SECTION 6: Economic Issues Flashcards
Macroeconomic objectives
- Low and stable inflation
- Low unemployment
- Economic growth
- Balance of trade
concequences in general and for businesses
Low and stable inflation
concequences of inflation:
Decrease in real income –> increase in living costs –> decrease in living standards
Switching from consuming domestic products to foreign product
If as a result, output(GDP) begins to fall –> firms will not expand –> output will fall even more –> income will fall even more
Uncertainty
for businesses:
Employees will ask for higher wages to at least keep the same level of real income → higher costs
Prices of goods are higher→ higher costs of production
Inflation in country X > Inflation in trading countries:
Exports are becoming more expensive, lower demand for exported goods
Imports become cheaper, higher demand for imported goods than domestically produced
inflation
a general and sustained increase in level of prices of goods and services over time
Why low and stable inflation?
The increase in prices will incentivise the firms to grow
Low → prevents loss of purchasing power
Stable → ensures predictability
unemployement concequences
Consequences:
Output level lower than potential
Lower disposable income → lower standard of living and no engine to grow and develop
Payment for unemployment benefits → opportunity cost of funding hospitals and schools
Consequences for businesses:
High unemployment
Many people willing to work → perhaps easier to recruit and with lower unit labor cost
lower demand for goods and services: higher sales for businesses that sell cheaper alternatives
Low unemployment:
Few people available → higher wages needed to be paid to incentivise workers → higher costs
People have higher disposable income → higher demand for goods and services: higher sales for businesses, lower sales for businesses that sell cheaper alternatives
How do we measure our economy?
economic growth, and negative growth
GDP - Market Value of all goods and services produced in a country in a year
Economic Growth = increase in GDP
Economic negative growth = decrease in GDP (recession)
fiscal policy
changes by the government in tax rates or public sector spending
Citizens and Firms pay Taxes → Budget → Government Spending (Education, Defense, Health, Law and Order, Transport)
Public goods
Redistributed income
Wages (public workers)
Subsidies
Taxes
fiscal policies
Direct taxes - paid directly from incomes
(Disposable income - level of income a taxpayer has after paying income tax)
Profit tax (corporation tax) - tax on the profits made by the businesses
Indirect taxes - are added to the prices of goods and taxpayers pay the tax as they purchase the goods
Import Tariffs - tax on imports
Import Quota (not really a fiscal policy) - limiting the quantity of imports
Monetary Policy
change in interest rates by the government of central bank, for example the European Central Bank
Supply side policies
try to increase the competitiveness of industries in an economy against those from other countries. Policies to make the economy more efficient
Social responsibility (CSR)
a business decision benefits stakeholders other than shareholders → protecting the environment
consumer boycott, pressure groups, government
external costs and benefits
private costs and benefits
together social costs and social benefits
Sustainable development
does not put at risk the living standards of future generations
Use renewable energy
Recycle waste
Use fewer resources
Develop new “environmentally friendly” products and production methods
Globalization and Free trade agreements
Globalization - Term used to describe increases in worldwide trade and movement of people and capita between countries
Free trade agreements - when countries agree to trade imports/exports with no barriers such as tariffs and quotas
