Week 4 - macroeconomic environment Flashcards
What is political economy
How the political, economic and legal system of a country are interdependent e.g how they interact with each other and how they affect the economic wellbeing of a firm
What is the political system
The system of government in a nation
The link between political ideology and economic systems
- countries that stress individuals goals are likely to have market based economies
- countries where state ownership is common, collective goals will be dominant
Market economies
All productive activities are privately owned and production is determined by the interaction of supply and demand
Command and planned economies
Government plans the goods and services that a country produces, how much they produce and their set prices
Mixed economies
Certain sectors of the economy are left to private ownership while other sectors have state ownership
What does the circular flow of income demonstrate
How money moves through society and measures a nations income
Aggregate (monetary) demand (AD) calc
AD = c + i + g + x -m
c = consumer spending
i = investment spending
G = government spending
x-m = net exports
Multiplier effects
The increase in government spending, this initial injection raises income and consumption which circulates between firms and consumers
Accelerator effects
If the same increase in government spending encourages firms to invest more, this will allow firms to meet the additional consumer demand
Key macroeconomic issues
- economic growth
- unemployment
- inflation
- global economic relationships
- financial wellbeing
- the relationship between the financial system and the economy
Economic growth =
Refers to the increase in the production of goods and services in an economy over a period of time (measured in GDP)
Consumer price index (macroeconomic indicator)
Measures the average change in prices paid by consumers for a basket of goods and services over time
Headline cpi
raw figure that reflects changes in the cpi across the entire economy
Core cpi
cpi is adjusted to exclude food and energy prices
Producer price index (macroeconomic indicator)
Measures the average change in selling prices received by domestic producers for their output, tracking inflation at the level before it reaches consumers
Purchasing managers index
Survey based indicator of economic activity. It assesses changes in production, employment new orders and the condition of the supply chain
The business cycle
The natural rise and fall of economic growth over time
Expansion phase - business cycle
- increasing economic activity
- decreasing unemployment
- rising consumer and business confidence
Peak phase - business cycle
- maximum output
- high confidence
- inflation may significantly rise
- investments slow as economy reaches limit
Contraction phase - business cycle
- declining economic activity and GDP
- rising unemployment
- decreased consumer spending
- falling inflation as demand weakens
- investor confidence drops
Trough - business cycle
Lowest point of economic activity
- high unemployment
- low consumer confidence
- inflation low or negative
- economy stop declining and stablizes
Recovery - business cycle
- slow improvement in economic indicators
- lower unemployment
- rising GDP
- increased consumer spending and investments
Impact of the expansion phase on a business
Businesses expand, hire more workers and invest in growth
Impact of the peak phase on businesses
businesses may struggle with rising costs and tight labour markets
Impact of contraction phase on businesses
Businesses cut back on production, delay investments and lay off workers
Impact of trough phase on businesses
Businesses may consolidate and prepare for the next cycle of growth
What do the government do in relation to the business cycle
Use fiscal and monetary policy tools to smooth out extremes in the cycle
What do global economic relationships refer to
Refer to bi - lateral and multilateral economic interaction and interdependencies
Examples of global economic relationships
World trade organisation - makes sure that nation states adhere to laid down in trade treaties, promote lower barriers to trade and investment
