Real life examples, macro Flashcards
Interest rates affecting C and I in AD equation ; low
Lowered in china in 2023 to promote consumption
Japan set at -0.1% to promote cosumption and fight deflation
Interest rates affecting C and I in AD equation ; high
Turkey
High rates of inflaiton since 2019 driven by weak currency, COVID crashed economy and Lira
Increased rates from 4% in 2020 -> 14% in 2022 -> beyond 40% today
ALL TO HALT INFLATION SPIRAL
High consumer confidence boosting C in AD equation
High oil prices and strong performance in oil exporting nations such as UAE and Qatar
Low consumer confidence reducing C in AD equation
China, 2022, strict COVID restricition and border policies. Remains low in 2024
Positve wealth affect increasing C in AD equation (high asset prices)
In UK, high correlation between house price growth and consumption; house prices rising since 2010
Negative wealth affect decreasing C in AD equation (Low asset prices)
Chinese real estate market collapes in 2023 due to liquidity issues of major property developers
Low household indebtedness -> affecting C in AD equation
Germany, extremely low for western country, $2200 per household excluding mortgages
Result of german culture
High household indebtedness -> affecting C in AD equation
UK and USA higly reliant on debt to dirve conusmption
UK household indebtedness is at 90% of GDP; £12,800 excluding mortgage debt
High real disposable incomes ->affecting C in AD equation
Economic growth in India, strong throughout 2023
Low real disposable incomes -> affecting C in AD equation
Economic crisis in Venezuela
Real disposable incomes falling from $18,000 GDP/Capita PPP in 2013 -> $6,000 GDP/Capita PPP in 2024
in 11 years
Low income tax rates -> affecting C in AD equation
2018, Donald Trump announced Federal income tax reductions in USA on 5 of the 7 tax bands -> aiming to raise real disposable incomes
High income tax rates -> affecting C in AD equation
Scotland, high income earners face increases in income tax from 2024.
Top rate will rise from 47% to 48%.
A new 45% tax band will be added for earnings between 75k and 125k
- France president imposed a millionares SUPER TAX of 75% for anyone earning more than 1 million euros -> designed to improve state of government finances after Great Financial Crisis
2015 policy was reversed given millionares leaving france, and many high income earners voicing disinterest in movint to france, businesses cant attract talented workers from abroad
POLICY FAILED with budget deficits rising as policy was in place
Low cooporation tax to boost I in AD equation
2018 Donald Trump cut US coorp tax from 35% to 21% to promote domestic capital investment, FDI and encourage re-shoring
High cooporation tax
UK increased from 15% to 19% in 2023 to raise revenue
Government spending to boost G in AD equation
September 2020, France -> 100 billion euro stimulus package -> mainly loans and grants for businesses hit hard by COVID
also for Gov spending on renewable energy, job support and infrastructure
Austerity - Gov spending cuts to reduce G in AD equation
UK, conservative party from 2010 to 2019, Gov spending cuts to reduce high budget deficit
Weak exchange rate -> possibly boosting (x-m) in AD equation
Argentina Peso / Sri Lanka Rupee
Strong exchange rate -> possibly reducing (x-m) in AD equation
US dollar strengthened against major currencies in 2023 due to:
Good economic performance, high interest rates
Determinants of SRAS
Gloabl prices of oil, gas, electricity rose throughout 2022 and into 2023 -> Germany, staglaftion, Russia Ukraine war
2020 UK VAT cut
Demand side shocks causing recessions
Coranavirus Pandemic 2020 ; shutting down parts of countries, businesses running at limited capacity, deep recesions worldwide
Also, COVID crashed commodity prices, driving countries reliant on export of these like NIgeria fell into recession
Great Financial Crisis of 2008
Housing market crash in US between 2007 and 2009
Supply side shocks causing recession
Germany entered recession in 2023 due to increased costs of production from oil, energy and food prices due to Ukraine war. Led to staglfation ; higher infaltion than growth
Problems with GDP as measure of growth
Informal sector in Italy and Greece, approx 25% of their GDP
Deforestation in Malaysia
Over specialisation in Botswana (diamonds)
Switzerland have over valued currency
Benefits of growth
China ; higher incomes, poverty alleviation, job creation ETC
Problems with CPI as a measure of inflation
UK has wide differences in tastes and preferences and incomes, no indivduals spending habbits are the same.
Inflation in 2022/23 burdened poor more given root casue of higher fuel, gas, electricity and food prices
Demand pull inflation
UK and USA in 2021, strong economic growth, peaking at more than 10%
Cost push inflation
Venezuela due to currency weakness -> hyperinflation
Bad deflation
Japan, decades of demand side deflatiopn after banking crisis in 1990s
Anticipated, deflationary spirals
Good deflation
2015 and 2016 in UK and Eurozone due to falling oil and commodity prices
Costs of inflation, uk
Income tax bands in UK frozen until 2028, but inflation will drag indivudlas into higher tax bands -> fiscal drag
Turkey, Argentina, Lebanon = reduced purchasing power
Cyclical unemployment
Coranvirus -> USA, Greece and Spain
Structural unemploymejnt
India, 50% of population under 25, being trained for jobs for which there are little vacancies
Uk loss of comparative advantage to textiles industry to south east asia
Real wage unemployment
Germany minimum wage in 2015 -> employers absorbing cost increase and as a result, real wage unemployment
Costs of unemployment
Greece = Unemployment rates in excess of 10%, with national debt at 180% of GDP -> dealing with costs of unemployment
Expansionary monetary policy ; lower interest rates
Monetary Policy Committee of the Bank of England, in response to COVID economic crisis, lowered rates from 0.75% to 0.1% -> aiming to boost economic growth
Result = interest rates were already very low + lwo consumer and business confidence so money wasnt spent, limited effectiveness, needed huge QE instead -> cirtics argue that this fueled inlfation
Expansionary monetary policy ; QE
Uk, post covid, £450bn
Expansionary monetary policy ; EXTREME negative interest rates
japan -> -0.1% for commercial bank deposits, to boost economic growth and ensure positive inflation rates after COVID
Commercial banks, as they must pay fee to hold money at central bank, incentivised to keep less money there and lend out cash to cosumers and businesses to boost spending
Contractionary monetary policy ; higher interest rates
Throughout 2022 and 2023, Fed reserve and Bank of england raising rates and introducing quantative tightening to tackle inflation
Close to not working with lower growth, has now worked, room for expansionary policy in 2024
Supply side policies
In UK,from 2019, investment tax free allowance has increased five fold from £200k to £1million -> incentivising businesses to invest
NHS budget will increase in real terms in 2025
Protectionism
USA v China Trade War
2018 Donal Trump launched trade war against them due to the 375bn US China trade deficit, accusing them of illegal dumping and many other things
He imposed tariffs, starting at 10% but hitting 25% by may 2019
China retaliated with 25% tariffs on US exports
Firms like Harley Davidson moved some production away from US to avoid tariffs -> US growth in economy slowed in 2019 due to cost psuh inflation -> trade deficit actually widened to 420 billy at end of 2018.
Biden has kept them in place
China ahs also suffered from lower growth, 6.2% in 2019, lowest in 28 yrs
CA deficit
UK over last decade, made up of large deficit -> caused by strong domestic income growth and a weak domestic manufacturing base AND a lack of international competitiveness due to high wages.
Critics = concerned over UKs ability to attract FDI and foreign buyers of british debt to run consistant FA surpluses given uncertain Brexit climate
Pros = Main driver is high income growth creating large sucking in effect of imports, indicating propserity in economy. Britain has no problem attracting FDI given size, strength and stability of UK economy -> policies to reduce deficit could have nasty side effects
CA surplus
China since 1990s, peaking at 10% of GDP in 2007 ->
exploiting their comparative advantage -> driven by trade surplus
Problems = Economcy dependant goods exports without other signifcant avenues of growth. Whenever trade figures dissapoint; chinese gov has to spend large amounts of borrowed money
Weak exchange rate
UK, pound falling by 15% after brexit vote against major currencies.`
Fixed exchange rate
Denmark’s Krone fixed agaisnt Euro since 1999
UAE Dirham against dollar
Managed exchange rate
Chinese Yuan, authorities regularly intervene to manage rates to suit interest of chinese economy.
In 2019, devalued Yuan by slashing interestr rates three times to boost exports in middle of trade war with US
Globalisation winners
Vietnam
Once heavily centralised after Vietnam war -> economy opened up through a series of economic trade political reforms known as ‘Doi Moi’ reforms ; trade liberalised through reduction in tariffs, FDI encouraged and red tape was reduced
Recently joined trading bloc ASEAN
Vietnam now specialised in exporting textiles
Incomes in 1985 of $230 GDP/Capita
Now at $2400 GDP/CApita
Globalisation losers
Sub Saharan African countries
Slowest rate of HDI since 1980s because of resource curse, falling into deep recessions whenever commodity prices fall or overseas demand weakens
