Macro Flashcards by matt foulerton

Economic growth/cycle - Limitations of GDP as a measure of living standards

Difficult to calculate GDP because statistics will ignore the underground economy
negative externalities, such as, pollution
does not take into account how hard people work
ignores distribution of income
depends what the economy produces
cannot get a true comparison because there will be a different purchasing power in different countries

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Economic growth/cycle - Costs of growth

Inflation
Boom and bust economic cycles
deficit on the current account

Environmental costs
Inequality

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Economic growth/cycle - Benefits of growth

Higher average incomes
Lower unemployment
Lower government borrowing

Improved public services
Money can be spent on protecting the environment
Investment

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recessions - Causes of recessions

Higher interest rates
Credit crunch and fall in bank lending
Global recession
Stronger exchange rate
Fall in house prices
Tightening of fiscal policy

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Inflation - Costs of Inflation

Cost of reducing inflation
International competitiveness
Confusion and Uncertainty

Menu Costs
Shoe leather costs
Income redistribution
Boom and bust economic cycles

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Inflation - Causes of inflation - Cost push inflation

pass this on to consumers:
Wage Push Inflation
Import prices
Raw Material Prices

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Inflation - Evaluation of Inflation targeting

The Monetary Policy Committee (MPC) was made independent in 1997
Between 1997 and 2007
Other problems were ignored

couldn’t have reduced inflation without causing a deeper recession
quantitative easing

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Deflation - Problems of Deflation

Lower spending If prices are falling
Liquidity trap
Real wage unemployment
Real value of debt will increase

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Fiscal policy - Evaluation of Fiscal Policy

Disincentives to work
Reduced public services
Poor information

Time Lags
Increase in budget deficit
Depends upon other components of AD

Monetarist Critique
Depends on size of the multiplier

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fiscal policy - government borrowing - Economic Effects of Government Borrowing

Increased aggregate demand (AD)
Higher taxes and lower spending
Loss of Confidence

Higher debt interest payments
Crowding out

Increased Interest rates
Inflation

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fiscal policy - government borrowing - Advantages of Govt Borrowing

Recession

Investment
Bailout key industries

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fiscal policy - Policies to reduce a budget deficit

Cut government spending
Tax increases
Economic growth

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Monetary Policy - Tight Monetary Policy

increasing interest rates to reduce AD:
borrowing more expensive
cost of mortgages payments increase
Saving money in a bank is more attractive
appreciation in the exchange rate
reduce demand for buying houses

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Monetary Policy - Evaluation of monetary policy in reducing Inflation

depends upon the position of the economy and the slope of the AS curve
depends upon other variables affecting AD
Higher interest rates will cause an appreciation in the exchange rate
It is difficult to solve both cost-push inflation and lower output through the use of interest rates

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Monetary Policy - Benefits of the MPC setting Monetary Policy

successful in keeping inflation close to its target
stable and continuous growth
govt could always change the target if there was a shock
political considerations

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Monetary Policy - Criticisms of The MPC approach

An inflation target is not enough
shocks to the economy such as higher oil prices may increase inflation (harder to keep to target)
Fine control of monetary policy is not possible
Low inflation between 1997-07
asset bubble and resulting credit crunch in 2007-2009
Monetary policy alone may not be enough. Keynesians

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Unemployment - The Natural Rate of Unemployment

equilibrium
difference between those who
frictional and structural unemployment

Monetarists
NAIRU
full employment level of unemployment

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Unemployment - Explaining Changing Natural Rates of Unemployment (fall in the uk)

Fall since the 1980s:
Increased labour market flexibilities
Privatisation has helped increased the competitiveness
Better education and training
changes to benefits

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Unemployment - Explaining Changing Natural Rates of Unemployment (rise in rest of EU)

Rise since 1990s:
Rigidity in EU labour markets
Restrictions on closing factories and mandatory severance pay
unionisation resulting in wage rigidity
Generous benefits which lessen the pain of unemployment
Hysteresis effects
Growing competition from Asian countries
Also due to below trend economic growth

Unemployment - Consequences of Unemployment

Loss of income
Negative multiplier effects
Fiscal costs

Loss of national output (hysteresis effect)
Social costs

Balance Of Payments - Reasons for a current account deficit

Overvalued exchange rate
Declining competitiveness
Growth in consumer spending
Low savings ratio
Large inflows of foreign capital

Balance of payments - Potential problems of current account deficit

financed through borrowing
long-term investment
depreciation in the exchange rate

loss of confidence
fundamental weaknesses

Balance of payments - However a current account deficit is not necessarily harmful

A current account deficit can be used to finance investment
Inward investment can be beneficial for the economy
floating exchange rate
depends on the size of the deficit as a % of GDP

International Trade - Benefits of Free Trade

trade creation

Economies of Scale
Increased competition

Increased exports
Trade is an engine of growth
Make use of surplus raw materials

International Trade - Arguments for Restricting Trade

Infant industry argument The senile industry argument Protection against dumping Need to diversify the economy Environmental

globalisation - Causes of globalisation

Growth of free trade Multinational companies Technology Transport WTO / Trading Blocks Opening up of China and Eastern Block

globalisation - Benefits (impact) of globalisation

Global trade cycles Competition Economies of scale

globalisation - Costs of Globalisation

Domestic firms uncompetitive Impact on developing world Environmental costs Dominance of global brands

types of Trading Blocks

``` Free Trade Areas Customs Union Single Market Economic Union Monetary Union ```

Exchange Rates - Causes of Appreciation in Exchange Rate

Relatively higher interest rates Relatively lower inflation rate Current account surplus Speculation

Exchange Rates - Advantages of Fixed Exchange Rates

Provide greater stability for firms involved in trade Can help reduce inflation reduce speculation

Exchange Rates - Disadvantages of Fixed Exchange Rates

exchange rate being overvalued to maintain may require high interest rates UK forced out of ERM in 1992

Euro / Monetary Union - Advantages of Joining the Euro

Lower transaction costs Eliminate exchange rate fluctuations Increased inward investment Greater Price Transparency The UK financial sector would benefit Lower Inflation

Euro / Monetary Union - Disadvantages of Joining the Euro

Lack of exchange rate flexibility Low inflation may conflict with other objectives The UK will lose ability to set interest rates Loss of independence over fiscal policy Lack of convergence in the UK Bond yields

Measures to Increase Competitiveness / Supply side policies

Education and Training Investment in infrastructure Privatisation and deregulation Devaluation in exchange rate Limiting wage growth

Taxation - Impact of Increasing Rate of Income Tax

increase tax revenues - gov can spend more May encourage tax evasion May reduce incentives to work redistribute income

Taxation - An increase in government spending as a % of GDP could imply

Government Spending as a % of GDP shows Investment in education and infrastructure In a recession, government spending may be effective in stimulating the economy. Redistribution a consequence of the recession

Taxation - Evaluation

disincentives to work Inefficiency of government spending Vested interests of public sector Crowding out It depends on what the government is spending the money public-private partnerships

Taxation - Taxation principles

``` Adequacy Broad Basing Convenience Restricted exemptions Predictability and regularity ``` ``` Earmarking Efficiency Equity Neutrality Simplicity ```

Supply side policies - Supply side policies examples

Privatisation Deregulation Reducing Income Taxes Increased education and training ``` Reducing the power of Trades Unions Reducing State Welfare Benefits Providing better information about jobs Lower Tariff Subsides ```

Supply side policies - Supply side policies benefits

cost push inflation reduce the natural rate of unemployment increase the sustainable rate of economic growth Improved trade and Balance of Payments

Supply side policies - Supply side policies costs

can take a long time to work its way through the economy very costly to implement equity (negative impact on distribution) Resisted by various interest groups

Comparative advantage - Criticisms

overstate the benefits of specialisation by ignoring a number of costs assumes that markets are perfectly competitive might create structural unemployment Comparative advantage is not a static concept - it may change over time

European union - Benefits of EU (single market)

Economies of scale Dynamic efficiency reduction in export bureaucracy UK citizens have the right to...

European union - Costs of EU (single market)

firms can't compete with new entrants It's a work in progress service sector Delays in other areas