theme 2

• Macroeconomic indicators 1. The rate of inflation2. The rate of economic growth3. The level of unemployment4. The state of the BOP (balance of payments)
• GDP, GNP and GNI GDP is the total amount of goods and services produced in an economy in a given time period.Can be expressed in 3 ways:-Output -Expenditure-IncomeGDP per capita= GDP/population sizeGNP is GDP+ (net incomes earned from overseas investments by UK residents - net incomes earned by overseas residents)GNI is GDP+ income paid into the country by other countries for such things as interest and dividends.
• Nominal and real values Nominal values are without inflation taken into accountReal values have inflation accounted for
• Purchasing power The amount of goods and services that can be purchased with a given amount of money
• Limitations of GDP to meausre standards of living It assumes income is distributed evenly across all householdsRising GDP could be the result of working longer hours meaning less leisure time and poorer healthIt does not account for the depreciation of capital (SR growth but less LR growth)It does not account for the informal economy (output not recorded)It includes money spent on dealing with problemsIt may deplete natural resources meaning that it is unsustainableSpending on capital goods may be prioritised nowAccess to free technology is not accounted for
• SR, LR growth and output gaps The SR is when at least one factor of production is fixedThe LR is when all factors of production are variableSR growth is an increase in real incomes or outputLR growth is an increase in the productive capacity of an economyA positive output gap is when actual growth is greater than potential growthA negative output gap is when actual growth is less than potential growth.
• Inflation, disenflation and deflation Inflation is the general rise in the price levelDisinflation is when the rate of inflation slow downDeflation is the general fall in the price levelHyperinflation is when there is a very high inflation rate typically over 50% per month
• How inflation is measured A shopping basket of 700 goods across 150 locations is weighted and is used to measure the rate of inflation.CPI and RPI are measures of inflationGoods which are purchased most frequently are given the highest weighting such as fuel and food.
• Cost push inflation Rising costs for firms usually feeds through into higher prices for consumers.The cause of higher costs could be due to energy, labour, tax hikes and suppliers."
• Demand pull inflation Households increasing consumption results in rising demand for goods and services.More consumers chasing the same amount of goods puts upward pressure on prices especially as supply is thought to be inelastic in the SR."
• The money supply Governments can print more money. This is known as Quantitative easing.Printing too much money in a short space of time will devalue it and this affects the moneys purchasing power.Households and firms will find that the same amount of money buys them less than before so to consume the same amount as they did before they must spend more money and pay higher prices.
• Benefits and drawbacks of inflation Benefits:1. Might stimulate SR growth as purchases are bought forward2. Increasing asset prices makes households feel wealthier so they consume more3. Higher wages making mortgages that have already been taken out more affordable as they are fixed4. Higher tax revenues for the government Drawbacks:1. Lower demand for exports as UK prices increase which affects unemployment and the current account2. Lower investment by firms 3. Disincentivises saving as money is losing value4. Low skilled workers cannot achieve higher wages so are most disadvantaged by inflation.5. Menu costs to firms as the must adjust prices to take into account inflation6. Shoe leather costs to households for shopping around for best deal (O.C)7. Wage price spirals.
• The phillips curve Higher govt spending increases demand for labour which leads to fewer unemployed workers.Firms compete for fewer workers by raising nominal wages. Workers have greater bargaining power to bid up nominal wages which increases costs for firms. These are passed onto consumers as higher prices
• Index numbers These allow you to measure relative changeUse a base year to provide a reference point.(Current value/base value) *100
• Employment, Unemployment and economically active Employment are those of working age and economically active in paid work either full or part timeUnemployment is people of working age and economically active who are willing, able and actively seeking work at the current wage rateEconomically active are those aged 16-64 and classified as employed and unemployedEconomically inactive are those aged 16-64 who are not available to work or looking for work There are 6 groups of economically inactive people:1. Discouraged workers2. Home makers3. Full time students4. Early retired5. Long term sick6. DisabledUnder employment is where somebody is in work but wants to work more hours.Zero hours contract is where a worker is employed but has no guarantee of hours.
• The claimant count This is a monthly count of people claiming unemployment benefits.Claimants must declare that they are out of work, able, willing and actively seeking workBenefits:Relatively cheapIt is a by product of the welfare systemQuick to compileEasy to understandDrawbacks:Inaccurate as some may be claiming but not seeking workMay underestimate unemploymentNot suitable for international comparisons
• The ILO LFS This is the international labour organisation labour force surveyIt surveys 60,000 households each month across the country to assess what proportion are classed as unemployed.Benefits:Captures more of the unemployedSuitable for international comparisonsUsed by the statistical officeDrawbacks:More expensiveMay include sampling errors (stigma)Figures are outdated by a month
• Types of unemployment Least worrying: Frictional     Moving between jobs                         Seasonal     Demand following seasons                         Cyclical        Follows the economic cycle                         Voluntary      Workers choose not to workMost worrying:  Structural      A whole industry is wiped out
• Cyclical unemployment This unemployment follows the conomic cycleAs GDP rises, unemployment fallsThis is because labour is thought to have derived demandCauses:Lack of business confidenceAn increase in the value of the currencySlow rates of productivity growthExternal shocksIncreased use of imports from low income countries(Bazil, Russia, India, China, South Africa)
• Causes of structural unemployment Decline of manufacturingOccupational immobilityGeographical immobilityRobotics replacing jobsForeign competitionLong term regional declineOutsourcing production
• Factors affecting unemployment The school leaving age (workforce smaller in the SR)Number of school leavers entering higher education(if fewer students continuing this could cause some unemployment)Level of net migration (can cause both employment and unemployment)GDP (increases in GDP create more jobs)Level of taxes and benefits (increases in tax reduce the incentive to work)Level of human capital(more skills could mean less unemployment)
• Classical view to tackle unemployment This view is that markets work best without government intervention.They believe that unemployment is caused by real wages being too high and they believe that unemployment could be solved if the unemployed accepted a lower wageThis would not harm SOL as firms would have lower costs and can therefore reduce pricesThey believe that unemployment benefits should be cut, trade unions reduced and abolish minimum wages.
• Keynesian view to tackle unemployment They believe that there is a need for govt intervention because unemployment is an LR problem. They believe that the govt should create jobs by expanding the public sector during economic downturn to minimise cyclical unemployment.By stabilising the economy they argue that the private sector would expand as GDP risesWorkers can return to the private sector.Aim is to avoid a cycle of negativity where lower job security leads to lower spending and more savingResulting in less demand for goods and services and higher unemployment
• Effects of unemployment Consumers: lower incomes and lower standards of living so increased saving and decreased spendingFirms: decreased demand so prices reduce leading to decreased profit. increased labour productivity as fear of reduced job security so decreased average cost and therefore increased profitsWorkers: increased structural unemployment, decreased job securityGovt: increased unemployment which leads to increased benefits payments. Lower tax revenue. Higher povertySociety: increased unemployment resources (O.C). Increased risk of crime
• The balance of payments, key words This is a set of accounts showing transactions between countries.The current account is an account which tracks trade in goods and services, trade in goods, investment income and international transfers.Exports are goods/ services sold to other countriesImports are goods/services bought from other countries.Visible trade is trade in goodsInvisible trade is trade in services.A trade deficit exists when the value of imports is greater than the value of exports.A trade surplus exists when the value of exports is greater than the value of imports.
• The current account Made up of: Trade in goodsTrade in servicesInvestment income  (foreign interest earned, foreign profits, foreign dividends)International transfers ( Foreign aid, benefits payments, foreign grants, Membership fees)Current account deficits matter because:A trade deficit requires FDI which can be volatileFDI means UK assets become foreign ownedUK exports may have lost price competitivenessRisks losing domestic jobsMight not matter because:Higher demand for imports which increases SOLMay represent only a small % of GDPCould result in a currency devaluation making exports more price competitiveIncreased imports of capital have LR benefitsCurrent account surpluses matter because:Lower SOL for housholds if reducing demand for importsMay be due to high domestic savings which impacts optimisim and confidenceRisks political retaliationMight not matter because:Higher employment due to higher demand for exportsIt creates funds to purchase foreign assetsMay be due to domestic goods being cheaper so no deterioration of SOLExports may be price competitive
• The financial account Made up of investment flows:Direct investmentportfolio investmentother investmentsCentral government transactions:Intervention in the FOREX market using foreign currency reservesfinancial account surplus could be due to:Inward investment in return for UK assetsIncreased borrowing by the governmentHigher UK interest rates to attract short term capital flows.
• The capital account This is made up of capital equipment bought and sold across international borders aaswell as patents copyrights and franchises(capital transfers, Acquisition/disposal of non-produced, non-financial assets.
• Aggregate Demand This is also GDP and thereofre a measure of total economic activity in an economy in a given time period.The exchange rate is the value of one currency against another.The bank rate is the interest rate banks pay to borrow money from the bank of England.
• Components of AD and diagram  C+I+G+(X-M)Consumption + Investment + Govt spending + (Exports - Imports)Changes in the value of the AD components cause shifts in AD while changes in the PL cause movementsAD is drawn downward sloping because:1. The real balance effectLower prices increase purchasing power and overall consumption of goods and services increases.2.The net export effectAt higher price levels, exports are less price competitive and therefore experience lower demand. Imports are more price competitive so experience a rise in demand.3. The real interest effectA higher price lvl means higher interest rates because the cost of borrowing increases as loands become more expensive so firms reduce investment and households increase saving."
• Consumption key words Consumption is total planned household spending.Income is money generated on a regular basis from work, investments, shares and other assetsDisposable income is the income after tax and NI are deductedDiscretionary income is income after regular bills have been paid.Average propensity to consume is the proportion of disposable income spent(Income spent/disposable income)*100Average propensity to save is the proportion of disposable income saved(income saved/disposable income)*100Marginal propensity to consume/save is the proportion of extra disposable income spent/saved(extra income saved or spent/ extra disposable income)*100
• Factors affecting consumption 1. IncomeIf incomes increase it will result in rising consumption which shifts AD to the right. Higher incomes also make people more optimistic and confident about the future so will take out more loans to fund large value purchases.2. Wealth effectsIf assets increase in value then equity increases and so does wealth. This enables households to borrow more money. Households may be more willing to take out additional loans as they feel wealthier. This means that rising asset prices results in increased consumption.3. Interest ratesincreasing interest rates result in decreased consumption. The opposite is also true.4. Optimism and confidenceThis is influenced by economic growth. Rising GDP makes people more optimistic as job security increases.5. UnemploymentIncreasing unemployment affects incomes and job security for households. Falling incomes reduces purchasing power so consumption falls. People in employment have lower job security, saving more which reduces consumption.6. Population size7. Demand for exports and imports
• Consumption function This measures the change in consumption following a change in disposable income."
• Milton friedman and Franco Modigliani Friedman:Argues that consumption decisions are not based on current income.Households asses expected future income when making consumption decisions. Households will take on more debt if they expect future income to be high enough to repay loans. This is the permanent income hypothesisFranco:He developed the life cycle hypothesis which states that people borrow in their youth to consume, save in middle age and then use savings in retirement to fund consumption."
• Investment key terms Depreciation is when the value of an asset fallsGross investment is the value of investment before depreciationNet investment is the value of investment after depreciation has been taken into account.
• Reasons for investment 1. To increase capital stock This results in increased output.2. Replace capitalThis increases efficiency and results in increased output.These both aim to increase productive capacity
• Factors affecting investment 1. Interest ratesIncrease in interest rates means the cost of borrowing has increased. This reduces the return on investment and makes it less attractive to invest.2. The availability of creditThis is how easy it is for firms to take out loans. Banks may be unwilling to lend if they are concerned about future risk.3. Expected future demandFirms will forecast future demand which will affect whether investment is undertakenHowever, GDP fluctuates affecting other KPIs and consumer behaviour is difficult to predict.4. Government incentivesThese come in the form of subsidies, grants and tax breaks.
• Importance of investment 1. Increases productive capacity enabling GDP to rise2. Controls inflation3. Increases productivity making firms more price competitive4. May facilitate increased demand for exports5. Enables more innovation.
• Government spending key words Transfer payments are cash payments made to those in society that are means tested and qualify for welfare. Examples of transfer payments include: Universal credit, child benefits, conditional welfare payments, working tax credits and state pensionsA downturn is where the rate of economic growth slowsA recession is when the rate of economic growth is negative for two consecutive quartersRecovery is when the rate of econ growth becomes positiveBoom is when the rate of econ growth is rising at a fast paceExpansionary fiscal policy is when taxation is decreased and government spending increasesThe opposite is true for contractionary fiscal policy.A budget deficit is when govt spending is greater than tax revenuethe opposite is true for a budget surplus.
• Current spending and capital spending Current spending is spending on public sector worker salaries, drugs used in the NHS, road maintenance and maintenance of the armed forcesCapital spending is spending on new hospitals and schools, new equipment in the NHS, new infrastructure and new defence equipment.