Macro

• Trade Cycle

  Output gap = measure of the difference between actual output and potential output

  Positive = actual output is greater then potential output

  Negative = actual output is less then potential output
• Investment

  Money spent by firms on new capital goods used in the production process

  Factors affecting investment:

  • Interest rates
  • Animal spirits - mix of confidence, trust, mood and expectations
  • Rate of economic growth
  • Demand for exports
  • The influence of government and regulation e.g. corporate tax
• Aggregate Demand

  The total of all spending in the economy at any given price level

  Relative importance:

  • C = 65% - largest component of AD
  • X>M in UK
  • I = fluctuates more than other components due to business confidence
• Multiplier


  Process by which any changes in the components of AD will lead to an even greater change in national output.

  1/1-MPC = 1/MPW

  The multiplier process is based on the principle that one persons spending becomes another person's income.
• Circular flow of income


  The flow of goods and services between households and firms and their corresponding payments in money terms.

  • Income = a flow of money measured over a period of time.
  • Wealth = a stock of assets measured at a point in time.

  
• Inflation

  Inflation = a sustained rise in prices across an economy.

  Disinflation = a fall in the rate of inflation across an economy.

  Deflation = a sustained fall in prices across an economy.

  Consumer Price Index:

  • a measure of the price level used by the bank of England to measure inflation against target inflation.
  • Inflation is calculated as the percentage change in CPI relative to a base year
• Shifts in AS

  Price Factors:

  • Wages
  • Price of materials
  • Energy cost
  • Rent

  Non-price factors:

  • Technological innovation
  • Increase in available labour
  • Increase in factors of production
• Factors affecting consumption

  • Level of disposable income
  • interest rates/availability of credit
  • consumer confidence - job prospects, level of unemployment
  • Asset prices - possible wealth affect
• Key equations

  Index numbers = value of year x/Base year value x 100

  Real GDP = Nominal value for year/Price index for year x 100

  Unemployment rate = unemployed/economically active x 100
• Average/Marginal propensity to consume

  Average propensity to consume (APC):

  • The proportion of income that households devote to consumer expenditure
  • C/Yd

  Marginal propensity to consume (MPC):

  • The proportion of a change in income that households devote to consumer expenditure:
  • Change in C/Change in Yd

  Important if government want to cut tax
• Lawson Boom

  • High consumption and investment along with tax cuts in 1987 caused large amount of economic growth.
  • Economy was ''overheating'' and inflation increased a lot.
  • Government increased interest rates to 15% which affected many household e.g. couldn't afford a mortgage
• China export-led growth model

  • China experienced large amounts of economic growth due to industrious labour force and low wages causing exports to rise a lot.
  • China affected by global financial crisis as they were too dependent of the state of the global economy and foreign demand.
  • Would be better to transition to a more sustainable domestic consumption-led growth model.
• Purchasing power parity (PPP)

  The rate at which the currency of one country would have to be converted to that of another country to buy the same good in each country.
• Benefits and costs of economic growth

  Benefits:

  • Higher disposable income
  • Higher employment
  • Higher profits for firms
  • Increase in tax revenue

  Costs:

  • Inflation
  • Income inequality
  • Environmental costs
  • Current account deficit

  Evaluation = sustainable growth, inclusive growth
• Structural unemployment

  
  

  • When the pattern of demand and production changes leaving workers unemployed in labour markets where demand has shrunk
  • Geographical immobility = the inability of workers to move from one area to another
  • Occupational immobility = refers to the inability of workers to move between jobs due to lack of appropriate skills
• Cyclical unemployment

  • Unemployment which is caused by a lack of aggregate demand and occurs when there is a slowdown in economic growth or a recession.
  • The unemployment is caused by factory and office closures and an increase in redundancies
• Real wage unemployment

  Unemployment as a result of real wages being set above the equilibrium wage rate.

  This causes an excess supply of labour.
• Hidden/Under-employment

  Hidden:

  • Those who are not actively seeking a job, but if a suitable job came up they would take it.

  Under-employment:

  • Looking for an additional job or searching for a new job with longer hours
  • They want to work longer hours at their current job
  • They are overqualified for the job
• Quantitative easing

  1. Electronic money creation by the Central Bank
  2. Central Bank purchases government bonds, increasing the demand for bonds
  3. price of bonds increase, yield decreases
  4. other investment options look more comparatively attractive
  5. Financial institutions start to lend or invest in shares/corporate bonds.
  6. supply of credit and investment increases, so general interest rates fall, borrowing increases.
• Fiscal policy

  The use of government spending, taxation and budget balance to manipulate the economy.

  Reasons for taxation:

  • discourage and encourage production and consumption of certain goods - depends on elasticity of demand
  • raise revenue to finance government spending
  • Change the pattern of economic activity
  • Redistribute income
• Monetary Policy

  The Central Bank taking action to influence interest rates, the money supply and the exchange rate to manipulate aggregate demand in the economy

  
  

  Exchange rates:

  • Interest rates increase
  • saving in UK banks more attractive
  • Increase in hot money flows
  • Demand for pound increases
  • Appreciation of the pound
• Supply side policies

  Policies designed to increase the productive capacity of the economy, shifting AS to the right

  Interventionist SSP:

  • Government spending on education/training
  • Government spending on infrastructure
  • Subsidies to firms to promote investment

  Market based SSP:

  • Tax reform - e.g. lower income/corporate tax
  • Labour market reform - reduce benefits, min wages, trade union power
  • Competition policy - privatisation, deregulation
• Evaluation of supply side policies

  • No guarantee of success
  • Cost
  • Time lag
  • Negative stakeholder impacts
  • output gap