economics macro

• the benefits from growth driven by technological change are:

  1. a rise in productivity = high GDP per capita, lower unit cost, higher wages, higher profits
  2. New goods and service = consumer welfare gain (lower prices), Improved living standards
  3. improved health = healthy life expectancy, increased productivity
• average rate of tax= tax paid as a proportion of income earned
• progressive taxation = as income rises, a.r.t rises
• proportional taxation = as income rises, a.r.t stays the same
• regressive taxation = as income rises, a.r.t decreases

  (burden the poor)
• Automatic stabilizers are fiscal tool to influence GDP and counter fluctuations in the economic cycle
• the fiscal tools used to automatic stabilizers are progressive income tax system and welfare benefit (unemployment benefits)
• in a BOOM automatic stabilisers:

  • higher income --> workers move to higher tax bands --> high average rate of tax --> lowers consumption massively
  • lower unemployment --> lower gov spending on welfare benefits
• In a recession, automatic stabilisers:

  • lower income --> workers move to a lower tax bands --> lower average rate of tax --> prevents a large decrease in consumption
  • higher unemployment --> more government spending on welfare benefits
• the benefits of economic growth is :

  • higher real disposable income = more people in work, higher wages due to firms making higher profits, more productive
  • lower unemployment
  • higher profit margins for businesses --> can trigger accelerator effect due to an increase in innovation
  • fiscal dividends --> more tax revenue for the gov due to VAT, corporation tax and income tax --> sending on health, education
• the costs of economic growth is:

  • inflation (demand-pull)
  • income inequality --> one dominant sector, capital intensive production= higher income for owners of the capital, rural vs urban, lack of welfare state, poor quality jobs created from economic growth
  • environmental costs = negative externalities, resource depletion , deforestation
  • current account deficit
• some key constraints on economic growth is:

  1. infrastructure gap
  2. Primary export dependency
  3. Macroeconomic instability
  4. endemic conflicts and corruption
  5. human capital weakness
  6. insufficient private savings
  7. natural capital being depleted
  8. rising income inequality
• investment in education and training to increase the quality of the labour force and make people more flexible in the labour market
• investment increases the size of the capital stock and helps to achieve 'capital deepening' (more capital per worker) but businesses needed skills and experience to make best use of new technologies
• policies to attract FDI are:

  1. attractive rates of corporation tax
  2. flexible labour markets -- equates fairness
  3. special economic zones -- offer incentives and benefits to businesses such as favourable tax policies
  4. high quality infrastructure
  5. availability of low cost labour
  6. trade and investment agreements
• best way to sustain economic growth is to have:

  1. inclusive growth = everyone is benefitted
  2. sustainable growth = using resources efficiently
  3. balanced growth = urban/rural balance
  4. role of private sector = to pay the workers well, to look after the environment, to invest well
  5. role of the government = to ensure the environment isn't damaged, to ensure supply side policies are used to reduce inflation, to ensure there are redistribution policies so everyone is benefitted
• Flexible labor markets

  Policies that allow businesses to hire and fire workers more easily, but can also potentially lead to worker exploitation
• the costs for inflation is:

  1. lower purchasing power
  2. erosion of savings (negative interest rates)
  3. lower export competitiveness
  4. Wage/consumer price spirals --> lead to cost-push and demand-pull inflation risk
  5. fiscal drag =if the progressive income tax system rise in line with inflation
  6. uncertainty = due to volatile inflation (can stop long run investment)
• benefits of inflation are:

  1. workers with higher wages = increases motivation --> higher productivity
  2. can keep unemployment low in a recession (stagflation)
  3. reduces the real value of debt
  4. improvements of gov. finances = fiscal drag, lower gov spending
• characteristic of a BOOM economy is:

  1. higher profits
  2. low unemployment
  3. higher consumer and business confidence
  4. high demand imports
  5. rising tax revenues
  6. demand-pull inflation
• characteristics of a recession/trough economy is:

  1. declining AD
  2. high unemployment
  3. sharp falls in confidence/investment
  4. de-stocking and discounting prices
  5. Falling house prices and construction
  6. lower inflation
  7. Loose policy
  8. low demand for imports
• characteristics of a recovery economy:

  1. rising consumer and business confidence
  2. higher house prices
  3. higher investments
  4. increase in infrastructure
  5. loose policy
• why are there fluctuations in economic growth?

  demand side and supply side SHOCKS

  demand = anything to do with AD

  supply = wars, natural disaster, sudden increase in business tax and wages
• why is there high unemployment in a recession?

  1. to protect profit margins
  2. less demand for labour due to less demand on goods and services
• purchasing power parity is when two countries tells us how much of one currency is needed to purchase a basket of goods compared to another currency.
• population changes is a limitation of gdp because if the population is increasing more than the real GDP, then GDP per capita will decrease so everyone will be worsen off
• the adv of lower benefits

  1. improves government fiscal balance as there will be less government welfare spending
  2. reduces the risk of benefits trap
• the disadvantage of lower benefits is:

  1. reduces consumption
  2. higher income inequality (a downward multiplier effect)
• a rise in income tax rates on the rich may not increase tax revenue because:

  1. they may work less
  2. brain drain --> move to different countries that has 0% income tax rate
  3. tax evasion or avoidance due to getting an accountant
• evaluating low tax economy

  1. stimulates work incentives and productivity
  2. helps to create more jobs because businesses have less tax to pay
  3. encourage an inflow of FDI
  4. incentivises enterprise and start-ups - a source of long-term wealth and jobs
  5. laffer curve idea
• Evaluating high tax economy

  1. taxation is a key instrument for changing final distribution of income and wealth
  2. Tax cuts doesn't necessarily lead to an increase in tax revenue
  3. Taxes are needed to fund high quality public services
• long-term economic effect of a recession

  • rising structural long-term unemployment and regional decline
  • low rates of investment can reduce the size of the capital stocks
  • persistent budget deficit and a rising national debt leads to austerity (cut in public services)
• long term social effects of a recession:

  • Falling real wages hits average living standards and reduces demand
  • widening inequality of income and wealth leading to rising property
  • social costs such as loss of social cohesion and threats to democracy
• structural budget deficit

  Budget deficit at full employment
• cyclical budget deficit

  budget deficit in a recession
• pros of a budget deficit:

  1. Boost growth , lower unemployment = expansionary fiscal policy
  2. An increase in gov spending= boost AD and improve the supply side of the economy
  3. Tax cuts incentives (laffer curve concept) = higher productivity
  4. crowding in effect
  5. redistribution of income = welfare spending
• what is crowding in:

  An increase in government spending will boost AD which will incentivise private sectors to invest and grow their business to increase potential profits
• Cons of a budget deficit

  1. Deterioration of Gov finances = put off FDI (opportunity cost), low credit rating on gov bonds
  2. Inflation conflicts = depends on the stage of the economic cycle
  3. crowding out effect = lower private sector investments
  4. Current account deficit
  5. X-inefficient = this is due to government not being profit motive
• Evaluation on budget deficit

  1. State of gov finances = if its high--> taxes may increase in the future, opportunity cost due to cutting spending on other areas
  2. short run/long run impacts = high debt at the start
  3. Automatic stabilisers = can lead to a discretionary fiscal policy
  4. stage of the economic cycle = ideal in a slowdown/recession
  5. consumer/business confidence
• the Ricardian equivalent is when the government cannot afford for expansionary fiscal policy in the form of a income tax cut, then households will save the tax cut now expecting a tax rise in the future = will not boost the economy