3.2: UK macroeconomy Flashcards
Aggregate Demand =
Consumption (C) + Investment (I) + Govt Spending (G) + (X-M)
AD shift becuase of any of these factors i.e. if firms more confident, they are more likely to borrow in order to finance investment
Demand-shock
Anything that causes AD to change
What is and what happens when there is negative shock?
May be interest rate rise or crach in housing market etc. -> fall in GDP -> knock-on effect on confidence -> further falls in inactivity -> multiplier + accelerator effects could magnify thr impact of any initial negatice shock -> keynesians may suggest government intervention required at this point
What are movements along the AD curve caused by?
Change in price level i.e. rise in price causes contraction in AD
What happens to real incomes if average price level rises?
Fall in real value of income
What happens to the balance of trade if the average price level of a foreign country falls?
Domestic consumers would demand more imports, causing a contraction in AD
What happens to interest rates if average price level rises?
Will be inflation -> interest rates rise to counter this
Facors affecting the level of saving
Interest rate
Consumer confidence about the future
Wealth effects
Inflation exepctations
Level of income
Investment
Any expenditure that increases the capital stock of a country
What do banks do with savings in bank accounts?
They recycle the savings and lend to companies. Allows them to invest in long-term projects
Gross investment
Total amount companies spend on investment
Net investment =
Gross investment - depreciation.
Depreciation is the dterioration of assets over time i.e. cars
How is investment measured?
As a % of GDP. GDP high = investment high
What does a high rate of economic growth signal?
Economic strength -> gives businesses confidence in future -> will invest to increase productive capacity , expecting increases in demand to continue in future
Keynes ‘Animal Spirits’
Overly invest in goods times, underinvest when consumer spending is weaker and business confidence is lower
Export demand
If international demand for a good rose, likely would invest to increase capacity of production
Interest rates
Cost of borrowing, reward for saving
What happens if firms have higher access to credit?
More likely to invest
What is it when governments subsidies certain industries i.ee healthcare or renewable energy?
Government regualtion
Fiscal policy
Changing government spending and taxation, according to economic conditions
Contractionary policy decreases AD by decreasing:
- Consumption
- Investment
- Government spending
Shifts AD left as AD has fallen
Expansionary fiscal policy increases AD by:
- Increasing government spending
- Cutting taxes
Shifts AD right as AD has increased
What can expansionary fiscal policy cause?
Tax cuts -> more disposable income -> higher consumption
Cutting business taxes -> rise in investment
Government spending rises -> higher government spending i.e. new hospitals/schools
What does a trade cycle display?
A countries economic growth
Four different phases of a trade cycle
Boom - building economic growth
Peak - climax of economic growth + rates starting to fall
Economic downturn - economic growth rate falling
Trough - bottom of cycle + growth rates start to rise
What happens if there is a boom?
More govt spending
Higher incomes to govt as they receive more revenue due to tax
Pay less benefits
What happens in economic downturn?
Less govt spending
Less income to govt as receive less revenue due to tax
Pay more benefits
Main UK exports
Financial services, cars, wholesale medicines, gas trubines, petroleum and gold
Leading recipients of UK exports
USA, Germany, Holland and France
Why is there a decrease in UK exports to EU?
Brexit and rapid growth of Brazil, China, Russia and India
Why is there an increase of UK exports of financial services?
Due to London growing as a financial hub
Main UK imports
Cars, vehicle parts, aircraft, gold, petroleum and wholesale medicines
Main UK suppliers
Germany, China, USA and Holland
Where do UK imports come from?
Over 50% come from EU but rapid growth of China means increased imports from there
Why have the UK imported more manufactured goods?
Due to a decline of the UK being an industrial nation -> worsens the trade deficit
Factors influencing net trade
Spare capacity - how much spare capacity to store resources. Less there is, more raw materials imported
Relative income - higher domestic income, higher marginal propensity to import
Exchange rates - determines relative prices of exports + imports
Inflation rates - relative inflation rates affect domestic Vs international prices
Protectionism - if country introduces protectionist policies, imports less desirable. Protectionism is an attempt to improve the ratio of exports to imports and increase AD
