The Macro Economic Environment Flashcards Preview

ACCA: F1: A: The Business Organisation, Stakeholders and the External Environment > The Macro Economic Environment > Flashcards

Flashcards in The Macro Economic Environment Deck (34)
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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)

1. Investment levels
2. Multiplier effect
3. Inflation
4. Savings
5. Confidence
6. Interest rates
7. 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

1. Recession
2. Depression
3. Recovery
4. Boom


Inflation is... increase in price levels generally; manifest in the decline in purchasing power


Causes of inflation: (5)

1. Demand pull factors (Demand exceeds supply; low unemployment)
2. Cost push factors (Wage increases)
3. Import cost factors (Oil; fall in FOREX value)
4. Expectations (Wage-price spiral: 8% annually!)
5. 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)

1. Loss of output
2. Loss of human capital
3. Increasing inequalities in income distribution
4. Social costs (Suffering, distress, theft, vandalism)
5. Increased burden of welfare payments


Causes of unemployment: (6)

1. Real wage unemployment (Unions)
2. Frictional (Time to match workers to jobs)
3. Seasonal
4. Structural (A port or new sporting development)
5. Technological (Typing vs voice recognition; robots)
6. Cyclical or Demand-deficient (Business cycle!)


A government can create jobs or reduce unemployment by:

1. Spending more on jobs directly (Civil servants)
2. Encouraging growth
3. Encouraging job skills training (Finance training schemes)
4. Offering grant assistance to employers
5. 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:

1. Growth in potential output (Amount of resources like land, labour & capital AND in their productivity (Technology & labour practices))
2. Growth in aggregate demand


Technological progress can be divided into 3 types:

1. Capital saving
2. Neutral
3. Labour saving


Advantages of economic growth:

1. Higher income per head --> higher levels of consumption --> Better standard of living
2. Easier to provide welfare services without intolerable tax burdens


Disadvantages of economic growth:

1. Faster use of natural resources
2. Pollution
3. Structural unemployment
4. Higher growth requires a cut in consumption (short-run)


4 main objectives of economic policy:

1. Economic growth
2. Control price inflation
3. Achieve full employment
4. Achieve a balance between exports and imports


Fiscal policy is...

1. 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:

1. Lowering tax
2. Spending more


Functions of taxation:

1. Raise revenues for the government
2. Price certain products to take into account their social costs
3. Redistribute income and wealth
4.Protect industries from foreign competition


A direct tax is...

paid direct by a person to the revenue authorities
Income tax
Corporation tax
Inheritance tax


An indirect tax is...

collected by the revenue authority from an intermediary who then attempts to pass the tax on to consumers


Indirect taxes are of 2 types:

1. Specific - fixed sum per unit sold
2. Ad valorem - Fixed percentage of the price


Monetary policy uses

1. Money supply, interest rates or credit controls to influence aggregate demand
2. Government policy on the money supply, monetary system, interest rates, exchange rates and the availability of credit


Balance of payments: Current account transactions are divided into 4 parts:

1. Trade in goods (Visible's)
2. Trade in services (Invisible's)
3. Income (Invisible's)
4. Transfers (Invisible's)


Balance of payments: Current Account: Income is divided into 2 parts

1. Employment of UK residents overseas
2. Capital investments overseas


Balance of payments: Current Account: Transfers are divided into 2 parts

1. Interest payments to and from overseas bodies
2. Non-government sector payments to and from bodies such as the EU


Capital Account: Made up of...

Public sector flows of capital into and out of the country (Government loans)


Financial Account: Made up of...

Flows of capital to and from the non government sector (Direct investment in overseas facilities; Portfolio investment; Speculative flows of currency; Movements on government foreign currency reserves)


'Balance of payments' vs. 'Balance of trade'

B of P: Surplus or deficit on the current account
B of T: Surplus or deficit on the trade of goods ONLY!


A government can rectify a current account deficit by:

Expenditure switching:
1. Depreciate the currency = devaluation
2. Restrict imports (Tariffs, import quotas or exchange controls)

Expenditure reducing:
3. Domestic deflation to reduce aggregate demand