house prices
A collapse in the supply of credit
What are examples of a drop in business and consumer confidence that can cause a recession?
Lower business confidence cuts investment and may also lead to job losses
Declining consumer confidence leads to less spending and more saving.
What does a recession affect in the short term?
Business profits and capital investment
Unemployment and falling real incomes
Government finances
Inflation
How does a recession affect business profits and capital investment in the short term?
Falling demand can cause more businesses to fail and profits to fall.
Planned investment declines, hitting those industries that make capital goods.
How does a recession affect unemployment and falling real incomes in the short term?
A steep decline in aggregate demand causes a fall in demand for labour.
This causes a contraction in employment and a rise in cyclical unemployment.
How does a recession affect the government finances in the short term?
Recession causes a decline in tax revenues and more welfare spending.
The result is usually an increase in the budget deficit and a rising national debt.
How does a recession affect inflation in the short term?
Many businesses offer price discounts to help off-load their excess (unsold) stock.
A deep recession risks causing a period of sustained deflation.
What are the long term effects of a recession?
Rising structural long term unemployment and regional decline
Low rates of investment can reduce the size of the capital stock
Persistent budget (fiscal) deficits and a rising national debt leads to austerity (and cuts in the public services)
What are the long term social effects of a recession?
Falling real wages hits average living standards and reduces demand.
Widening inequality of income and wealth leading to rising poverty.
Social costs such as loss of social cohesion and threats to democracy.
What are the benefits of economic growth?
Higher living standards
Real GNI per capita helps to lift many people out of extreme poverty and improve development outcomes
Employment effects
Sustained growth creates jobs and contributes to lower unemployment which in turn helps to reduce inequality
poverty and social problems.
Fiscal dividend
Higher economic growth raises tax revenues and allows the government to spend more on public and merit goods or help cut fiscal deficit.
Accelerator effect
Rising growth stimulates new investment e.g. in low carbon technologies and it provides profits that fund research and innovation.
What are downsides to economic growth?
Risks of higher inflation and higher interest rates
Environment effects
Inequalities of income and wealth
Gives examples of how risks of higher inflation and higher interest rates are a downside to economic growth?
Economic growth can lead to demand pull and cost push inflation.
Central bank may decide to raise interest rates to control inflation
Rising consumer spending might lead to an increasing trade deficit.
Give examples of how possible environment effects is a downside to economic growth?
Negative externalities such as pollution and waste are produced potentially with growth.
Risk of unsustainable extraction of finite resources- causing a long-run depletion of natural resources.
Give examples of how inequalities of income and wealth is a disadvantage of economic growth?
Rapid growth can lead to a higher level of inequality and social divisions, the distribution of gains from growth are often unequal.
Many of the gains from growth may go to only a few people; growth might be at the expense of hours worked and increased stress.
How is unemployment measures in the UK?
The official measure of unemployment in the UK is based on the quarterly Labour Force Survey.
This asks 40,000 households to self classify as either employed, unemployed or economically inactive.
To be classed and counted as unemployed a person must be:
Without a job, want a job have actively sought work in the last four weeks and are able to start work within the next two weeks.
OR
Out of work but have found a job and are waiting to start it in the next two weeks.
What is Cyclical unemployment?
Cyclical unemployment or otherwise known as demand deficient unemployment is caused by weak aggregate demand, reducing demand for labour.
When does cyclical unemployment rise most quickly?
During recessions as that is usually when aggregate demand is lowest and as a result cyclical unemployment is highest.
What is frictional unemployment?
Frictional unemployment is caused by workers seeking a better job; or who are in-between jobs.
It also affects those people who are new entrants to the labour market such as school and college leavers.
What is structural unemployment?
Structural unemployment is unemployment that is caused by lack of suitable skills for the jobs available; as a result of long-term changes in the pattern of demand for the products of particular industries.
Often people remain unemployed because of disincentive effects including the unemployment trap.
What is the unemployment trap?
This is a situation in which there is little financial incentive for someone who is unemployed to start working because the loss of welfare benefits and a need to pay income tax and other direct taxes might result in them being worse off.
What is seasonal unemployment?
Seasonal workers without jobs due to the time of year where there are seasonal changes in employment.
E.g. Fruit pickers in summer, retail jobs pre-Christmas
What is seasonal demand?
Season demand refers to the fluctuations in demand and sales related to the season of the year. For most products there will be seasonal peaks and troughs in production or sales.
E.g.
Ice creams are more demanded in the summer when it is hot, rather than in the winter when its cold
What is economic inactivity?
Economic inactivity is that section of the working age population which is not in employment and is not actively seeking employment. These persons are therefore not part of the working population.
What are the main reasons for economic inactivity?
Full-time student Looking after family or home Long-term sick Retired from the labour force Discouraged workers who have given up job search
What is long term unemployment?
Long term unemployment accounts for people who have been out of work for at least one year.
What is the structural problem in the labour market?
The longer people are without a job, then the harder it is for them to find their way back into employment.
One reason is that people’s skills tend to worsen due to economic inactivity. Motivation also suffers.
Employers tend to favour people who have consistent record of being in a job rather than having gaps in their CV.
What is the impact labour migration has on the labour market?
Increase in the active labour supply which might cause lower unit labour costs for a host country.
What is the impact labour migration has on Fiscal effects in the economy?
Inward migration increases pressure on government spending but can also lead to rising tax revenues.
What is the impact labour migration has on consumption in the economy?
Increase in population size
Rising demand for public services
If housing stock is fixed, can lead to higher prices and rising rents
What is the impact labour migration has on the competitiveness of the market?
Human capital helps to generate ideas and products.
Many migrants start businesses possible exporters.
Knowledge spillovers.
What are the economic and social costs of unemployment?
Slower long run trend rate of economic growth
Risks of period of price deflation
Rising income inequality
Erosion of people’s skills
Fiscal budget costs to the government
Externalities from social problems
What is a NEET?
Not in employment education or training
What is causing the increase in Youth unemployment?
Skill Gaps
Reluctant employers
Falling retirement rates
Competition for jobs
How are skill gaps in youth causing youth unemployment?
Employers may not be willing to employ young people who lack basic functional literarcy
How are Reluctant Employers causing youth unemployment?
They may prefer older more experienced workers with a track record and are more reluctant to employ youth.
How are Falling Retirement rates causing youth unemployment?
Declining pension incomes means less jobs for younger people to go for.
How is increased competition for jobs causing youth unemployment?
Increasing competition from more highly skilled migrant workers can cause youth unemployment.
What policies/programs are in place to try reduce Youth unemployment?
Expand mentoring programmers- more alternatives to university post 18
Most certified apprenticeship schemes
Better career education in schools
Lower national insurance for employers who take on younger workers
Increasing funding for education in STEM and coding
Improvements in basic skills including numeracy and literacy
Increased bursaries for university tuition
Macroeconomic policies that help avoid recessions
A lower minimum wage for younger workers
What policies are there to try reduce unemployment?
Macro Stimulus Policies
Cutting the cost of employing extra workers
Competitiveness policies
Reducing the occupational mobility of labour
Improving Geographical mobility of labour
Stimulate stronger work incentives
What are Macro stimulus policies that are aimed to reduce unemployment?
Low interest rates
Improving credit supply to businesses
Depreciation in the exchange rate to help exporters
Infrastructure investment projects
How is the government cutting the cost of employing extra workers, in order to try and reduce unemployment.
Reductions in the rate of national insurance contributions
Financial support for apprenticeships/paid internships
Extra funding for regional policy/Specific economic zones
What are examples competitiveness policies that are aiming to reduce unemployment?
Reductions in corporation tax to increase investment
Tax incentives for research / innovation spending
Enterprise policies to encourage new business start ups.
How is occupational mobility aiming to reduce unemployment?
Better funding for and more effective work training
Teaching new skills e.g. coding for gaming
An expansion of apprenticeships / intern programmes
How is improving geographical mobility of labour going to reduce unemployment?
Rise in house building will help to keep property prices lower and encourage more affordable housing rents
Active regional policy to improve transport infrastructure.
How is stimulating stronger work incentives going to reduce unemployment?
Higher national living wage
Increased tax free allowance
Welfare reforms to reduce the risk of the poverty trap
What are the economic and social benefits of falling unemployment?
Increased employment increases real GDP, helps to lift living standards and demand
More people in work creates extra tax revenues for the government either to lower the budget deficit or to increase spending
Social costs of high unemployment are severe progress in cutting it has important economic and social benefits.
What are the potential disadvantages of falling unemployment?
Extra spending from expanding labour market might worsen the current account.
Risk of an acceleration in demand pull and cosh push inflationary pressures if unemployment falls rapidly.
Fewer spare labour will mean a rise in unfilled vacancies; labour shortages might put off some inward investment.
What is inflation?
Inflation is a sustained increase in the cost of living or the general price level leading to a fall in the purchasing power of money.
How is inflation measured?
The rate of inflation is measured by the annual percentage change in consumer prices.
What is the UK government’s target for inflation?
2%
Is a fall in inflation a fall in prices?
Not necessarily, only when there is deflation will the general price level fall, i.e. the rate of inflation becomes negative.
What is deflation?
When the rate of inflation becomes negative
What is disinflation?
The falling rate of inflation.
What is the main measure of inflation?
The consumer price index.
How is inflation calculated in the UK?
A base year is selected and a family expenditure survey is carried out- the survey covers many thousands of UK households. The survey tracks what people are buying.
A representative basket of over 600 goods and services is used and weights are attached to each item based on these items importance in people’s expenditure.
Weights are then multiplied by price changes the weighed price changes are then totalled to calculate the inflation rate.
What are the main causes of inflation?
Demand pull inflation
Cost push inflation
Regulated prices
What is demand pull inflation?
If aggregate demand (AD) rises faster than productive capacity (LRAS), then firms will respond by putting up prices, creating inflation.
What are causes of demand pull inflation?
Lower interest rates. A cut in interest rates causes a rise in consumer spending and higher investment. This boost to demand causes a rise in AD and inflationary pressures.
The rise in house prices. Rising house prices create a positive wealth effect and boost consumer spending. This leads to a rise in economic growth.
Rising real wages. For example, unions bargaining for higher wage rates.
Devaluation. Devaluation in the exchange rate increases domestic demand (exports cheaper, imports more expensive). Devaluation will also cause cost-push inflation (imports more expensive)
What is Cost push inflation?
Cost-push inflation occurs when we experience rising prices due to higher costs of production and higher costs of raw materials. This is usually done to protect their profit margins.
What can cost push inflation lead to?
Cost-push inflation can lead to lower economic growth and often causes a fall in living standards, though it often proves to be temporary.
What causes cost push inflation?
Higher Price of Commodities. A rise in the price of oil would lead to higher petrol prices and higher transport costs. All firms would see some rise in costs. As the most important commodity, higher oil prices often lead to cost-push inflation (e.g. 1970s, 2008, 2010-11)
Imported Inflation. A devaluation will increase the domestic price of imports. Therefore, after a devaluation, we often get an increase in inflation due to rising cost of imports.
Higher Wages. Wages are one of the main costs facing firms. Rising wages will push up prices as firms have to pay higher costs (higher wages may also cause rising demand)
Higher Taxes. Higher VAT and Excise duties will increase the prices of goods. This price increase will be a temporary increase.
Profit-push inflation. If firms gain increased monopoly power, they are in a position to push up prices to make more profit
Higher Food Prices. In western economies, food is a smaller % of overall spending, but in developing countries, it plays a bigger role. (food inflation)
