The Macro Economic Environment Flashcards
(34 cards)
Withdrawals and injections:
Households —-> firms
Savings —> Financial Sector —> Investment spending
Taxation —> Government sector —> Government spending
Import demand —> Foreign sector —> Export demand
NB Point: Changes in behaviour of one of the components of the circular flow can lead to…
…significant changes in economic performance as a whole
Factors which influence the economy: (7)
- Investment levels
- Multiplier effect
- Inflation
- Savings
- Confidence
- Interest rates
- Exchange rates
Aggregate Demand (AD) is…
total planned or desired consumption demand in the economy for consumer goods and services and also for capital goods
4 main phases of the business cycle
- Recession
- Depression
- Recovery
- Boom
Inflation is…
…an increase in price levels generally; manifest in the decline in purchasing power
Causes of inflation: (5)
- Demand pull factors (Demand exceeds supply; low unemployment)
- Cost push factors (Wage increases)
- Import cost factors (Oil; fall in FOREX value)
- Expectations (Wage-price spiral: 8% annually!)
- Excessive growth in the money supply
Demand Pull Inflation is…
…inflation resulting from a persistent excess of aggregate demand over aggregate supply
Cost Push Inflation is…
an increase in the costs of production of goods and services (Raw material or wage increases)
Problems caused by unemployment: (5)
- Loss of output
- Loss of human capital
- Increasing inequalities in income distribution
- Social costs (Suffering, distress, theft, vandalism)
- Increased burden of welfare payments
Causes of unemployment: (6)
- Real wage unemployment (Unions)
- Frictional (Time to match workers to jobs)
- Seasonal
- Structural (A port or new sporting development)
- Technological (Typing vs voice recognition; robots)
- Cyclical or Demand-deficient (Business cycle!)
A government can create jobs or reduce unemployment by:
- Spending more on jobs directly (Civil servants)
- Encouraging growth
- Encouraging job skills training (Finance training schemes)
- Offering grant assistance to employers
- Encouraging labour mobility
‘GNP’ stands for…
Gross National Product
Economic growth is measured by…
increases in the real gross national product per head
Actual growth in the long run is determined by 2 factors:
- Growth in potential output (Amount of resources like land, labour & capital AND in their productivity (Technology & labour practices))
- Growth in aggregate demand
Technological progress can be divided into 3 types:
- Capital saving
- Neutral
- Labour saving
Advantages of economic growth:
- Higher income per head –> higher levels of consumption –> Better standard of living
- Easier to provide welfare services without intolerable tax burdens
Disadvantages of economic growth:
- Faster use of natural resources
- Pollution
- Structural unemployment
- Higher growth requires a cut in consumption (short-run)
4 main objectives of economic policy:
- Economic growth
- Control price inflation
- Achieve full employment
- Achieve a balance between exports and imports
Fiscal policy is…
- A method of managing aggregate demand in the economy
2. Government policy on taxation, public borrowing and public spending
PSNCR or PSBR is…
Public Sector Net Cash Requirement or
Public Sector Borrowing Requirement
A government can stimulate demand in the economy by:
- Lowering tax
2. Spending more
Functions of taxation:
- Raise revenues for the government
- Price certain products to take into account their social costs
- Redistribute income and wealth
- Protect industries from foreign competition
A direct tax is…
paid direct by a person to the revenue authorities Income tax Corporation tax CGT Inheritance tax PROGRESSIVE / PROPORTIONAL
