Macro Performance Flashcards
What are the main macro objectives
- Price stability
- Low stable unemployment
- Satisfactory Balance of Payments
- Strong sustainable growth
3 other macro objectives that are not main
- fair distribution of income
- Environmental preservation
- Sound government finances
3 different measure of GDP
- Output method - adding all the value of all goods and services produced in an economic year
- Income Method - Adding all factor incomes in a year
- Expenditure method - C+I+G+(X-M)
what assumtion do we make about the measure of GDP
Output = Income = expenditure
3 reasons for shifts of the AD curve
- Wealth effect - as price decreases purchasing power increases
- Trade effect - As price decreases exports become more competitive
- Interest effect - when prices are low, inflation is low therefore interest rates are low and this stimulates high consumption and investment in the economy
3 Factors affecting consumption
- Real disposable income
- Interest rates
- Consumer confidence and Animal spirits
2 factors that can change consumer confidence
- household Dept
- Asset prices
- Interest rates
- Animal spirits
Name three factors that affect the savings rate
- Level of interest rates
- consumer confidence
- Age structure of economy
3 factors that affect the investment rate
- Interest rates
- Tax rates
- Business confidence
what are the types 4 types of spending done by a government
- Current spending- maintenance of public sector
- Capital spending -investment
- Welfare spending - pensions and benefits
- Dept interest spending
3 factors that affect net exports
- Exchange rate
- Disposable income at home and abroad
- Protectionism
3 reasons for shifts in costs of production
Supply side shocks
- wages
- Raw material/commodity prices (oil/import prices)
- Tax rates
what is uk natural rate of unemployment
The natural rate of unemployment, if the uk is at its natural rate is between 4-6%
3 factors that shift the LRAS curve
- Productivity
- Quantity and quality of FOP
- Technological advancement
when analyzing shift of AD or AS in macro economics what should you focus on
the effects on the key macro objectives
What is a multiplier effect
When changes in components of AD cause an even greater change in national output
What is the equation for the multiplier
1/1-MPC
what is the marginal propensity to consume
the proportion of how much of 1 pound will be spent again
how to you calculate final national output using the multiplier
initial injection x Multiplier = Final GDP
3 Determinants of the MPC
- Tax
- MPS
- MPI
(the size of the withdrawals from the economy)
What is the accelerator affect
when changes in GDP directly correlate to changes in investment
3 determinants of the accelerator effect
- Economic Growth
- investor confidence
- time lags on investment
3 reasons why UK investment rate is low
- low productitvity
- low public investment
- regulatory issues and land costs
When an economy is in recession AD will have little inflationary pressure, Why?
- Unemployment - if unemployment is high firms can increase unemployment without changes wage rates therefore no cost push inflation
- Unused capacity - Unused factors of production are cheap and readily available therefore firms can ramp up production with little increased costs
- Consumer consumption is low - Firms do no set prices high as they are eager to sell
Why must governments measure GDP
- gives insights into growth and performance and living standards in an economy
What is GDP and real GDP
GDP - the final value of all goods and services produced in an economy in a year
Real GDP - GDP by adjusted for inflation
3 reasons why GDP may be inaccurate
- Double counting - when goods in the primary and secondary sector are counted twice.
- informal activity is not included
- Errors
3 Problems with using GDP as a measure of growth
- Negative externalities are not included therefore value of green GDP is much lower
- Income inequality - GDP has no bearing to which class in society that national income goes to
- Many other quality of life measures are not included
how to measure GDP per capita
GDP/Population
2 problems with using GDP per capita as a measure of GDP
- Remittance - when income earned is not spent in the uk
- FDI can distort rate however foreign profits will go elsewhere
what is GNI
Total income generated by a countries factors of production no matter where they are
what is net factor income
difference in income earned from foreign factors of production and income paid to foreign factors of production
what is the equation for GNI
GNI = GDP + net factor income
what doesn’t GNI account for
FDI
what is the equation for Green GDP
Green GDP = GDP - environmental costs
negatives of using Green GDP as a measure of GDP
- Environmental costs are subjective therefore placing monetary value on them is hard
- GDP is most likely massively reduced giving impression of a weak economy
- Politically sensitive
what is a recession
Two successive quarters of negative growth
what are fluctuations in the economics cycle caused by
supply and demand side SHOCKS
3 causes of economics growth
outline 3 costs and 2 benifits of economics growth
Pros
- higher disposable incomes
- higher profits
Cons
- inequality
- Inflation
- CA deficit
4 evaluation points for economic growth
- what type of growth (consumption vs export led)
- balanced growth?
- Sustainable
- Private sector crowding out
what are the 2 main way of measuring unemployment
- Labour force survey
- Claimant count
what is cyclical unemployment
economics cycle causes unemployment
what is real wage unemployment
When wages are forced above equilibrium causing excess supply of labour
What is structural unemployment
Structural unemployment is made up of occupational immobility and geographical immobility
(mismatch of skills a producer needs vs skills a worker has and workers not willing or able to move to where demand for labour exists)
3 causes of structural unemployment
- Tech advancement
- Loss of comparative advantage
- economics transitions (primary to secondary)
what is Fricional unemployment
when workers are between jobs
what is seasonal unemployment
demand fluctuates with seasons therefore demand for labour also flucutates
What is the natural rate of unemployment
what does it consist of
- Unemployment that occurs when labour markets are in equilibrium
it consists of structural and frictional
what are determinants of the natural rate of unemployment according to free market economists
- Generous benefits system
- Excessive regulation in labour markets (firms aren’t willing to risk hiring low skilled labour because of hiring and firing laws)
what are the determinants of the natural rate of unemployment according to interventionists.
- Lack of transport and housing infrastructure
- Lack of in education and training
Outline 3 costs of unemployment
- Deteriation of government finances
- high cost push inflation
- inequality/poverty
outline two benefits of unemployment
- Greater pool of workers to hire from
- less of a currant account deficit
give 4 evaluation points about costs and benefits of unemployment
- Is unemployment at natural rate
- Duration of unemployment (hysteresis?)
- Type of unemployment
- Distribution of unemployment (which classes and age groups in society are affected)
what is the CPI
- expenditure survey is used to create a basket of goods that reflect the spending habits of consumers in the economy. These items are weighted as a percentage of income. As price levels rise the average price of the basket of goods will rise and this can be used to calculate inflation
what is the retial price index
the measure includes the rise in house prices. A basket of goods is calculated and weighed accordingly to consumer spending habits. Arithmetic mean is used to calculate average price changes of items in the basket of goods.
what are criticisms of the RPI measure of inflation
it uses an arithmetic mean which usually leads to an overestimate
What are 2 criticisms of the CPI measure of inflation
- It represents average changes therefore people on high and low incomes may experience different levels of inflation
- CPI is heavily affected by oil prices but does not include housing costs
Name 2 benfits of inflation
- Reduces the real value of dept (purchasing power of money declines)
- ## Low and stable inflation creates buisness and consumer confidence
Name 3 costs of inflation
- Loss of purchasing power (erodes savings, could effect most vunrable in society)
- Erodes export competitiveness
- Reduces buisness and consumer confidence
3 evaluation points about the effects of inflation
- How high it is
- Cause (demand/supply side)
- Anticipated vs unanticipated (hyperinflation)
what are the 3 cons of deflation
AD deflation:
- unemployment
- lack of economic growth
- debt burdons
what are 3 positives of deflation
Supply side :
- export led Economics growth
- increased purchasing power therefore confidence
- productivity
what is the main factor that affects the severity of demand side deflation
whether deflation is anticipated of not
what are 3 characteristics of anticipated deflation
- Delayed spending - Causes further price falls (but could also cause price increases)
- Positive real interest rates
- Increases the real value of dept
the two evaluation points for the severity of deflation.
Whether it is anticipated
What is its cause
