spring B - macro

• national income - the total value of all goods and services produced in a country in a given period of time
• GDP - Gross Domestic Product, the total value of all the goods and services produced in a country in a year
• economic growth - increase in the real value of goods & services produced in an economy

  • GDP
• low unemployment -

  • unemployment: people actively seeking work for last 4 weeks and available to work in 2 weeks
  • low unemployment: when the economy is likely to be performing at full capacity - more resources are employed
• low & stable inflation:

  • inflation: rise in general price level
  • creates economic growth, as helps businesses & consumers better plan spendings, savings & investment
  • 2% target
  • measured by CPI- measures basket of goods against a base year
• Balance of payments equilibrium on current account

  • BoP - record of all financial transactions that occur between country & rest of the world
  • current account - focuses mainly on financial transactions related to exports & imports of G/S's
  • aim for exports = imports (otherwise deficit Ei/surpluseI)
• balanced govt budget:

  • presented anually, includes forcasted revenue & expenditure
  • expenditure > revenue, there is a budget deficit
  • any borrowing is added to the public sector deficit
  • if debt too high, lenders lose confidence in UK's ability to repay debt, govt then has to raise interest rates which makes borrowing more expensive
  • to REDUCE DEFICIT: cut public sector pay, raise taxes, reduce unemployment benefits
• fiscal policy - use of government spending and taxation to influence AD
• expansionary fiscal policy - to inc AD

  why?

  • increase economic growth
  • reduce unemployment
  • increase inflation ( demand pull)
  • redistribute income (reduce inequality & spending on welfare benefits)
• expansionary fiscal policy - examples

  1. reduction in income tax
  2. reduction in corportation tax -> firms net profit inc -> investment inc -> ad increase -> inflation inc
  3. inc VAT -> consumers pay more tax -> discretionary income reduces -> consumption & ad reduces -> inflation reduces
  4. govt reduces public sector pay -> consumer confidence falls -> consumption & AD & inflation DC
• monetary policy - adjusting interest rates and the money supply to influence AD

  • set by bank of england
  • 2 main instruments: 1. incremental changes to interest rates 2. quantitative easing (inc money supply)
• monetary fiscal policy - incremental changes to interest rates:

  • official rate - base interest rate set by BoE
  • market rates - interest rates set by commercial banks for their customers
  • asset prices - asset = any resource/good that can provide future economic benefits (property, shares)
• monetary fiscal policy - examples

  • official rate dc by 0.25 % -> market rates decrease - > loans are cheaper -> consumers borrow more -> consumption & AD & inflation INC
  • official rate inc by 0.25 % -> market rates increase -> existing loan repayments now more expensive to repay -> discretionary income falls -> consumption & AD & inflation DC
• fiscal - govt budget deficit & surplus

  • balanced budget - revenue = expenditure
  • budget deficit = revenue < expenditure
  • budget surplus = revenue > expenditure
• taxation:

  direct taxes - taxes imposed on income & profits

  • paid directly to govt by individual or firm (income, corporation, capital gains)

  indirect taxes - imposed on spending

  • supplier responsible for sending payments to govt
  • -> VAT 20% rate in 2022 -> lower spending, less indirect tax paid
• quantative easing transmission mechanism (monetary policy) - increases supply of money in the economy

  1. BoE commits to buy £60bn of gilts (long term form of lending by govt) a month
  2. commercial banks receive cash for their gilts
  3. liquidity in the market increases
  4. commercial bamks lower lending rates
  5. consumers & firms borrow more
  6. consumption, investment INC, AD & inflation INC
• Some of the Factors That Influence the Decision Made by The MPC

  • Without further intervention, the likely state of the economy a few months ahead
  • Rate of real GDP growth(output gaps?)
  • Current level of CPI Inflation
  • Interest rate elasticity(low confidence = inelastic response)

  State of the property market(Overheating?)

  Unemployment figures

  Business & consumer confidence

  Global outlook

  The exchange rates
• balance of payments on current account - sum of a country's balance of trade in goods & services, net income from abroad, and net current transfers
• trade deficit - when value of imports is greater than value of exports

  • if trade deficit worse, value of imports INC
• stronger pound means its worth more relative to other currencies so exports are cheaper
• SPICED

  Strong

  Pound

  Imports

  Cheaper

  Exports

  Dearer (more expensive)
• calculating CPI:

  1. expenditure survey carried out
  2. consumer basket of most popular goods/services formed with average price attached
  3. prices of these goods/services are weighted based on % of income
  4. weighted prices are added to give total weighted price of the basket

  eggs carrots peas weed
• Deflation occurs when there is a fall in the average price level of goods/services in an economy
• Disinflation occurs when the average price level is still rising, but at a lower rate than before
• cpi - measures inflation

  
• dew eh
• demand pull inflation:

  - caused by excessive demand in an economy

  • ad = sum of all expenditure in a country (c+i+g+(x-m))
  • If any of the four components of AD increase, there will be a shift to the right of the AD
  • At the original price (AP1), there is now a condition of excess demand in the economy
  • As prices rise, there is a contraction of AD and an extension of SRAS
  • Prices for goods/services are bid up from AP1 → AP2
  • Demand pull inflation has occurred
• cost push inflation:

  • caused by an increase in the costs of production in an economy
  • If any of the costs of production increase (labour, raw materials etc.), or if there is a fall in productivity, there will be a shift to the left of the SRAS curve
  • At the original price (AP1), there is now a condition of excess demand in the economy
  • As prices rise, there is a contraction of AD and an extension of SRAS
  • Prices for goods/services are bid up from AP1→AP2
  • Cost push inflation has occurred
• Changes to the Money Supply

  • If the Central Bank lowers the base rate, there is likely to be increased borrowing by firms and consumers
  • This will result in an increase in consumption and investment
  • It is likely to lead to a form of demand-pull inflation
• impact of inflation on CONSUMERS

  • dc purchasing power (amount of g/s that can be purchased with 1 unit of local currency)
  • dc in real value of savings
  • fall in real income
• impact of inflation on WORKERS:

  • demand higher wages
  • if the wage increase isnt equal to the inflation, motivation & productivity may fall
• impact of inflation on GOVT:

  • eroded international competiticeness of export industries
  • trade-offs involved in tackling inflation (eg economic growth, unemployment)
• impact of inflation on FIRMS:

  • uncertainty - could delay investment
• interest - cost of borrowing and reward for saving