macro Flashcards
the main macroeconomic objectives
the aims or goals of government policy
- economic growth (% change in GDP)
- price stability (control of cost and price inflation)
- high employment rate, low unemployment, reduced inactivity in the labour market
- sustainable overseas trade balance in goods/services/ balance of payments current account in equilibrium
- improved national well being/ higher standards of living
- net zero
- targets for reducing child poverty
- new house building
other macro economic objectives
- environmental protection (growth needs to be sustainable)
- improved productivity
- improved international competitiveness
- creating a good economic environment for investment
- improved public services (eg healthcare/education)
- sustainable government finances and balancing the budget
- more equitable final distribution of income and wealth (greater income equality)
- target for reducing poverty (esp child poverty)
objectives can change over time depending on context such as…
- in a cost of living crisis, achieving price stability may become more important than growth
- in a recession, achieving economic recovery can be highest priority
- climate change is pushing environment protection up on the list of priorities
gross domestic product (GDP)
measures the value of real output of the economy over a period of time; a rise in GDP indicates economic growth
real GDP
the nominal value of GDP adjusted for inflation (GDP at constant prices)
the annual % change in the consumer price index (CPI)
the ‘headline’ rate of inflation
what does the CPI track?
changes in the prices of a basket of goods and services purchased by an average household - expressed an an index number
retail price index (RPI)
the basket of goods/services includes some items not in the CPI, such as council tax and mortgage interest payments - often used to calculate increases in welfare benefits, pensions, index linked bonds and wage negotiations
in a period of rising interest rates it gives a higher rate of inflation than CPI
balance of payments
a record of all the flows of money between the residents of one country and the rest of the world
balance of payments on the current account
the section of the balance of payments that records international trade in goods, services , primary income and secondary income
balance of trade in goods and services
the value of exports of goods and services minus the value of imports and services - if this is positive, there is a trade surplus, if negative there’s a trade deficit
public finances
measured by looking at the budget deficit (gov borrowing when government spending exceeds tax revenue) and the National Debt as a % of GDP - The Budget and Autumn Statement reveal the government’s fiscal plans
public finances
measured by gini coefficient
comparing macroeconomic indicators across countries
- check you are comparing like for like
- think about what exchange rate is used or if data used purchasing power parity (PPP)
- to think about how the data was collected
- data accuracy (data collection may be more robust in some countries compared to others)
national income
the monetary value of the flow of output produced in an economy over a period of time
national income can be measured at any point as income flows around the economy so…
national income = national expenditure = national output
explaining the circular flow model
households earn income by selling their factors of production to firms and use it to purchase goods and services produced by the firms, which use up these resources
financial sector
not all income is spent, some is saved - the financial sector lends income saved to businesses to invest
government sector
some income is taken out of the flow as tax, but the government also spends which injects income into the flow
foreign sector
some income flows out to other countries when imports are purchased - exports add to the flow of income because income comes in from outside the economy
injections
add money to the circular flow of income which can lead to economic growth - they are investment I, gov consumption G, exports x
withdrawals
remove money from the circular flow of income which can lead to economic contraction - they are savings S, taxation T, imports M
national income equilibrium
planned injections = planned withdrawals
if injections exceed withdrawals, national income rises (economic growth)
if withdrawals exceed injections, national income falls (economic contraction)
aggregate demand curve (AD)
shows the relationship between the level of real planned expenditure and the general price level in an economy
AD formula
AD = C + I + G + (X - M)
consumption + investment + gov spending + (exports - imports)
factor that shifts AD curve - changes in monetary policy
lower interest rates make saving less attractive and borrowing cheaper, so consumers are more likely to spend; mortgage holders may also find their mortgage interest payment fall giving them more spending income; businesses are more likely to invest because borrowing costs are lower and saving any retained profit gives a lower return
factor that shifts AD curve - change in fiscal policy
the government can increase its own consumption and/or public investment (I) - it can fund this via more government borrowing - cutting income tax can boost, cutting indirect taxes such as VAT can also increase disposable incomes and cause consumer confidence to rise, cutting corporation tax may encourage more (I) - all these can cause AD to increase
factor that shifts AD curve - changes in the exchange rate and in the global economy
a depreciation reduces exports prices and increases import prices so net exports rise - global growth can also boost net exports (X-M)
reverse the chains of reasoning for all factors for decreasing AD
foreign direction investment (FDI)
capital investment made by a company based in one country in another country
why do firms invest?
- to expand their business and increase their output capacity
- to reduce average costs of production due to economies of scale
- to increase efficiency and productivity through innovation and technological progress
- to meet an increase in market demand and increase market share
- to expand a firm’s product range
- to replace depreciated capital
- to increase competitiveness at home and abroad
impact of investment on AD and AS
- investment adds to aggregate demand AD causing short run growth, lower unemployment
- successful investment also adds to the economy’s capacity, long run aggregate supply LRAS, long run non inflationary growth
factors influencing investment
- interest rate - lower interest rate reduces the cost of borrowing and boosts the attractiveness of investing relative to retaining profit; investment will increase
- availability of finance - if a firm is borrowing funds to invest, it has to access them from financial institutions, if they have funds, it will be easier to borrow
- demand for the final product - if the demand for a firm’s output increases, a firm has a greater incentive to expand to meet the demand, driven by potential for more profit
- business confidence - if business are confident about their future sales them they are more likely to invest
- corporate taxes - taxes on companies
- business regulation - a reduction in red tape and bureaucracy for businesses can incentivise more investment
- technological change - businesses will invest in new technologies/innovations to ensure they don’t lag behind competitors
how investment influences the macro economy
- creates extra demand in investment goods industries
- injects money into the circular flow of income (multiplier effect)
- boosts both short run and long run economic growth
- new capital boosts productivity and increases the capacity to supply
- improves a country’s competitiveness, improving the trade balance
- improves the economy’s infrastructure to make it more efficient
- can help create new jobs (eg lost to AI)
- can help reduce inflation pressure
role of gov spending
changing gov spending is a part of fiscal policy
- can be used to change the level of AD (with fiscal multiplier)
- can be used to provide public and merit goods
- can be used to correct market failures (eg positive consumption externalities)
- can be used to influence economic regions
- can be used to achieve greater equity in society by providing public services, including universal access to healthcare and education
decisions about how much the gov spends in the economy are often dependent on the gov economic and political goals
budget deficit
gov spending exceeds tax revenue - gov borrows to fund its spending
budget surplus
government spending is less than tax revenue - gov can pay back some of its debt
fiscal multiplier
estimates the final change in real national income (GDP) that results from an initial change in gov spending plans
trade surplus
net export demand is positive and adds to AD
trade deficit
net export demand is negative and reduces AD
trade balance equilibrium
value of exports is equal to value of imports - net export demand is neutral and AD doesn’t change
factors that shift the SRAS curve
- change in wage costs
- changes in productivity
- changes in unit labour costs
- change in commodity, energy and raw material costs
- changes in education/skills
- changes in indirect taxes and subsidies
- changes in the exchange rate
- changes in regulation
factors the shifts the LRAS curve
the LRAS represents the economy’s productive potential - its maximum output given its resources - LRAS is located at the economy’s full employment level of output
no spare capacity - shifts when theres
1. change in the quantity of resource (land, labour, capital and enterprise)
2. change in the quality of resources
3. technological progress
