Unit 2.1 Flashcards
Macroeconomics
looks at whole economies or groups of economies such as the EU or the eurozone. Sometimes macroeconomics will look at the whole world ( global economy)
Economy
The state of a country/region in terms of the production and consumption of goods and services. The state of an economy is measured by GDP
GDP
Gross Domestic Product measures the total value of natural output of goods and services produced in a given time period. It estimates the size of and growth in the economy. It counts the value of output produced within the geographical boundaries of a country.
How is GDP calculated- Expenditure
-Consumption (C)
-Government Spending (G)
-Investment Spending (I)
-Changes in value of stocks
-Exports (X)
-(minus) Imports (M)
=GDP (aka Aggregate Demand)
AD=C+I+G+X-M
How is GDP calculated- Factor Incomes
- Income from wages and salaries
-Profits of private and public sector businesses
-Rental income from the ownership of land
(NOTE: Transfer payments such as welfare benefits are excluded from GDP)
How is GDP calculated- Value of output
-Value added from each of the main sectors.
These are:
-Primary (e.g. farming, forestry and mining)
-Construction
-Manufacturing
-Tertiary (e.g. tourism and healthcare)
- Quaternary ( e.g. Business Consultancy)
Manufacturing
Manufacturing is the business of producing tangible goods in factories such as new vehicles or smart phones. In March 2023, the manufacturing sector accounted for 95% of total uk economic output. It accounted for 8% of employment in the same period.
EXAMPLES OF SERVICE INDUSTRIES
- Services are part of the tertiary sector
- Examples include services such as accountancy, health and social care, hospitality, education, and tourism.
- Service industries accounted for 80% of total UK economic output
(Gross Value Added) and 82% of employment in 2022 - Many manufacturing jobs depend on the demand for and output in service industries - for example, factories that make coffee machines, train services that require manufacturing of new carriages, signalling and track.
EXAMPLES OF MANUFACTURING INDUSTRIES
Automotive: The UK has a significant automotive industry, with major car manufacturers such as Jaguar Land Rover, Mini, and Rolls-Royce
* Aerospace: The UK is home to major aerospace companies, including Airbus, BAE Systems, and Rolls-Royce.
* Chemical and pharmaceuticals: The UK has a large chemical industry, producing a range of products including plastics, paints, and detergents. The country is also home to major pharmaceutical companies, such as AstraZeneca and GlaxoSmithKline.
* Food and drink: The UK have a diverse food and drink industry, producing a range of products including beer, whisky, chocolate, and processed foods. A large percentage of food and drink production is exported.
Gross Value By sector UK
In the UK in 2022, Real Estate had a £270,093 Million Gross Value giving it the largest value along with Wholesale and Retail which had a £238,068 Million Gross Value
GDP per capita
Measures the average economic output per person in a country. It’s a useful metric for understanding the average standard of living or income level within a given nation. Per capita GDP provides a way to compare the economic performance of different countries while considering their population sizes. Per Capita GDP = Total GDP / Population.
GNI
Gross national income is an alternative to GDP as a measure of wealth. It calculates income instead of output.
GNI= GDP+ Net primary income+ Net secondary income
Net Primary income
This includes wages, salaries and other income earned by a country’s residents working abroad, as well as earnings from foreign investments such as dividends and interest.
Net secondary income
Refers to transfer of money between countries, such as remittances from foreign workers to their families in their home countries or international aid.
PPF in macro economics
A macro PPF is likely to be labelled consumer goods and capital goods, or goods and services.
Purchasing Power Parity
Purchasing power parity (PPP) is the idea that items should cost the same in different countries, based on the exchange rate at that time. PPP measures how many units of one country’s currency are needed to buy the same basket of goods and services as can be bought with a given amount of another currency.
In countries where the relative cost of living is high such as Norway and Switzerland, there will be a downward adjustment to a nation’s PPP-adjusted GNI per capita.
In nations where the relative cost of living is low such as India, the real purchasing power of $1,000 will be higher and this leads to these countries seeing their PPP-adjusted per capita incomes rising in global league tables.
Big Mac Index
The Big Mac Index measures each currency against a common standard – the hamburger sold by McDonald’s all over the world - manufactured in a standardized size, composition and quality.
PPP is calculated by comparing the price of a basket of comparable goods and services in different countries
By converting the average national Big Mac prices to United States dollars, the same goods can be compared.
This can tell us something about whether a currency is under or overvalued in foreign exchange markets.
BigMac Index January 2023:
Switzerland- Over 7 dollars
Venezuela- Under 2 dollars
What is real national output (real GDP)
Real GDP stands for Real Gross Domestic Product.
It’s called “real” because it considers inflation, which can distort the value of goods and services produced in an economy over time.
Real GDP is adjusted for changes in prices, providing a more accurate measure of an economy’s actual growth.
Real GDP is usually expressed “at constant prices”
What is nominal (money) national output?
Nominal GDP measures the total value of all goods and services produced within a country’s borders during a specific time period, but it doesn’t account for the changes in prices that may occur during that time.
Nominal (or money) GDP is expressed at current prices.
Nominal GDP in a given time period = Quantity of Goods and Services Produced × Current Prices
Converting money GDP into real GDP
In one year, an economy had a nominal GDP of £12 billion
During that year, inflation was 6%.
Calculate the value of real GDP compared to the previous year:
Real value in current year = (Nominal value in current year / price index in current year) * 100
Real value in current year = (£12bn / 106) x 100
Real value in current year = £11.32 billion (at constant prices)
Measuring standard of living
-Improving human capital
-Getting more people into properly-paid work
-A living wage can help to lift labour productivity
-Accessible and high-quality public services
-Better / affordable housing to rent & buy
-Wealth generated from successful businesses
What economic information is used to measure the level of and changes in average living standards within an economy?
Baseline indicator is real national income per capita (GDP or GNI)
This is real GDP divided by the population = Income per head
Real means that the income data has been adjusted for the effects of price inflation
PPP – a purchasing power parity adjustment is made when comparing and contrasting standards of living across countries.
MOVING BEYOND INCOME PER HEAD
Income per head is a guide to living standards but many economists argue that we should move beyond it as a simple indicator:
Look at disposable income rather than gross income (not least because the burden of taxes varies between nations)
Focusing on income per head can ignore deep-rooted inequality
Median disposable income might be a better measure of living standards for people in the middle of the income distribution
Income per capita is not always a reliable guide to well-being
WHAT IS DISPOSABLE INCOME?
Disposable income is the amount of money households have available for spending and saving after direct taxes such as income tax and national insurance contributions have been accounted for.
It includes earnings from employment, private pensions and investments as well as cash benefits provided by the state.
Mean disposable income in UK in 2019 was £39,328
Median disponible income in UK in 2022 was £32,349
LIMITATIONS OF DATA ON INCOME PER HEAD
Changes in the distribution of income (known as relative poverty)
Official data on incomes can be inaccurate – existence of shadow economy where income is earned but not registered for taxation
Regional and local variations in per capita income + rural/urban gaps
Changes in length of working hours and job conditions & security
Problems in accurately measuring a nation’s GDP and price inflation – makes it harder to assess real incomes
WHY IS GDP A FLAWED GUIDE TO LIVING STANDARDS?
Ignores the distribution of income and wealth
Need to consider changing working hours / work-life balance
Does not include the value of non-marketed output and unpaid work such as family care and voluntary activities
Rising real GDP may not be sustainable – risk of lost natural capital
Defensive spending such as cleaning up the effect of pollution & waste and crime prevention add to GDP but hurt welfare
May not capture value of free services including digital economy
What is economic well-being ?
Economic well-being refers to the overall quality of life and material prosperity enjoyed by individuals and households.
It encompasses various aspects, including income, consumption, access to basic needs and services, wealth accumulation, job security, social safety nets, and overall life satisfaction.
Measuring economic well-being is crucial for understanding how individuals are faring within the broader economic context and for evaluating the effectiveness of economic policies.
Economic growth
The sustained growth of real GDP over time
Contributes to rising average living standards (GNI per capita)
Long-run increase in a country’s productive capacity
Economic welfare
A broader measure of well-being (social and economic)
Many aspects of well-being are not material aspects of our daily lives
Wellbeing measure might include the level of inequality + median incomes
HOW MIGHT WELL-BEING BE MEASURED?
Median Household Income and Real Income Growth:
Income Inequality: Gini coefficient or other measures of income distribution
Wealth and Assets: Including financial assets, property, and investments
Percentage living below a defined poverty line, often based on income thresholds.
Underemployment and job security
Healthy Life Expectancy
Education: Literacy rates, school enrollment, and attainment levels.
Surveys that ask individuals about their overall happiness and satisfaction with their lives.
Inter-Generational Mobility: The extent to which children’s economic outcomes (such as income or education) are related to those of their parents.
Air and Water Quality: Measures of pollution and cleanliness that impact well-being.
WHAT IS SUBJECTIVE HAPPINESS?
Subjective happiness refers to self-reported levels of happiness with one’s life, usually determined using questionnaires.
Measuring subjective happiness usually involves considering emotions, rather than asking about material well- being
Factors that tend to affect your happiness include: your personality and genetics, social influences (including a network of close friends), income and wealth (to a smaller degree than you might expect), health, and ability to enjoy leisure time.
WHAT IS THE EASTERLIN PARADOX?
The Easterlin Paradox concerns whether we are happier and more contented as our real living standards improve
Within a society, richer people tend to be happier than poor people.
Richard Easterlin argued that life satisfaction does rise with average incomes but only up to a point.
Beyond that the marginal gain in happiness declines (there are diminishing returns)
One of his conclusions was that someone’s relative income can weigh heavily on people’s minds.
Several papers have contested the findings of the Easterlin Paradox
Well being budget
The New Zealand government announced the world’s first well-being budget in 2019. Their fiscal budget is now based on wellbeing priorities such as improving mental health, addressing child poverty and sexual violence and improving access to affordable housing.
THE HAPPY PLANET INDEX
The Happy Planet Index measures life expectancy, experienced well-being, inequality of outcomes, and ecological footprint in order to determine the countries that can deliver the longest and happiest, but also most sustainable lives to their residents.
The Index works to measure efficiency by ranking countries relative to how they offer their people long and happy lives, for each unit of environmental output.
Most sustainable countries, Happy Planet Index for 2021- Costa Rica- 62.1
Least sustainable countries, Happy Planet Index for 2021- Qatar- 24.3
How inflation is calculated
CPI is a price index that measures the price changes in a basket of goods that are consumer faces. RPI is a price index that uses the same principles of CPI, but ultimately use a different basket of goods/services to measure inflation, and the average is calculated in a different way.
Internal causes of inflation
Large surge in property prices.
Higher wages/labour costs.
Boom in credit/money supply
Rise in business taxes, for example VAT
External causes of inflation
Increase in world oil/gas prices
Inflation in global commodity prices
Deprivation of the exchange rates
Higher inflation in other countries
Effects of inflation
Causes problems for consumers as they find their money doesn’t go as far as it used to.
Effective business is because it can lead to uncertainty and instability, E.G.businesses may have a hard time planning for the future and making long-term investment when inflation is high.
When inflation, high central bank usually raises interest rates in attempt to curve inflation
Cost of borrowing – inflation leads to higher interest rates for businesses and consumers with debts
Reduced demand for country exports
Effects of inflation on the government
Pressure on government to raise value of state welfare benefits, including the state pension or out of work benefits to help control poverty.
High inflation can cause real GDP growth to slow – can lead to lower tax revenues and the government, then having to borrow more money
Can lead to increase in market interest rates, making borrowing more expensive when they issue new bonds
Hi relative inflation can lead to worsening of international competitiveness causing fall in exports which can threaten jobs and GDP growth.
Two Main measures of unemployment
The Claimant court- can you measure in which the number of people claiming job seekers allowance is counted (JSA)
Labour Fore Survey- uses International labour organisation, definition of unemployment( someone who is out of work, but is willing and able to work .can start a job in the next two weeks) Survey carried out quarterly, 44,000 households surveyed
Under employment
Refers to a situation where an individual is working but the job does not fully utilise their skills or ability, and/or does not provide sufficient hours or pay to meet their needs. Under employment can occur for a variety of reasons and can take many forms such as:
-Looking for an extra job or actively searching for a new job with longer hours to replace their current (main) job
-They prefer to work longer hours in their present job
-Under-employment also means that workers are under-utilized in terms of their ability, formal qualifications and experience.
Under-employment can be rising even though unemployment is declining.
The existence of under-employment tends to make the official unemployment figure look better than it truly is.
Cyclical unemployment
When unemployment rate rises during an economic downturn and falls during a recovery. It’s caused by fluctuation in the business cycle. Involuntary unemployment due to lack of aggregate demand for goods and services. Also known as Keynesian unemployment or demand-deficient unemployment.
Causes of cyclical unemployment
When an economy is booming, demand for goods and services increases leading to more hiring. The employment rate rises as real GDP expands.
When economy slows and goes into a recession, demand decreases and companies lay off workers
Keynesian economic places lots of emphasis on the role of aggregate demand in influencing unemployment. Keynes argued during economic downturns, aggregate demand increases and firms reduce their production and lay off workers. This can lead to a negative multiplier effect.
Structural unemployment
Caused by changes in the economy, like the decline of certain industries or rise of automation. Happens when there is a mismatch between skills of workers and needs of employers. Often people stay unemployed because of disincentive effects from the tax and welfare system also because of disincentive effects including the unemployment trap . Often happens because of other barriers to people finding work such as unaffordable housing, high cost of childcare and expensive transport services. Links closely to the concept of occupational immobility of labour.
Causes of Structural unemployment
New jobs often require new skills – cost of training
Unaffordable housing ( both to buy and rent)
Employer discrimination against some groups
Erosion of skills from long-term unemployment
Impact of automation on certain occupations
Effect of welfare system on work incentives
Frictional Unemployment
Short-term unemployment caused by people transitioning between jobs, moving to a new location or re entering the workforce after a break. Can be reduced by making information in jobs more available and making job search more affordable via cheaper transport or subsides. Always a level of frictional unemployment in labour market, helps provide pool of labour for employers .
Causes of Frictional Unemployment
School and college leavers entering labour market
People searching for work following a career change
Early retired, coming back to the labour market
Mothers returning to active job search
Incomplete information could hamper job search
People on short-term contracts
Effects of unemployment
Loss of income – declining, living standards, decline in spending power
Loss of national output – workers can’t contribute to economy, working within PPF
Decrease in consumer spending – loss of disposable income
Reduce tax revenue – less paying a more receiving benefit
Increased government spending in social welfare programs
Reduced investment, firms less confident in economy so less likely to invest in projects
Increase relative poverty – unable to meet basic needs so require government support
Balance of payments
Summarises all transactions between residents of a nation and non-residence during a period. Includes value of trade flows investment incomes and other financial transactions across national borders.
There are three parts of balance payments:
The current account (Records payments for trade in goods and services plus net flows of primary and secondary income)
Capital account
Financial account
Unemployment
To be counted as unemployed, someone must be of working age, willing and able to work and actively seeking work but cannot find a job.
Ways of measuring unemployment
Labour Force Survey- This survey asks 60-70,000 UK households to self-classify as being employed, unemployed or economically inactive.
Claimant Count-This counts the total number of recipients of Job Seeker’s Allowance (JSA) added to those looking for work to claim Universal Credit (UC).
