MACRO ASPECT

• Gini Coefficient

  - A coefficient of 0 represents perfect equality.

  - A coefficient of 1 represents complete inequality.
• Lorenz curve

  - a more unequal distribution of income is represented below the 45-degree line

  
  

  - a more equal distribution will be closer to the 45-degree line.
• benefits of unequal income distributions

  - it can motivate some to work hard and can encourage entrepreneurship
• costs of unequal income distribution

  - it will increase levels of absolute and relative poverty

  
  

  - if poverty is high, people may not be able to afford the basic needs, leading to increased levels of crime

  
  

  - if some people have a very high income, depending on the marginal propensity to import, this could lead to a worsening of the balance of trade. If income rises, people will import more
• progressive taxation

  - As income increases, the proportion of income taxed increases

  
  

  - this reduces inequality in income & wealth
• effects of progressive taxation

  - By increasing the tax on higher income brackets, you are discouraging workers from earning more money

  
  

  - The gain from working might not be as great as the loss of benefits from moving up an income bracket

  
  

  - It can reinforce the poverty trap
• proportional taxation

  - it's the same tax rate on everyone regardless of income or wealth
• effects of proportional taxation

  - it gives taxpayers an incentive to earn more because they are not penalised with a higher tax bracket
• regressive taxation

  - it's a tax imposed by a gov't which takes a higher percentage of someone's income from those on low incomes
• effects of regressive taxation

  - reduced disposable income, increased financial hardship, and increases existing income inequalities
• multiplier effect

  - it comes about because injections of new demand for goods/services into the circular flow of income, stimulating spending as "one's person's spending is another's income"

  
  

  - it quantifies the total change in national income resulting from an initial change in spending

  
  

  - it leads to a bigger final effect on the level of national output and total employment in the labour market
• types of policy instruments

  - Monetary policy: changes to interest rates, the supply of money and credit and also changes to the value of the exchange rate

  
  

  - Fiscal policy: changes to government taxation, government spending and borrowing

  
  

  - Supply-side policies designed to make markets work more efficiently e.g ↓ in corporation or income tax, Reduction in Benefits, NMW, Trade Union Rights, Improved Information on Job Vacancies, Education & training, privatisation, deregulation
• Objectives of UK Macroeconomic Policy

  - Stable low inflation (inflation target is 2.0% for the CPI), price stability

  
  

  - Sustainable growth: growth of real gross domestic product, reducing the environmental impact of growth

  
  

  - Improvements in productivity: improve competitiveness and global trade performance

  
  

  - High employment - the gov't wants to eventually achieve a situation where all those able/available can find work

  
  

  - Rising living standards and a fall in relative poverty - cutting child poverty and reducing pensioner poverty

  
  

  - Sound government finances: including control over state borrowing and the total national debt
• Additional objectives of UK macroeconomic policy

  - a sustainable growth of real GDP (national output)

  - improve global competitiveness, improve the trade balance (BOP - export led growth)

  - a more equitable distribution of income & wealth

  - balancing the budget and reducing the national debt

  - improved access to public services

  - improved competitiveness

  - environmental sustainability
• economic stability

  - it occurs when there is low volatility in key indicators such as prices, jobs, economic growth, interest rates, investment and trade
• economic/business cycle

  - tracks the fluctuations in the rate of growth of a country's GDP, some countries have a more volatile cycle than others
• BOP DEFICIT

  • policies to ↓ the price of domestic goods,↓ imports & ↑ exports (e.g supply side policies to remove structural problems)
  • devalue (fixed exchange rate systems) or depreciate (floating exchange rate systems) the currency, exports cheaper, imports expensive, Marshall-Lerner condition ( PeD(x) + PeD(m) > 1) must hold to be successful
  • fiscal/monetary policy to ↓ spending, this ↓ imports, ↓ domestic demand & harm growth
  • impose restrictions on imports, tariffs to make imports more expensive for domestic consumers, may cause inflation if demand for imports is too price inelastic

  D- deflation

  I- import controls

  D- devaluation

  S- supply side