Macro 2.1 Flashcards
1
Q
Deflation
A
Reduction of the general price level in the economy
2
Q
Hyperinflation
A
Large increases in the price level (at least 50% over a month)
3
Q
Short run economic growth
A
The actual annual percentage change in real national output.
OR
% Change in Gross Domestic Product
4
Q
What is Gross Domestic Product?
A
The value of goods and services produced in the economy over a period of time
5
Q
Long-run economic growth
A
An increase in the potential productive capacity of the economy.
This is shown on a PFF.
6
Q
What’s the difference between nominal and real values?
A
Nominal is expressed in monetary terms, but real value takes into account inflation
7
Q
How to calculate real national output
A
Nominal national output / Average price level
8
Q
What is total national income?
A
The value of all goods and services produced in a country
9
Q
What is per capita income?
A
The total income divided by the number of people in the country
10
Q
What is Gross National Product?
A
The value of all goods and services produced by domestic businesses and property at home and abroad
11
Q
What is Gross National Income?
A
The total level of income of a country, including net income earned abroad from dividends and interest payments.
12
Q
Why is GNI not suitable for low income countries?
A
Many jobs in those countries are informal rather than official , so they are not given a financial record.
13
Q
What is Purchasing Power Parity?
A
It takes into account the relative costs of living, for example, £1 goes further in some countries than others.
Say if a basket of goods costs $2 in one country and £1 in another country, then the national income should be converted at $2:£1 regardless of the exchange rate.
14
Q
Limitations of using GDP to compare living standards
A
Accuracy of statistics - some countries may not be able to record them well due to limited resources
The quality of goods may not be represented by monetary value
The shadow economy is not included in measurements
Transactions can be without a monetary value
The negative externalities that economic growth can cause aren’t taken into account
Economic growth can cause inequalities in income and wealth within a country - distribution of income is not measured
15
Q
Problems of comparison between developed and developing countries
A
Accuracy of statistics can vary dramatically between developed and developing countries
Developing countries often consume what they produce (subsistence farming) - no monetary value
Developed countries often increase incomes at the expense of quality of life, like working long hours
Developing countries might wish to achieve growth at the expense of health and safety
Alternative methods of measuring quality of life are available
16
Q
Why is economic growth such an important Macro-economic objective/
A
Increase in real GDP = Increase in National Income
This is a proxy measure fo an improvement in living standards
Increased income = the power to buy more consumer goods and services that make us happy
17
Q
The 6 factors that the UN identifies for World Happiness Report
A
Real GDP per capita Healthy life expectancy Having someone to count on Perceived freedom to make life choices Freedom from corruption Generosity
18
Q
3 ways of calculating GDP
A
Expenditure/Aggregate demand
National Income
National Output
19
Q
Factors of GDP (Expenditure)
A
Consumption Government spending Investment spending Change in value of stocks Exports minus imports
20
Q
Factors of GDP (Income)
A
Incomes for people in jobs and in self-employment
Profits of private and public sector businesses
Rental income from the ownership of land
21
Q
Factors of GDP (Output)
A
Value added from the main economic sectors:
Primary (like farming) Construction Manufacturing Tertiary (like tourism) Quaternary (like consultancy)
22
Q
What is inflation and how is it measured?
A
Inflation is the sustained increase in the cost of living/fall in the purchasing power of money
This is measured by the rate of change in the general price level over time.
23
Q
What are the 3 principle measures for inflation?
A
CPI - Consumer Prices Index
CPIH - as above with housing costs
RPI - Retail Prices Index
24
Q
What is the government’s preferred measure of inflation?
A
CPI
25
What is the Basket of Goods and Services?
The Office of National Statistics compile the CPI, CPIH and RPI
A base year is selected and a family expenditure survey is carried out, covering 40,000+ households
All measures are based upon a basket of goods and services which is designed to represent typical purchases of consumers throughout the UK
Each month government officials collect 120,000 separate price quotations in 141 locations of around 700 products
700 items in the basket of goods and services
Different items are weighted according to their relative importance in terms of how much their price changes impact upon customers
For example, petrol is given a high weighting given that it forms a large part of individuals disposable income and there are few direct substitutes
26
Limitations of CPI as a measure of inflation
It’s not fully representative, it will be inaccurate for the ‘non-typical’ household, like 14% of the CPI index is devoted to motoring costs - inapplicable for non-car owners.
Single people have different spending patterns from households that have one or more children
Changing quality of goods and services - although the price of a good or service may rise, this may also be accompanied by improvements in quality/performance of a product
New products - CPI’s reaction is slow, only a few items are switched every year
CPI omits housing costs which can comprise significant part of some people’s spending
27
What is deflation
It’s a decrease in the general price level.
Inflation rate is negative
28
Causes and problems of deflation
Deflation tends to occur during periods of very low, or stagnant growth
Despite the fact the value of none would be rising, deflation generally indicates that demand is very low or suppressed
As prices are falling, consumers tend to deal purchasing decisions because they think prices will fall in the future
As a result, consumptions slows significantly, which means that firms will lose the confidence to invest, thus harming greater demand still further
29
What is disinflation?
The inflation rate is positive but is falling
| Fall in the rate of inflation
30
Causes of inflation
Demand-pull
Cost-push
Growth of money supply
31
Demand-pull inflation
Excessive growth in aggregate demand
High consumer spending
Fiscal stimulus (government increasing spending or reducing taxes)
High foreign demand for exports
Bottleneck shortages
32
Cost Push Inflation
Continuing rises in input costs which occur independently of aggregate demand:
A rise in wages
A rise in the cost of imported raw materials
Firms with market power increasing profit margins
A rise in indirect taxes
33
Internal causes of inflation
A large surge in property prices
Higher wages/labour costs
Boom in credit/money supply
Rise in business taxes like VAT
34
External causes of inflation
Increase in world oil/gas prices
Inflation in global commodity prices
Depreciation of the exchange rate
High inflation in other countries
35
Effects of inflation
The price of goods and services tends to rise
If wages and earnings remain constant, then as prices rise, consumers are worse off in real terms, as their disposable income will buy less goods and services than previously
Therefore it is said that inflation erodes the value of money
Inflation is a main focus of macroeconomic policy and the Bank of England has been delegated an inflation target of 2%
36
Costs of inflation: Shoe leather costs
Lose knowledge of what a fair price is and therefore more shopping around
Reduced disposable income due to higher prices
Loss of value in savings
37
Costs of inflation: Menu costs
Businesses need to spend money recalculating prices and also print off new menus, price labels
38
Psychological and political costs
People feel worse even if income rises
Unpopular for government
Disturb the distribution of income
39
Costs of inflation: Redistribution costs
Inflation causes redistribution of income, such as:
Those on a fixed income (pensioners from private companies will lose money in real terms)
Borrowers benefit
If government taxes don’t change, government will experience a deficit in real terms
Government’s failure to change personal taxes in line with inflation, the burden of tax could be heavier
40
The costs of inflation: Unemployment and growth
Inflation is believe to cause unemployment and lower growth as inflation...
Causes a rise in cost of production and lower profit margins
Causes uncertainty in consumer confidence therefore reduced spending
Causes uncertainty of investor confidence therefore less likely to take risk
Exports become too expensive
41
The difference between anticipated and unanticipated inflation
Anticipated inflation is expected inflation, and steps have been taken before to mitigate its effects.
This could be done by indexation, which is where wages and taxes are adjusted in line with inflation.
Unanticipated inflation is inflation that was not estimated by the government and steps have not been taken before, having a greater impact on the economy.
42
Effects of inflation on consumers
Higher prices - less able to afford goods and services, and erosion of living standards if wages do not keep up with price rises.
Savers will suffer a fall in the value of their savings in real terms (unless interest rates keep up with rise in prices).
Borrows may benefit from a reduction of the value of debt (over time) in real terms.
Those on lower incomes may suffer real hardship as they tend to spend a greater proportion of income than other groups.
43
Inflation effect on workers
Workers are likely to exert pressure on bosses to increase wages.
Longer term - workers may have less job security if firms become less competitive due to rising costs
44
Effect of inflation on Firms
Increased costs - this will affect their ability and willingness to supply as many goods and services as before, affecting their profitability.
Uncertainty - Rising costs cause uncertainty as firms find it difficult to plan and budget. Investment decisions are likely to be postponed.
Menu costs - firms have to adjust their prices on menus, on websites, in store, in vending machines.
45
Effect of inflation on the economy
Reduced investment due to uncertainty. This will reduce AD in the short term and economic growth long term.
Decline in competitiveness - Firms selling goods overseas will not be able to compete if rising costs have forced their prices to increase. This will reduce economic growth and damage the balance of trade.
The Bank of England may raise interest rates - causing high costs for businesses and reducing consumption.
46
Who is responsible for interest rates and how do they manage it?
The Bank of England
They’re responsible for monetary policy:
Exchange rates
Quantitative Easing
Interest Rates
The MPC (Monetary Policy Committee) meet every 6 weeks to set the base rate.
47
How changes in world commodity prices affect domestic inflation
Commodities such as oil and some food items make up a large proportion of UK imports
This means that they have a significant impact on the price level
Many of the commodities that are brought in the UK are price inelastic products
Therefore, a rise in the world price of commodities will feed trough to UK inflation
48
How changes in other economies can affect inflation in the UK
The UK is impacted in a number of ways
Emerging markets are creating a growing demand for goods and services globally. This has led to demand pull inflation.
The economic performance of our major trading partners such as the EU and the US will impact on demand for UK products.
49
Evaluating the Consequences of Price Deflation
Holding back on spending
Debts increase
The real cost of borrowing increases
Lower profit margins
Confidence and saving hit
Income distribution (redistribution of income from debtors to creditors)
Increased competitiveness eventually, coming at a cost of higher unemployment in the short term
50
Unemployed
The unemployed are those people able, available and willing to work at the going wage but cannot find a job despite an active search for work
51
What is the level of unemployment by definition?
The number of people who are unemployed
52
What is the rate of unemployment by definition?
The number of people unemployed as a % of the labour force
53
What does the labour force include?
All those who are economically active - people willing and able to work
54
What is the activity/participation rate by definition?
Number in work or unemployed divide by the population of working age
55
What is the inactivity rate by definition?
Those not in work and unemployed divided by the population of working age
56
The two ways of measuring unemployment
Claimant Count - the number of people claiming Job Seekers Allowance
Labour Force Survey (International Labour Organisation) - Quarterly survey of approximately 60,000 households compiled by the Office of National Statistics studying the employment circumstances of the UK population
57
What is underemployment?
It occurs when workers cannot find a nob that is suitable for their qualifications and experience or who cannot find enough hours to work:
- Graduates are unable to find work that is of graduate standard and are being forced to work in less skilled jobs such as supermarket assistants
- Workers are being put on zero hour contracts and are called into work when required rather than being given a permanent contract
58
Factors changing the rates of employment, unemployment and inactivity
The school or compulsory training leaving age
Number of school leavers entering high education
State retirement age
Level of net migration
Availability of jobs
Level of taxes and benefits
59
Significance of increased employment
Improved Skills - Investment in human capital raises productivity and international competitiveness
Multiplier Effects - Increased incomes leads to increased spending so firms see increased profits and a virtuous cycle
Higher government taxation revenue - more people pay more income tax and spend more (VAT revenue)
60
Significance of decreased unemployment and inactivity
All significances of increased employment
Falling government spending on out-of-work benefits
Prevents people from become unemployable
Job market becomes more flexible (more workers for employers to choose from)
Decreased dependency ratios (the number of inactive people that active and employed people are supporting, directly or indirectly)
61
What is the Classical view of unemployment?
There are only unemployed people who are not able and willing to work at the going wage rate
Leave the market to get on with it and eventually unemployment will vanish
Real wage inflexibility
62
Keynesian View of unemployment
People can be unemployed even in the long run because of insufficient aggregate demand (equilibrium with full employment)
Demand-deficient unemployment
63
What is Real Wage unemployment?
Real Wage unemployment occurs when wages are above the equilibrium level causing the supply of labour to be greater than demand
When real wage rates are stuck at a level above than needed to reduce unemployed any further.
One cause of this is minimum wage legislation. Some unemployed people may be willing to work for less than the minimum wage, likewise some employers may be willing to take money workers but only if below the minimum wage
64
What is structural unemployment?
A measure of workers who lose jobs in a declining industry and do not have the skills to join other industries
Regional unemployment (poor mobility of factors of production)
Sectoral unemployment (some skills are not transferable and retraining is required)
Technological unemployment (technology replacing their jobs)
65
What is cyclical unemployment?
This is heavily linked to the economic cycle and occurs when there is a negative output gap, indicating demand is low, or demand-deficient.
GDP above and below the trend line.
66
What is seasonal unemployment
When people are employed at certain times of the year - they are not needed all year round.
67
What is frictional unemployment
Transitional unemployment due to people moving between jobs
68
Economic costs of unemployment
Lost output, the economy is inside the PFF - lost efficiency.
Fall in real incomes and lower living standards for those affected
Drop in tax revenues and higher welfare - budget deficit
Possible decline in labour supply as unemployed move overseas
69
Social costs of unemployment
Increase in relative poverty and welfare benefit dependency
Extra demands on NHS
Link between persistent unemployment and social problems
70
Any beneficial effects for high unemployment?
Reduced risk of inflation - lower wage claims and price discounts
Pool of unemployed labour available for growing businesses
Rise in self employed start-ups as an alternative to being unemployed
71
Labour scarring effects from high unemployment
Loss of work experience
Loss of current and future income
Changing pattern jobs in the economy
Check pg26 of GoodNotes 2.1
72
What does the balance of payments (BOP) record?
All financial transactions made between consumers, businesses and the government in one country with other nations
Inflows of foreign currency = positive entry
Outflows of foreign currency = negative entry
73
What is the balance of trade in goods?
The difference in value between visible imports and visible exports
74
What are invisibles?
Services
75
What is a current account deficit?
Imports > exports
76
What is a current account surplus?
Exports > imports
77
Income and current transfers
Income - generated from the loan of factors of production overseas:
- Interest payments
- Profits
- Repatriation of earnings/wages
Current Transfers - Mainly government transfers to and from overseas organisations such as EU, NATO.
78
What is a financial account?
Records money flows for investment purposes: FDI and FPI - speculative flows related to exchange rates and interest rates
79
What is the capital account?
Records changes in net assets in each country
80
What items are included in the current account?
Trade balance in goods
Trade balance in services
Net primary income from overseas assets
Net secondary income
81
What is listed under primary income?
Profits, interest and dividends from investments in other countries
Net remittance flows from migrant workers
82
What is listed under secondary income?
Overseas aid/debt relief
Military grants
UK Payments to the European Union
83
Causes of a current account deficit
Relatively low productivity
Relatively high inflation rate
Over-valued exchange rate
Dependence on highly prices imported raw materials
Relocation of manufacturing industries to low-wage countries
Protectionism by other countries
84
Causes of a current account surplus
Export-oriented growth
Foreign direct investment
Undervalued exchange rate
High domestic savings rates
Closed economy
Strong investment income from overseas investments
85
Why is there a persistent deficit on the UK current account?
We have a high propensity to consume imported goods.
UK firms have become less competitive in the manufacture of goods.
Our exchange rate is too strong (pre-Brexit).
We have an unbalanced economy.
86
Restoring a balance to a current account deficit
Controlling consumer spending will reduce the demand for imports
Investing in the supply-side
Depreciation of the exchange rate
Improve overall macroeconomic conditions in the UK
