Macroeconomics Flashcards
where will the economy always be at in the long run
the economy will always be at full unemployment
what indicators in macroeconomics tell us how the economy is doing
growth -> indicator of income and living standards in economy
unemployment -> keep it low
inflation -> rate of growth of prices in an economy
trade -> looking at the value of imports of goods and services compared to the value of exports of goods and services
distribution of income -> how incomes are distributed across households in an economy
what are the different macroeconomic objectives
growth to be strong, sustained and sustainable -> growth is measure of living standards so want that to be high and sustained over time
low unemployment, full employment
low and stable inflation rate 2% (+-1%)
balanced trade in and out of country (trade deficit, trade surplus)
fair distribution of income -> idea of fair changes of whoever is in charge
Why did the UK use heavy expansionary fiscal policy during covid?
massive increases in government spending -> huge increase in healthcare spending on NHS + furlough scheme paying wages of employed and self-employed despite no production of goods and services taking place
massive tax cuts -> VAT cut for industries that were hit hardest e.g. leisure, hospitality, tourism from 20% to 5%
these industries were exempt from paying business rates -> tax on the value of physical property
why?
To increase aggregate demand -> bring economy out of recession + close the negative output gap and propel the economy towards recovery
increase inflation to avoid deflation with increased AD
increased AD to keep unemployment low
consequences:
demand pull inflation
massive budget deficit
aid and globalisation havent really been tested yet so make heavy revision on that
do this video when rest of notes are made and understood
https://www.youtube.com/watch?v=ZlJ8TfmzgL4&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=3&ab_channel=EconplusDal
https://www.youtube.com/watch?v=kJAJiFEmzLg&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=4&ab_channel=EconplusDal
what is the circular flow of income and draw it illustrating the different parts
a useful way of modelling the economy
model - https://www.youtube.com/watch?v=2BINy9AzHhQ&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=5&ab_channel=EconplusDal
what is the equation for calculating an index number
an index always has a base year of 100
Index number = (raw number / base year raw number) x 100
What is GDP and what does it measure
GDP -> the value of all goods and services produced in an economy annually
-measures growth
-measures living standards as it measures income
What is the problems with using GDP as a measure of economic growth
Double counting -> when the value of output in the primary sector is included again when the primary commodity is manufactured again into something in the secondary sector -> inflates the final figure
informal activity isn’t accounted for e.g. black market, illegal activity (businesses that aren’t registered), DIY work etc.
errors given the vast data collection
negative externalities of production aren’t included -> e.g. cost of air pollution, resource degradation, loss of biodiversity
Income inequality -> nothing in GDP mentions the distribution of income
the output produced -> e.g. if majority was capital it wouldn’t benefit consumers much + only benefits firms -> takes a long time for it to benefit consumers
other quality of life aspects GDP takes into account that would benefit living standards -> level of healthcare, education in society etc.
What is GDP per capita and what does it measure, give the equation to calculate it
GDP per capita gives us an average measure of individual incomes in an economy
calculated by GDP / Population
what are the issues of GDP per capita
remittances (when a worker leaves a country to work abroad and earn higher income, with that income being sent back to their home country)-> GDP per capita doesn’t take into account any factor income made abroad e.g. domestic business working abroad -> even though that income is clearly raising living standards
influence of FDI -> foreign business comes and produces in a home country -> will increase their GDP figure -> however a lot of the income generated will be sent back to their own home country and wont stay within the domestic economy
what is GNI and what is it used for, what is the equation to calculate it
GNI is used to find the total income generated by a countries factors of production regardless of where they are located
as long as the worker or firm is domestic, it will be included in GNI -> therefore FDI will not be included as is foreign
GNI = GDP + net factor income (income earned by domestic workers/firms - income earned by foreign workers/firms who operate at home)
what does green GDP account for that other measures don’t, how is it calculated
accounts for the environmental costs of production -> which can massively effect living standards
Green GDP = GDP - Environmental costs
takes away all negative externalities from the GDP to find more accurate living standards
what are the problems with using green GDP
putting monetary value on environmental costs are quite subjective
GDP could dramatically fall -> too politically sensitive
Define economic growth
an increase in real GDP in an economy in a year caused by an increase in AD or an increase in LRAS
increased AD -> increases economic growth
what is the equation to calculate AD
AD = C + I + G + (X - M)
draw the diagram for the economic/business cycle and show the 4 phases of the cycle
Diagram -https://www.youtube.com/watch?v=CBvM3YqsJYs&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=9
show a positive and negative output gap aswell
define recession
two successive quarters of negative economic growth
define a boom in an economy
Growth faster than trend rate -> high profits + low unemployment + high consumer and producer business confidence + high demand imports + rising tax revenues
however this boom also causes inflation
define a recession/trough
Declining AD -> high unemployment -> sharp fall in consumer/producer confidence and investment -> destocking and discounting of goods by firms + lower inflation + low demand for imports
define a recovery
rising consumer confidence -> higher house prices -> rising business confidence -> higher investment -> increase in construction
what are the benefits of economic growth
higher disposable income
higher employment
higher profits of firms
fiscal dividends for gov (increase in tax revenues)
what are the costs of economic growth
inflation
income inequality e.g. one sector dominates the economy, poor quality jobs, lack of welfare state
environmental costs -> producing goods from it -> e.g. deforestation, palm oil production -> cause negative externalities in production -> welfare loss
current account deficit -> incomes rise -> household incomes rise -> increase in imports spending -> widens the current account deficit
evaluation points for economic growth
Sustainable growth
inclusive growth
balanced growth
role for private sector/ gov
define unemployment
consists of those of working age who are willing and able to work, actively seeking work but who do not have a job
what is the labour force survey, and give the equation to work out the unemployment rate
a method of measuring unemployment in an economy
a survey that works out:
-the number of employed people
-number of unemployed people
-number of economically inactive people
Unemployment rate = Unemployment / Economically active labour (employed + unemployed) x 100
what is the claimant count
a measure of the total number of people who are claiming unemployment benefits
what are the issues with the claimant count
very difficult to compare between countries
not everyone will claim
not everyone can claim
could be subject to fraud
what are evaluations you can make to unemployment measures (labour force survey, claimant count)
sampling errors -> very tiny sample of people may not reflect the entire domestic economy
cost
hidden unemployed -> discouraged workers that tried many times to get a job but then gave up and dropped out labour force -> not counted as unemployed
inactive groups -> carers, early retired, people who are reliant on their spouses income ->workers with high productive potential for the economy -> wont be counted as they aren’t willing to work
under employed -> part time work is considered fully employed, workers on 0 hour contracts -> wrong to be recorded this way
what is cyclical unemployment
when there is a lower AD in economy there is less need for firms to employ labour -> labour is derived from the demand of goods and services -> if growth is low, there will not be much demand for labour
leads to an increase in unemployment
show a diagram demonstrating this
what is structural unemployment
the immobility of labour:
occupational immobility of labour -> person doesn’t have the skills necessary to enter a new industry
geographical immobility -> workers are not willing to move due to e.g. family ties
what is frictional unemployment
occurs when workers are between jobs -> left a job and are looking for another
what is seasonal unemployment
workers that have worth depending on the season e.g. summertime for the tourism industry
what is casual unemployment
workers that have contracts that end at random times might be casually unemployed until they get a new contract
what is real wage unemployment
where wages are fixed above the equilibrium in the labour market -> causing an excess supply of labour
what is inflation
the persistent increase of prices in an economy in a year
how do we carry out a consumer price index (CPI)
Family expenditure handed out to households -> to write down every fortnight the goods and services they buy, the prices they pay, the quantity, where they are buying them from and the % of income that is being spent on them
A consumer basket is then formed of the most popular goods/services which represents what the average family is buying over the fortnightly period with the average prices of them attached
prices of the goods/services are weighted based on the % of income (0-1)
weighted prices are then added to give total weighted price of the basket
index of them is created which is updated yearly
what is demand-pull inflation, draw a diagram demonstrating it
shift of AD to right due to increase in demand, may be caused by:
decreased interest rates
decreased income tax
increased consumer/business confidence
increased government spending
weak exchange rate
diagram -https://www.youtube.com/watch?v=q8LwZkid740&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=14
what is cost-push inflation, draw a diagram representing it
increased cost of production for firms -> decreased supply as a result
caused by:
increased price of raw materials
increased wages
increase business taxes e.g. VAT
increased price of imported raw materials due to a weaker exchange rate
what are the costs of high inflation
lower purchasing power -> consumers can buy less with the same amount of money
erosion of savings -> increased costs for things make people go through their savings faster
lower export competitiveness -> if inflation is higher in one country than the others then that country becomes less internationally competitive -> reducing demand for exports -> reducing revenue from exports
wage spirals -> increased price of things -> people ask for higher wages -> higher wages are given and increases costs of production for firms so pass on costs as higher prices -> increasing inflation -> workers ask for higher wages again etc.
fiscal drag -> inflation is rising + workers are receiving higher income -> only in line with inflation therefore the workers are not better off -> however may get dragged into a higher tax band and make themselves worse off -> if tax bands rise with inflation however it isn’t a concern
define cyclical unemployment and show it on a diagram
when there is a deficiency in demand in the economy for goods and services (perhaps due to a recession so people have less income to spend) -> less demand for firms to hire labour therefore less demand for labour
what are the two types of immobility of labour and describe them
occupational immobility of labour -> when workers dont have the skills to enter a specific market
geographical immobility of labour -> when workers are unable to move for work due to e.g. family ties
frictional unemployment
occurs when workers are in between jobs
therefore are searching for a new job and are unemployed for the time being
may be e.g. seasonal
what are the benefits of low and stable inflation
workers with higher wages
benefits of low and stable inflation
workers with higher wages
consumption is natural -> consumers buy goods and services when they need too (not anticipating anything)
firms encouraged to increase output -> firms can raise their prices and earn more revenue -> make more output + sell more at a higher price -> earn more
can keep unemployment low in a recession -> (we know in a recession its normal for firms to sack workers as revenues are falling and is a good way to keep revenues under control and their profit margin at a decent level) ->
give eval points of inflation
the rate of inflation
the cause of the inflation
the duration of the inflation
how stable the inflation is
deflation
the persistent fall of prices in an economy in a year
what is demand-side deflation and what does it come with
bad deflation
bad because -> if AD shifts left and a recession is caused in the economy -> recessions don’t just go away -> they last for a while -> the deflation could last at the same time -> even though there are policies to increase AD and get the economy out of recession, they take time to work -> deflation could be long term as a result and could become anticipated
occurs when ad shifts to the left
draw diagram for it
https://www.youtube.com/watch?v=PX9XdZGsFXs&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=16
comes with lower economic growth
deflation can be long term and anticipated (an assumption but likely)
supply side deflation
good deflation
occurs when SRAS shifts to the right
good because -> comes with higher economic growth -> more likely to be short term and unanticipated -> as values of e.g. raw materials change a lot
show on diagram
https://www.youtube.com/watch?v=PX9XdZGsFXs&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=16
comes with higher economics growth
this type of deflation is more likely to be short term and unanticipated
if deflation is anticipated it is dangerous because…
deflationary spiral -> consumers delay their spending (why buy now if in a couple of months prices will be even lower?) -> consumption is gonna fall now -> reduce AD -> lower growth and higher unemployment over time
real interest rates will always be positive -> (nominal interest rate - inflation rate) -> money saved will still be gaining value even if there is a no interest rate as prices of goods are falling -> saving makes more rational sense -> AD reduces further -> more deflation -> lower growth + higher unemployment
when deflation -> increases the real value of debt as when prices fall in economy -> profits for business and incomes for workers are going to be falling at the same time -> prices are falling firms will be making less revenue -> hit their profits and also -> if consumers are delaying spending -> firms are not going to be making as much profit
short term deflation is beneficial because
lower prices for consumers -> buy at cheaper prices -> improve their living standards -> purchasing power increases
falling input prices for firms -> sell goods at a cheaper price -> increased revenue
