MACRO definitions and key evaluations Flashcards
Main macroeconomic objectives
Trade balance- balance on the current account
Price stability - 2% inflation
Economic growth - long run around 2.5%
Minimising unemployment - 3% accounting for frictional unemployment
plus:
Balanced government budget
Greater income equality
Productivity
3 tradeoff of falling unemployment with other macro objectives (plus counter arguments)
Balanced government budget. We need to spend more to reduce unemployment. We could cut income taxes to push more into the workforce, but this would mean less revenue
BUT Cutting taxes depends on the laffer curve. By reducing taxes we may be increasing our total revenue. Government spending may be fixed in the long run as we hit an economic peak.
Low inflation The phillips curve shows how reducing unemployment leads to higher price levels, due to greater government spending.
BUT It may be a supply side improvement, which would lower price levels.
Balance of payments on the current account Higher employment will mean higher wages, and a greater amount of spending on imports, especially since the UK’s MPM is high. Inflation will also make our exports less viable.
BUT As more is being imported, UK currency supply would increase in the global markets. This would depreciate the pound, making our exports more competitive
3 tradeoff of lowering inflation with other macro objectives (plus counter arguments)
Unemployment The SRPC shows how inflation and unemployment are at odds. If we engage in contractionary monetary policy, C will fall, and therefore AD, but so will Y.
BUT We may have been experiencing stagflation, where AS is inelastic (not much spare capacity) A fall in price level won’t see a significant fall in Y
Economic Growth We will need to slow down economic growth to lower inflation. Contractionary policy will lower PL and AD, but also rGDP
BUT We may grow the economy and lower prices through supply side reform, which will lower AS
Inequality We could engage in austerity and contractionary fiscal policy. The poorest will see their benefits cut, which can further the divide between rich and poor. Contractionary monetary policy is also regressive due to higher interest on loans
BUT The contractionary fiscal policy could be achieved through higher income taxes, especially on higher bands, reducing inflation and inequality.
3 tradeoffs of increasing growth with other macro objectives (plus counter arguments)
inflation We may have had expansionary monetary policy, where we have grown AD and rGDP, but also Price Level
BUT We could have been operating way below capacity, so the rise in price level won’t be significant compared to rGDP
balance of payments When real incomes are rising, consumers will tend to import more, worsening the current account position.
BUT We may have grown due to supply side improvements, which would likely see our export competitiveness improve
inequality Economic growth often creates the best opportunities for the more skilled and educated. Those who are not will lag further behind. Benefits may lag behind inflation
BUT wages of the lowest paid may rise faster than the average raise. Government benefits may be in line with inflation, and progressive taxes may reallocate income.
What does real GDP measure?
rGDP measures GDP adjusted to inflation. GDP is the measure of the quantity of goods and services produced in the economy
What are the 2 main measures of unemployment in the UK?
The Claimant count The number of people claiming unemployment benefits like JSA. They have to prove they are actively looking for work
The Labour Force survey Taken by the ILO. Generally higher as includes people not on benefits such as part time unemployed
The 3 accounts on the BoP
Current Account, Financial Account, Capital Account
What is GNP
Gross National Product
Market value of all products produced in a year.
GDP + overseas income - income earned by foreigners in the UK
The limitations of GDP
No indication of distribution of income
May need to be recalutated in terms of purchasing power
Hidden economies like black market are hard to compare
No indication of welfare
The withdrawals from the circular flow
Imports
Savings
Taxation
The injections into the circular flow
Exports
Investments
Government spending
How much of AD is C as a %
Consumption makes up just over 60% of AD
What is the accelerator effect?
The accelerator effect is the relationship between planned capital investment and the rate of change of national income
Why does the accelerator effect occur?
- If firms see a rise in demad and expect this to be maintained, they will soon start to reach maximum capacity
- To meet future demand they will respond by investing now. A considerable investment outlay may be required
- Because of economies of scale in investment, it is more efficient to make a significant investment than small annual increases
- Therefore firms will wait for promising economic conditions before investing
Define automatic stabilisers
Policies which offset fluctuations in the economy. These include transfer payments and taxes. They are triggered without government intervention
How do exchange rates influence the current account balance? And what does this depend on
A depreciation of the pound means imports are more expensive, and exports are cheaper, so the current account trade deficit narrows
Depreciations make the currency relatively more competitive against other currencies
but this depends on
which currency the pound depreciates against. If it is the dollar or euro, it will have a more significant effect than a country the UK does not really trade with
The demand for UK exports has to be price elastic to lead to an increase in exports
What is the mutliplier effect?
The multiplier effect occurs when an initial increase to AD leads to an even bigger increase in national income (GDP)
How does the elasticity of SRAS influence the multiplier
When SRAS is elastic, there is lots of spare capacity, so extra output can be produced quickly at little extra cost. The shift in AD will lead to a greater increase to rGDP
Formula to calculate Multiplier
1/(1-MPC)
How does the strength of the currency affect imports
SPICED
Strong Pound Imports Cheaper Exports Dearer