Theme 2 Flashcards
Macroeconomics - performance and policies
What is GNI formula?
GNI = GDP + (inward remittances by businesses and individuals - outward remittances by foreigners residing in the UK)
What is GDP? Recent trends?
GDP (gross domestic product) is the total value of national output produced in a given time period), can also be GDP per capita.
In the UK it fell during pandemic but had since returned to pre-pandemic levels. GDP per capita had fallen (due to growing population)
Difference between GNI and GDP?
- GNI is a flow of income including British companies earning abroad and excluding foreign companies in the UK.
- GDP is value added output in our borders (excluding transfer payments)
What is HDI? How is it measured?
Human Development Index, made up of:
-Health (life expectancy at birth)
-Education (mean years of schooling)
-GNI per capita
Measured from 0-1 scale.
What is GNH? How is it gathered?
Gross National Happiness:
- Measures 33 factors in 9 categories including health, education, cultural diversity, living standards etc.
- They survey ~10% of population
Problems with using GDP when comparing countries:
- Real vs Nominal values
- Inaccurate data (some countries don’t share it, miscalculations)
- GDP per capita is more easily comparable
- Doesn’t take into account informal economy
- Doesn’t show accurate living standards
- Different currencies (why we use PPP or FOREX to help)
What is PPP?
Purchasing Power Parity:
- refers to the quantity of a currency needed to purchase a given unit of goods.
- often used to make GDP data more comparable
Benefits of economic growth for consumers:
- increased employment > increased disposable income > higher SOL
- more investment in public sectors = better quality stuff
- better quality products as more investment
Benefits of economic growth for producers:
- increase profits > increase investment in capital and innovation
- better quality labour (as increase SOL) > more productive
- increase output > increase exports = injections :)
Benefits of economic growth for the government:
- expansion means less unemployment = less spent on benefits, more in tax revenue
- increase in VAT as consumers demand more
Costs of economic growth:
- increase in inequality (owners of FOPs benefit e.g more dividens as more profits, landowners earn more from rent)
- environmental issues (pollution from factories bc expansion, exploitation of resources, congestion from more cars)
- inflation (will affect real income as COL increases)
- increased imports (leakages in the economy)
Causes of long-term economic growth. (Changes in quantity, quality and efficiency of FOPs)
- Land (natural resources, increase territory, irrigation)
- Labour (encourage immigration, increase retirement age, education, improve mobility of labour, increase participation rate (min wage))
- Capital (subsidies for growth industries, more spending on infrastructure projects, funding R&D)
- Enterprise (CMA limit monopoly power, provide funding/grants, protect intellectual property rights)
What does a economic cycle diagram look like?
Y axis - real GDP
X axis - time
NEED: positive/negative output gap, Trend rate, Actual rate
What is inflation/disinflation/deflation?
- Inflation - a sustained rise in the general price level
- Disinflation - a decrease in the rate of inflation
- Deflation - negative inflation / a fall in the general price level
What are the causes of inflation?
- Demand pull = AD rises faster than AS. As the economy reaches capacity, firms raise prices. E.g after lockdown
- Cost push = Rising costs of production are passed on to consumers through higher prices, in order to protect profit margins. E.g Ukraine war meant increase fuel price
- Growth of the money supply
How is inflation measured?
CPI (consumer price index)
1. Take a survey of 40,000 households to form a representative basket of goods
2. Goods are weighted if commonly used (e.g transport services)
3. Monthly gov collect price quotations in locations of around 700 products
4. Calculate using formula
What is the CPI formula?
CPI = cost of the market basket in given year / cost of the market basket in base year
What are the limitations of using CPI to measure the rate of inflation?
- Spending Patterns: e.g single people are different from households w/kids
- Change in quality of G+S: although price may rise, could be accompanied by improvements in quality
- New products: CPI is slow to respond to now G+S
- Not fully representative: inaccurate for non-typical household
What is RPI
Retail Price Index:
What are the effects of inflation for businesses?
- Administrative costs - e.g. shoe leather costs and menu costs (replacing menus/ updating websites)
- decreased demand
- wage-price spiral (higher prices = strikes = higher wages = ^COP = higher prices etc.)
BENEFIT: increased flexibility in prices and wages
What are the effects of inflation for consumers?
- Decrease in real income
- Demand decreases so many: ask for pay rise or start industrial action/ disputes (strikes or work-to-rule/bare minimum) - can lead to wage price spiral
- increased unemployment
- decreased confidence
BENEFIT: debtors gain (real value of borrowing falls gradually over time)
What are the effects of inflation on the government?
- increased unemployment = more spending on benefits
- fall in AD = fall in GDP
- Redistributional costs (^ inequality as fixed-rate pensioners suffer and those who fail to negotiate too)
- taxes may not rise with inflation
- psychological and political costs (price increases are unpopular)
BENEFIT: government gain as a debtor
How can costs of inflation be reduced?
Anticipated inflation via index action (increasing wages in line with inflation levels)
Definition of Economically inactive:
People without a job who are not actively seeking work. They’re neither employed/unemployed. (Retired, sick, children etc.)
Definition of employment and unemployment.
Employment: total number of people with a job
Unemployment: when workers who are willing and able to work are unable to find employment.
What are discouraged workers?
People out of work for a long time who might give up on job search and leave labour market.
Recent UK employment situation:
• Employment dipped after 2008.
• Peaks of unemployment are decreasing over time.
What is the claimant count? Limitations?
Claimant count - no. People eligible to be claiming unemployment related benefits e.g JSA
• not everyone eligible claims JSA (pride, don’t need it, too much time)
• not everyone meets criteria
What is the Labour Force survey? Why is it good? Limitations?
(ILO/International Labour Organisation method )
The labour force survey covers those who have looked for work in the past four weeks and are able to start work in the next two weeks.
Good = it’s international so comparable to other countries
Limited= Doesn’t take into account informal sector, students may answer wrongly (say actively seeking work = unemployed but they’re not technically unemployed)
Limitations/advantages in measuring unemployment:
(Via claimant count)
Advantages:
- large sample size
- regional data helps policy decisions
Low level of welfare benefit fraud
Disadvantages:
- sample errors
Much hidden unemployment
Hugh level of underemployment
Effects of immigration on employment:
• increases supply of labour
- skilled workers= higher quality labour
BUT if unskilled = willing to work for less = ^ competition for jobs = lower wage rates
EVAL: (Above depends on sector and have NMW so wage rates won’t fall that much)
• fills skill gaps (e.g undesirable jobs - low pay, bad conditions, long hours)
• ^ entrepreneurship
• ^ the countries productive potential if lots of available jobs
Depends on age of immigrants (younger = more working years)
Disadvantages of high unemployment:
• increase poverty rate = bad health and bad SOL
• can be long term as cycle of poverty is hard to break
• less tax revenue for govt and more benefit payments (opportunity cost of what it could’ve been spent on)
• excluded workers (if long term unemployed = harder to find a job in future)
• communities (crime, vandalism)
Regional effects
- skilled workers leave area = less investment and businesses close = ^ unemployment
- ^ poverty = health and mental health decline
- Firms have lack of demand as less disposable income = employ less
Advantages of high unemployment:
• decreases inflation al pressure (AD falls) - depends on inflation rate
• decrease wage demands (good for firms)
• Demand for inferior goods increases
• increase in self employment (even easier now than in past as online)
Evaluating unemployment:
Magnitude - what is the rate of unemployment
Type of unemployment:
- Some are harder to deal with than others
- Lead to hysteria if long-term
- discouraged workers if long term
- frictional unemployment is always expected
Causes of unemployment:
(Really Silly Fools Try Sucking Chips)
Real wage/ classical unemployment - when wages are too high so employers demand less labour
Structural unemployment - industry declines due to lack of demand/foreign competitiveness/trends/legislation e.g coal mining in uk
Frictional unemployment - when workers are unemployed for short lengths of time between jobs. Inevitable
Technological - capital labour substitution
Seasonal - when workers are employed for certain times of the year e.g tourism or farming
Cyclical/ Demand deficient - when there is insufficient demand in the economy for all workers who are willing at current wage rate to work e.g in recession demand falls so firms hire less = demand falls more and repeats (links to economic cycle)
Evaluating the causes of unemployment:
Real wage:- depends on strength of unions and how high NMW is
-If GDP is rising then firms maintain profits and no need to fire lots of people so insignificant.
-UK data suggests that NMW hasn’t caused much unemployment.
-some people are already payed above NMW
Structural: more significant for specialised workers - lack of mobility of labour
Frictional: is inevitable. Good thing- shows confidence in state of economy
Technological: potentially long term, more significant for specialised workers
Seasonal: Predictable so can make plans to minimise effects, difficult to directly address the issue
Cyclical: Short term is significant as leads to more unemployment but Long Term should improve as the economy does (link to economic cycle diagram)
what’s the difference between unemployment and underemployment?
Under-employed people have jobs but may not work many hours.
Unemployed people are without jobs.
What are the items in the current account?
Trade balance:
Trade balance in goods
Trade balance in services
Income balance:
Net money transfers - overseas aid/debt relief, private money transfers (remittances)
Net investment income from overseas assets - profit, interest and dividend for investments in other countries
What does the UK’s current account look like?
Trends:
Overall it’s a deficit (which has been steadily growing).
Imports>exports
Services>goods
Large jumps in current account deficit often come from net investment income.
Trade balance in services: surplus
Trade balance in goods: deficit
Overall trade balance: deficit
Net money transfers: deficit
Net investment income from overseas assets: deficit
What do we import/export the most? To who?
Imports: cars, gas, refined oil
From: US, Germany
Exports: cars, mechanical power generators, medicines + pharmaceuticals
To: US, Germany, Ireland (lots are in EU)
We export a lot of financial services as we’re specialised.
Why is the current account deficit a problem?
- firms may close down as less exports and less demand from abroad = structural unemployment
- less injections (exports) and more leakages (imports) means less growth
- shows structural weakness e.g uncompetitive producers = long term
Why is the current account deficit not a problem?
- May be short term e.g importing capital to use for future exports = long term future improvements
- shows that there’s a high SOL as people import more then they have high income = high SOL
- if cyclical issue is the cause: e.g it’s a result of income, inflation or exchange rate = not a problem as they’re expected to fluctuate
- Deficit = less demand for £ = WPIDEC (more exports, less imports) = deficit decreases and it fixes itself
Causes of current account deficit/surplus?
DEFICIT:
• Uncompetitive - if they’re uncompetitive they’ll need to import more (due to lower cop abroad, taxes/legislation, low investment, low R&D)
• Lack of natural resources = ^imports
• ^income people =(high propensity to import) more imports as they’re luxury
• inflation - high inflation means less exports, and more imports as may be cheaper than in uk
• Appreciation = more imports, less exports (SPICED)
SURPLUS
• High income people = more investment over road = more net investment income
• Depreciation = less imports, more exports (WPIDEC)
How does inflation effect the current account deficit?
- decreases price competitiveness
- consumers increase imports
= increase current account deficit
What factors affect the current account?
- high income people
- inflation
- natural resources
- competitiveness
- exchange rate
How do exchange rates effect the current account?
SPICED WPIDEC
- increased volatility = decreased confidence
How do exchange rates effect the current account?
SPICED WPIDEC
- increased volatility = decreased confidence
