Macro

• economic growth - increase in GDP over time

  Gross Domestic Product (GDP) - the value of output produced within a country in a year

  GDP per capita - GDP divided by population
• total output = total income = total spending

  economic growth = change in GDP / original GDP x 100
• Determinants of economic growth:

  • investment
  • size of workforce
  • natural resources
  • changes in technology
  • education and training
  • government policy
• Investment:

  • investment is spending in capital goods by firms
  • capital goods are man-made aids to production
  • they can be faster or more efficient than workers doing a job
  • they might also be used by workers to help them work more efficiently
  • this can lead to the economy being able to make more in the future
• Changes in technology:

  • advances in technology can improve the quality of capital goods
  • this means the same amount of capital can make more goods and services
  • improved capital may mean a country can use all its other factors of production more efficiently
• Size of workforce:

  • the size of workforce, or labour force, is the quantity of people who are willing and able to work in an economy
  • this is the number of people who either have jobs or are looking for them
  • an increase in the number of the potential workers in a country can mean that more can be made
  • this is because there is an increase in the factors of production
• Education and training:

  • education and training can affect the quality, and quantity, of the labour factor of production
  • an increase in spending on education may lead to more skilled workers in the future
  • these workers are more productive and can increase how many goods and services they make
  • this increase in output could mean an increase in GDP and economic growth
• Natural resources:

  • the quantity of natural resources available affects the land factor of production
  • if a country finds new natural resources, it can wither sell them to other countries or use them to make more goods and services
  • both of these could lead to an increase in output, GDP and economic growth
  • a country may also face a decrease in its natural resources
  • this can mean it is less able to make as much output and economic growth may decrease or become negative
• Government policies:

  • the amount of government intervention in a country will depend on the type of economy: command, mixed or market
  • a government may have policies that affect specific markets or ones that impact the whole economy
  • improved infrastructure can make it easier for producers to supply goods and services, by increasing their efficiency and reducing their costs
  • this can lead to an increase in output, GDP and economic growth
  • government policies can also affect total demand within an economy and economic growth
• Benefits of economic growth:

  • economic growth means an economy can make more output
  • this may be beneficial as there could be greater supply of goods and services available to buy, which may lead to a decrease in prices and an increase in living standards of consumers
  • more workers may be needed to make the extra output, which leads to more jobs and less unemployment
  • the government may receive more tax revenue, which can be used to improve the welfare of society
  • an increase in tax revenue combined with falling government spending on unemployment benefits may improve the budget balance
• Costs of economic growth:

  • pollution and quality of life: more production may create more pollution, harming health
  • pollution and the environment: increased production may harm the environment
  • congestion: if output increases, more inputs and goods have to be transported around the country
  • depletion of resources: more raw materials are needed to make more output, so non-renewable resources are used up and the ability to produce in the future is reduced
  • workplace stress: increased output might be achieved by increased pressure on workers, which can impact mental health
• Costs of economic growth:

  • inflation: if demand rises faster than supply, there is more competition between consumers for goods and price levels rise
  • international competitiveness: inflation makes a country's goods seem relatively more expensive than those from other countries and can result in a drop in demand
  • inequality: economic growth leads to increased average incomes, but there could be increased inequality if the increase in incomes is not evenly spread between people
• economic growth should improve the quality of life now without reducing it for future generations

  the costs or benefits of economic growth can have an impact on factors of production both now and into the future

  increased production due to more output during economic growth may lead to more air pollution that may cause global warming which could harm economic stability
• employment - when people who are willing and able to work can find a job

  unemployment - when people who are willing and able to work cannot find a job
• employment - when people who are willing and able to work can find a job unemployment - when people who are willing and able to work cannot find a job

  Claimant Count - a measurement of unemployment using the number of people who claim unemployment-related benefits

  level of unemployment - the total number of people who are in the workforce and are without a job 


  unemployment rate = number of unemployed / workforce x 100
• Types of unemployment: different causes of workers being unable to find a job

  • cyclical unemployment - workers without employment due to a fall in total demand for goods and services
  • frictional unemployment - workers without employment as they move from one job to another
  • seasonal unemployment - workers without employment due to a decrease in demand at certain times of year
  • structural unemployment - workers without employment due to the decline of an industry
• Benefits of unemployment:

  • easier to recruit: is there are more workers looking for employment, it is easier for firms to find new workers and expand output
  • dynamic economy: unemployed workers help an economy to be responsive if they can mover from one industry to another as demand patterns change
  • international competitiveness: workers ay have to accept a lower wage rate to get a job, which reduces costs for firms, meaning they can lower prices
  • inflation: lower wages means individuals can afford to buy less, so there is less demand for goods, resulting in lower general price level
• Costs of unemployment for individuals:

  • lower standard of living: individuals have less income, so can afford fewer goods and services that contribute to their wellbeing
  • lower income: unemployment benefit is relatively low and wages are pushed down due to a surplus of workers
  • excluded workers: firms may not want to employ the long-term unemployed
  • tax increases: income tax may increase for those employed if a government needs to raise more money to pay increased benefits
  • lower standard of living: due to less income tax revenue, the government may cut spending on services
• Costs of unemployment for government:

  • lower output than potential: one of the factors of production is not being fully used, so scarce resources are being wasted
  • budget deficit: the government may spend more than it receives in tax revenue due to increasing costs and falling revenues
  • costs linked to social problems: these may result from unemployment
  • cycle of increasing unemployment: lower incomes lead to lower consumption, leads to less total demand, leads to fewer workers needed to make less output, leads to increased unemployment
• Costs of unemployment for regions:

  • differing level of problems: depends on the level of unemployment in an area
  • regional standard of living: a cycle of increasing negative impacts due to high local unemployment
• Types of income:

  • wages: the reward for work
  • rent: the reward for use of land for a period of time
  • interest: the reward for saving or lending
  • profit: the reward for enterprise
  • state benefits: the government transfers income by taxing some people and paying benefits to others
• income - a flow of money over time, often as a reward for use of a factor of production

  wealth - the monetary value of all the assets owned by an individual person, firm or country at a specific time

  distribution of income - this describes how income is divided between individuals and households in a country total income is measured by GDP per capita
• Causes of differences in distribution of income:

  • assets are distributed unevenly: if individuals do not have any land, capital or shares in an enterprise, then they will not receive income in the form of rent, interest or profits
  • wage differences: wage rates are based on demand and supply for specific jobs, so the equilibrium price varies. many people may be paid the national minimum wage, whereas for jobs where there is high demand and low supply of labour, the wage rate will be much higher
• Causes of differences in distribution of income:

  • benefit reliance: state benefits are usually lower than wages and may be the only source of income for a household
  • age: both the young and old are likely to have a lower share of income. those under 25 have a lower level of national minimum wage. older people may be retired
  • gender: in the UK, the average income of women is less than that of men. legally, men and women are supposed to be paid the same for the same work. however, time taken out to look after families or gender bias are citied as reasons for lower pay being given to women
• Causes of differences in distribution of wealth:

  • inheritance: some families may own more possessions which can be passed on to the next generation
  • savings: some people with enough income may decide to save some of their income rather than spend it all. these savings receive interest and may increase their wealth over time
  • property: some people with enough income may decide to buy property which can generate income or increase in value
• Causes of differences in distribution of wealth:

  • inheritance: some families may own more possessions which can be passed on to the next generation
  • savings: some people with enough income may decide to save some of their income rather than spend it all. these savings receive interest and may increase their wealth over time
  • property: some people with enough income may decide to buy property which can generate income or increase in value
  • enterprise: entrepreneurs with a business idea may have invested their income or borrowed money to set up a business
• Costs of inequality:

  • poverty: in some countries, people without jobs or government benefits may be in absolute poverty so cannot afford to buy the necessities to survive and have less than minimum standard of living
  • housing: people on low incomes may not be able to afford to buy a house or may have to live in poor-quality housing
  • health: people on low incomes may not be able to afford some healthy food or medicines, so they may be likely to have health problems and a lower life expectancy
• Costs of inequality:

  • education: in countries with no state education, families on low income may not be able to afford education, which can lead to fewer skills, which results in a lower wage and continues the poverty cycle
  • social problems: the combination of poverty, poor housing, health and education may lead to unhappiness at the unfairness and social unrest within a country
  • lower economic growths: less-educated, unhealthy and unhappy workers are less productive, so there is less output in an economy
• Benefits of inequality:

  • incentives: some argue that the possibility of a higher income may motivate people to work harder, which may lead to greater productivity in an economy and its resulting benefits
  • trickle-down effect: some argue that if some individuals are on higher incomes, they may spend more in an economy or set up businesses, which may lead to more income for other people
• price stability - when the general price level either stays the same or rises at a low rate over time

  inflation - a sustained increase in the general price level

  real value - the value of an economic variable that takes account of changes in the general price level over time

  nominal value - the value of an economic variable based on current prices

  Consumer Price Index (CPI) - a measure of the general price level used to calculate the inflation rate
• Causes of inflation:

  • too much demand
  • rise in costs
• Too much demand:

  • this is also known as demand-pull inflation
  • it happens when total demand rises faster than total supply in a country
  • one cause is increased incomes, because consumers are able to afford more goods and services
  • this is more likely where an economy is operating close to its productive capacity because firms are less able to respond easily and quickly to increase in demand
  • the economy is close to full employment, so it is difficult to find any unemployed workers to produce more output
  • other causes are rises in investment spending, increased demand for exports
• Rise in costs:

  • also known as cost-push inflation
  • caused by a rise in costs of production, which firms try to pass onto consumers to maintain profits, leading to a rise in the general price level
  • costs of production include: wages and salaries, raw materials, fuel, tax and national insurance contribution
  • a fall in the exchange rate may increase prices of any inputs into production that are imported
  • an increase in trade union power may also lead to higher wages being negotiated, which may lead to a rise in inflation
  • a wage-price spiral can worsen inflation
• Consequences of inflation for consumers:

  • loss of consumer confidence: inflation makes it more difficult for consumers to value different goods and to decide how to prioritise spending their income, so the uncertainty may stop them buying goods and services
  • shoe leather costs: as price changes with inflation, consumers and firms have to keep comparing prices of different goods from different suppliers
  • fall in real income: if income rises at a slower rat than inflation, consumers will have less purchasing power
• Consequences of inflation for consumers:

  • income redistribution: some workers may be able to negotiate higher wages during times of inflation so they can maintain or increase their standard of living. however, other workers without this advantage may not get wage increases
  • consumers as debtors: if consumers have borrowed money, the real value of the debt falls if there is inflation. as the general price level increases, the opportunity cost of paying back the money falls as you can now buy fewer things with the money owed
• Consequences of inflation for producers:

  • increased production costs: inflation may increase the price of inputs, increasing costs and possibly reducing profits
  • menu costs: firms may have to update pricing information on their goods due to inflation, which can increase their production costs
  • labour market disputes: if there is inflation, firms may need to spend more time negotiating wage rises with workers, requiring wages for the negotiators and possibly increased pay for workers
• Consequences of inflation for producers:

  • lower exports: if inflation in the UK is higher than in other countries, UK goods may seem relatively more expensive to overseas consumers and they buy less from the UK
  • producers as creditors: if there is inflation, the real value of their loans to borrowers may fall
  • producers as debtors: firms with debts may gain as the real value of their debt falls
  • loss of business confidence: makes firms reluctant to invest, which can lead to lower productivity
• Consequences of inflation for savers:

  • if inflation is positive it reduces the purchasing power of money and means that a fixed amount of money can buy fewer goods and services after a period of inflation
  • inflation reduces the impact of any interest and may reduce the real value of the money saved
  • the real rate of interest is calculated by: nominal rate of interest - inflation rate
• Consequences of inflation for government:

  • government as employer: inflation leads to pressure on the government to increase wages for its employees, which can lead to costly industrial disputes and, if wage rises are agreed, increased government spending
  • government as benefits provider: benefits, may be linked to rise in line with inflation, meaning an increase in government transfer payments
• Consequences of inflation for governments:

  • tax revenue: if there is inflation, some tax revenue may increase. income tax may increase if it is a percentage of higher incomes and people may be dragged into higher tax brackets. VAT my increase because it is a percentage of higher prices. however, taxes that are fixed as specific amounts may fall in real terms
  • government as debtors: the governemnt borrows money to cover a fiscal deficit. the real value of the national debt can fall if there is inflation, so this may be a benefit for government