Macro Flashcards
Government role in the economy
-government sets the rules which economic agents must follow e.g. health and safety standards for food manufacturers
-rules are designed to protect citizens and promote positive economic outcomes
-also produces some goods and services
- can provide support to businesses
Industry role in the economy
-produce goods and services
- SMEs = small and medium enterprises , most businesses, not too small or large 50-250 people)
-majority focus on domestic market
-larger companies are usually multinationals
Consumers role in the economy
Buyers of goods and services, some economies are more reliant on consumers than others, confidence of consumers can have a large impact on economy performance in these cases
Central bank role in the economy
Sets interest rates and acts as banker to banks
Civil society role in the economy
Groups outside of government and business, they play various roles in the economy e.g. trade unions fight for improved working conditions, affecting business and government
Methods of finance profit
- retained profit (after paying dividends) can fund investment (spending on capital goods) or expansion
Key issues for government and economy - economic growth
The size of the economy determines the amount of goods and service available to citizens,
The quality of a country’s infrastructure and public services is also determined by the size of the economy.
Expanding the size of the economy is a vital objective for governments.
The conventional measure for size of an economy is gross domestic product.
Key issues for government and economy - employment
Most people of working age rely on jobs for income and sense of purpose.
Therefore, employment is important.
Large numbers of unemployed people has potential to lead to severe social unrest.
Key issues for government and economy -inflation
Inflation is a rise in general price level for goods and services.
High inflation erodes living standards if wages do not keep up.
Governments and central banks try to keep inflation low.
Key issues for government and economy - trade
National economies are only capable of producing a limited range of goods and services.
Natural resources and climate mean some goods are unavailable.
Some countries have weak technological capabilities, limiting production.
Macroeconomic objectives
Governments attempt to manipulate economy to improve economic performance.
Different economies perform in different ways.
Governments typically have macroeconomic objectives relating to four variables:
Economic growth
Unemployment
Inflation
Current account on balance of payments
Economic growth
Governments attempt to maximise the growth rate of their economies.
Low and middle income countries can reach higher rates of growth than high income countries, as high income ones have already been through industrialisation and are at forefront of technological developments.
A number of high income countries face a rapidly ageing population, where number of workers in economy is falling.
Unemployment and employment
Governments prefer minimal unemployment without inflationary pressure in the economy.
Zero unemployment is impossible as there is always frictional and seasonal unemployment.
Uk government has no official target.
Recent governments have been keen to expand employment, as higher employment should increase tax revenues and reduce benefits.
Inflation and deflation
Central banks and governments in the industrialised world tend to set inflation targets of 2%. This is low but positive inflation.
Higher inflation causes the fear that it will increase further.
Governments want to avoid deflation as it is seen as linked to recession and low or negative economic growth.
The balance of payments on current account
Governments aim for the balance of payments on current account to be broadly in balance over time.
Economies where current account is persistently in surplus are seen as strong whereas persistent deficits are seen as struggling or weak. However reality is more complex.
Countries can run surpluses but have low economic growth rates and vice versa.
Very large current account deficits measured as % of GDP can be dangerous as if borrowers reach a point where they cannot repay loans, there will be an economic crisis and sudden large fall in GDP.
Methods of finance
- retained profit
-borrowing
-issuing shares
-bonds
Methods of finance borrowing
- borrowing may be used to finance day to day operations or to fund investment
Methods of finance issuing shares
-issuing shares is attractive to investors as capital gains can be made, dividends an income stream, can take over company. Provides share capital to business.
Methods of finance bonds
- bonds provide business with funds, provides creditors with interest and money back once bond matures
Government budgets terminology
Balanced budget : spending = revenue
Budget deficit : spending > revenue
Budget surplus : spending < revenue
Government budgets sustainability
If a country is growing at around 2.5% a year and there us 2% inflation and low interest rates, a fiscal deficit of around 3% per year will probably maintain a stable level of national debt as a % of GDP.
Fiscal deficits that grow to over 10% of GDP are unsustainable in the long term as governments have to borrow far more money than they expect to pay with interest in the future.
Large fiscal deficits are sustainable so long as the deficit is reduced to manageable levels over time.
The environment
Environmentalists tend to be anti-growth, believing that any increased economic activity will damage the planet.
Pro growth economists argue that increases in output and improvements in technology allow economies to clean up their environments and reduce pollution.
We need sustainable growth.
Income distribution - right wing
Right wing economists and politicians argue that inequality is positive as it increased incentives to work and to take economic risks.
This increases economic growth rates, raising incomes for all.
They are against policies which reduce inequalities, particularly taxing higher earners and businesses.
Income distribution - left wing
Left wing economists and politicians argue that on principle of fairness, everyone should have access to a certain standard of living and that free markets lead to high levels of inequality.
Therefore, governments need to intervene and reduce inequality(e.g. by setting minimum wages or maximum prices on essentials).
They can also provide some goods and services, funded by taxes, especially on higher earners.
They argue individuals will work and take risks even if marginal rates of tax are high.
Consumer price index
Measure of inflation, deduced by comparing the cost of a basket of essentials
