macroeconomics objectives Flashcards
what boosts economic growth
- Growth in physical capital stock - leading to a rise in capital per employee (capital deepening)
- Growth in the size of the active labour force available for production
- Growth in the quality of labour (human capital)
- Technological progress and innovation driving productivity improvements i.e. higher GDP per hour worked
- Institutions - including maintaining the rule of law, stable demcracy, macro-economic stability
- Rising demand for goods and services - either led by domestic demand or from external trade
economic growth curve
ppf curve, ppf1 to ppf2
what challenges economic growth
- Changes in the real exchange rate affecting competitiveness
- Cyclical fluctuations in national output and external trade
- Financial instability e.g. unsustainable credit boom and fall in savings
- Volatility in world prices for essential imports and key exports
- Political instability / military conflicts
- Natural disasters and other external supply shocks
- Unexpected breakthroughs in the state of technology
what increases inflation
- depreciation of the exchange rate increases the price of imports and reduces the foreign price of a country’s exports. If consumers buy fewer imports, while exports grow, AD in will rise.
- Higher demand from a fiscal stimulus e.g. lower direct or indirect taxes or higher government spending. If direct taxes are reduced, consumers have more disposable income causing demand to rise. Higher government spending and increased borrowing creates extra demand in the circular flow
what increases inflation part 2
3.Fast growth in other countries – providing a boost to UK exports overseas. Export sales provide an extra flow of income and spending into the UK circular flow – so what is happening to the economic cycles of other countries definitely affects the UK
what increases cost push inflation
an increase in the prices of raw materials and other components.
Rising labour costs - caused by wage increases, which are greater than improvements in productivity. Wage costs often rise when unemployment is low because skilled workers become scarce and this can drive pay levels higher.
Higher indirect taxes – Depending on the price elasticity of demand and supply for their products, suppliers may choose to pass on the burden of the tax onto consumers.
A fall in the exchange rate – this can cause cost push inflation because it leads to an increase in the prices of imported products such as essential raw materials, components and finished products
consequences of inflation
Income redistribution: One risk of higher inflation is that it has a regressive effect on lower-income families and older people in society. This happen when prices for food and domestic utilities such as water and heating rises at a rapid rate.
Falling real incomes
Business uncertainty: High and volatile inflation is not good for business confidence partly because they cannot be sure of what their costs and prices are likely to be. This uncertainty might lead to a lower level of capital investment spending.
what increases structural unemployment
Structural unemployment happens when there is a long-term decline in demand in an industry leading to fewer jobs as demand for labour falls away.
Jobs on a production line being replaced by robots e.g. motor manufacturing, online banking and online retailing
globalisation- decreasing demand for workers in the uk
what increases cyclical unemployment
When there is a recession or a steep slowdown in growth, we see a rising unemployment because of plant closures, business failures and an increase in worker lay-offs and redundancies. This is due to a fall in demand leading to a contraction in output across many industries.
rising productivity- a country’s GDP is expanding at 1 per cent a year but output per worker is growing by 3 per cent. This means that the same national output can be produced using fewer workers
how to increase trade
tariffs, increasing the exchange rate, subsides
