3.1: UK macroeconomy Flashcards
Economic growth
Increase in GDP on an annual or quaterly basis
Gross domestic product (GDP)
Total value of goods or services produced by a country
GDP per Capita
GDP / population
Purchasing power parity (PPP)
Additional exchange rate adjustment that equalises the price of internationally traded goods across countries
Arbitrage
Buying goods at a cheaper exchange rate in one country and selling them for profit in another
National income
Total value of goods and services produced in an economy in a given period of time (same as GDP) -> higher GDP = higher incomes = higher standard of living. Used to see if people are generally becoming richer
Limitions of GDP
Doesn’t include unpaid work, gifts or black markets
Can’t measure quality of goods/services
Can’t show externalities
Some countries have poor data collection so can’t show GDP accurately
Can’t show sustainability
Can’t show national happiness
Can’t show what GDP is spent on
Real GDP
GDP adjusted for inflation
Nominal GDP
GDP at current prices
Inflation
An increase in the general price level over a period of time
What is used to measure inflation?
Consumer price index (CPI), Retail price index (RPI)
How is inflation calculated?
Calculated by changes in price of the basket of goods (each item is weighted according to the % of household income is spent on them)
What happens if there is high and unexpected inflation?
Goods and services become unaffordable as the purchasing power of income falls
Index numbers
A way of expressing economic data i.e. what countries did best after 2008 financial crisis or compare average price of housing
New value / base value x 100 = index
Disinflation
Inflation falls but remains positive
Deflation
Price level is going down
Causes of inflation
Growth in money supply - money pushed into economy -> purchasing power decreases -> price rises
Currency depreciation -> price of imports rise
Cost-push (rise in production cost)
Demand-pull (rise in demand)
Consequences of inflation on consumers
Real incomes fall -> purchasing power falls -> standard of living falls
Inequality rises (skilled workers wages may increase with inflation)
Cash loses value quickly
Prices rise
Impact of inflation on savers
Real interest rate (nominal interest rate minus inflation) falls as inflation rises
Impact of inflation on borrowers
Gain as real interest rates fall
Indebtedness falls as value of debt falls
Consequences of inflation on firms
Volatile prices reduce investment due to risk
Fall in international competitiveness (exports less competitive)
What happens if inflation is expected to rise?
People spend to avoid higher prices -> demand rises -> price rises -> wages expected to rise -> higher costs -> higher prices
Unemployment
Amount of people willing and able to work but can’t find a job
Measures of unemployment
Claimant count - amount of people receiving job seekers allowance
International Labour Organisation measure - actively seeking work for past four weeks and ready to start in two weeks. Collected by labour force survey
Underemployed
Working part-time but would like more hours
Frictional unemployment
When people are moving between jobs
Structural unemployment
Mismatch between skills workers have and skills firms are looking for
Cyclical unemployment
Caused by economy moving from expansion to recession . Is short term
Seasonal unemployment
Due to seasons of the year
Real-wage unemployment
Real wages too high in a market and above market clearing wage - caused by: high trade union power, high national min wage, slow to adjust wages
Employment rate
% of population at working age who are employed
What causes a rise in employment rate
Economic growth (vice versa for rise in unemployment)
Inflation due to rise in demand for imports
Inactivity rate
% of population of a working age who are not actively seeking employment. If this rises:
- Govt expenditure rises
- Govt revenue falls
Supply-side factors causing unemployment
Refers to supply of labour by workers. Those affecting employment/unemployment could be:
- Labour market flexibility i.e. trade union strength
- Skills of workers
- Geographic mobility of workers
- Occupational mobility of workers
Demand-side factors affecting unemployment
Refers to demand for labour. Those affecting employment/unemployment could be:
- Health of firms i.e. profit, demand for goods
- Confidence of firms
- Strength of economy
- Government intervention to encourage hiring
- Level of labour market costs/regulations for hiring
Balance of payments
Record of all transactions of a country does with the rest of the world. Made up of three accounts: current, capital and financial
Financial account
Net foreign ownership of domestic assets
Hot money flows
Capital account
Sale/transfer of patents copyrights, franchises, leases and other transferable contracts and goodwill
Transfers of ownership of fixed assets
Current account
Trade in goods/services (X-M)
Net primary income - net factor income from abroad (i.e. remittances, profits, interest on dividends)
Net secondary income - net unilateral transfers (i.e. foreign aid)
What does the balance of payments had to add up to?
0 but errors and omissions in calculating what comes in and goes out of an economy. So “balancing item” or “net errors and omissions” added to make it 0.
What makes up the current account?
Unilateral transfers - payments sent by govt or individuals abroad in which no good or service is received
Income receipts and payments - includes money received from foreign investments
Services trade balance - exports and imports of services
Merchandise trade balance - exports and imports of goods
Causes of a current account deficit
Low productivity
Inflation higher domestically than abroad -> reduces international competitiveness
Strong exchange rate -> reduces price of imports + increasing price of exports
Non-price factors i.e. quality of goods/services
Supply-side constraints -> cause goods imported from abroad
The current account deficit is a concern
If due to low exports
If a high % of GDP and getting worse
The current account deficit is not a concern
If due to capital imports -> productivity good in future
If due to purchase of current goods -> improves standard of living in short term
If due to foreign direct investment (FDI) from past -> profits being repatriated today, meaning investments was profitable
The effects of a current account deficit
Needs to be financed by a financial account surplus - will become a problem if foreign investors stop wanting to purchase assets in that country
If a country has a free floating currency, the currency will depeciate -> may partially affect the competitiveness of exports. Will also cause import prices to rise -> higher prices -> cost-push inflation
What does a current account surplus mean?
A country is exporting lots of goods. GDP = C + I + G (X-M). Exports > imports -> GDP may be rising -> signals economic growth
What does a current account deficit mean?
May mean economic growth slowing and unemployment rising
Could also mean importing more primary goods (food and raw materials) -> labour force working in productive economic areas like intellectual property -> may reflect change in structure of an economy and its labour force
May also show high imports. If labour and input costs are cheaper overseas, this may reduce inflationary pressure i.e. cheaper to produce in china than UK
