The Macro Economic Environment Flashcards
Withdrawals and injections:
Households —-> firms
Savings —> Financial Sector —> Investment spending
Taxation —> Government sector —> Government spending
Import demand —> Foreign sector —> Export demand
NB Point: Changes in behaviour of one of the components of the circular flow can lead to…
…significant changes in economic performance as a whole
Factors which influence the economy: (7)
- Investment levels
- Multiplier effect
- Inflation
- Savings
- Confidence
- Interest rates
- Exchange rates
Aggregate Demand (AD) is…
total planned or desired consumption demand in the economy for consumer goods and services and also for capital goods
4 main phases of the business cycle
- Recession
- Depression
- Recovery
- Boom
Inflation is…
…an increase in price levels generally; manifest in the decline in purchasing power
Causes of inflation: (5)
- Demand pull factors (Demand exceeds supply; low unemployment)
- Cost push factors (Wage increases)
- Import cost factors (Oil; fall in FOREX value)
- Expectations (Wage-price spiral: 8% annually!)
- Excessive growth in the money supply
Demand Pull Inflation is…
…inflation resulting from a persistent excess of aggregate demand over aggregate supply
Cost Push Inflation is…
an increase in the costs of production of goods and services (Raw material or wage increases)
Problems caused by unemployment: (5)
- Loss of output
- Loss of human capital
- Increasing inequalities in income distribution
- Social costs (Suffering, distress, theft, vandalism)
- Increased burden of welfare payments
Causes of unemployment: (6)
- Real wage unemployment (Unions)
- Frictional (Time to match workers to jobs)
- Seasonal
- Structural (A port or new sporting development)
- Technological (Typing vs voice recognition; robots)
- Cyclical or Demand-deficient (Business cycle!)
A government can create jobs or reduce unemployment by:
- Spending more on jobs directly (Civil servants)
- Encouraging growth
- Encouraging job skills training (Finance training schemes)
- Offering grant assistance to employers
- Encouraging labour mobility
‘GNP’ stands for…
Gross National Product
Economic growth is measured by…
increases in the real gross national product per head
Actual growth in the long run is determined by 2 factors:
- Growth in potential output (Amount of resources like land, labour & capital AND in their productivity (Technology & labour practices))
- Growth in aggregate demand
Technological progress can be divided into 3 types:
- Capital saving
- Neutral
- Labour saving
Advantages of economic growth:
- Higher income per head –> higher levels of consumption –> Better standard of living
- Easier to provide welfare services without intolerable tax burdens
Disadvantages of economic growth:
- Faster use of natural resources
- Pollution
- Structural unemployment
- Higher growth requires a cut in consumption (short-run)
4 main objectives of economic policy:
- Economic growth
- Control price inflation
- Achieve full employment
- Achieve a balance between exports and imports
Fiscal policy is…
- A method of managing aggregate demand in the economy
2. Government policy on taxation, public borrowing and public spending
PSNCR or PSBR is…
Public Sector Net Cash Requirement or
Public Sector Borrowing Requirement
A government can stimulate demand in the economy by:
- Lowering tax
2. Spending more
Functions of taxation:
- Raise revenues for the government
- Price certain products to take into account their social costs
- Redistribute income and wealth
- Protect industries from foreign competition
A direct tax is…
paid direct by a person to the revenue authorities Income tax Corporation tax CGT Inheritance tax PROGRESSIVE / PROPORTIONAL
An indirect tax is…
collected by the revenue authority from an intermediary who then attempts to pass the tax on to consumers
CAN BE REGRESSIVE
Indirect taxes are of 2 types:
- Specific - fixed sum per unit sold
2. Ad valorem - Fixed percentage of the price
Monetary policy uses
- Money supply, interest rates or credit controls to influence aggregate demand
- Government policy on the money supply, monetary system, interest rates, exchange rates and the availability of credit
Balance of payments: Current account transactions are divided into 4 parts:
- Trade in goods (Visible’s)
- Trade in services (Invisible’s)
- Income (Invisible’s)
- Transfers (Invisible’s)
Balance of payments: Current Account: Income is divided into 2 parts
- Employment of UK residents overseas
2. Capital investments overseas
Balance of payments: Current Account: Transfers are divided into 2 parts
- Interest payments to and from overseas bodies
2. Non-government sector payments to and from bodies such as the EU
Capital Account: Made up of…
Public sector flows of capital into and out of the country (Government loans)
Financial Account: Made up of…
Flows of capital to and from the non government sector (Direct investment in overseas facilities; Portfolio investment; Speculative flows of currency; Movements on government foreign currency reserves)
‘Balance of payments’ vs. ‘Balance of trade’
B of P: Surplus or deficit on the current account
B of T: Surplus or deficit on the trade of goods ONLY!
A government can rectify a current account deficit by:
Expenditure switching:
- Depreciate the currency = devaluation
- Restrict imports (Tariffs, import quotas or exchange controls)
Expenditure reducing:
3. Domestic deflation to reduce aggregate demand
