macroeconomics

Real GDP is the total value of all goods and services in the economy adjusted for inflation- used to measure growth.

GDP is only a measure of the output of goods and services it does not take into account any human well-being or implements in equality etc.

Nominal GDP is the total value of all goods and services in the economy at market price.

GDP per capita is the value of GDP once divided by the population

As GDP increases it is likely that there has been economic growth

Value is GDP's monetary value at the prices of the day; volume is GDP adjusted for inflation.

OTHER MEASURES

GDI-(gross national income)

it is assumed that a higher real income will lead to increased happiness due to a better standard of living.

measuring growth by changes in national income.

HDI-(Human development index)

measuring through standard of living eg. health, education, income.

gives a broad measure of growth, easy to calculate, doesn't acknowledge inequalities, employment, housing or environment.

SEDA-(Sustainable economic develop assessment)

measures how growth leads to welfare and well-being. measures through income, employment, infrastructure, education etc.

improving well-being doesn't take lots of GDP. Eg Brazil improve their equality with only 0.5% of GDP.

Purchasing Power Parities (PPP)

can be used to compare the wealth and strength of currency across countries.

PPP is an exchange rate of one currency for another which compares how much a typical basket goods in one country costs compared to that of another country.

Potential growth: economic growth as measured by changes in the productive potential of the economy over time.

Output Gap: the difference between the actual level of GDP and the productive potential of the economy. There is a Positive output gap when actual GDP is above the productive potential and it is in boom. there is a negative output gap when actual GDP is below productive potential.

actual growth: economic growth as measured by recorded changes in RGDP over time.

Inflation is, on average, the speed at which prices are rising. a rise in the general price level.

Deflation is a fall in the general price level.

Disinflation is a fall in the rate of inflation.

CPI- consumer prive index

CPI for year X= [total expenditure in year X/total expenditure in base year] X100

if the number given =100, prices have not changed, a number <100 = a decrease in prices- vice versa.

WEAKNESSES: doesn't show individual spending patterns, could be calculation errors, there are expenditure survey absences (70-80% reply) which leads to distortion, delay in updating.

%change in prices= [CPI new - CPI old/CPI old] X100

RPI-retails price index.

main one used in the UK. calculated from the same survey as CPI and uses the Carli index to calculate.

includes housing, council tax, mortgage repayments. covers a different sample of the population to CPI, RPI excludes the top 4% of income earner.

CAUSES:

Demand-pull: too many people are chasing too few goods, AD shifts out but AS remains, leading to an increase in the price level.

Growth of money supply: increasing money supply faster than the growth of real output leads to more money chasing the same number of goods, leads to increased prices as firms are forced to increase prices.

Cost-push: any factor that will increase the cost of production and therefore, force producers to push up prices.

EFFECTS:

not everything changes at the same rate, fall in real incomes, shoe leather costs- consumers less clear on reasonable prices so shopping around increases, menu costs- cost of changing labels etc, increased inequality, cost of borrowing increases.

Circular flow of income: a model of the economy which shows the flow of goods, services and factors and their payments around the economy.

income: rent, interest, wages and profits earned from wealth owned by economic actors.

wealth: a stock of assets which can be used to generate a flow of production or income.

economic growth

balance of payments equilibrium

low unemployment

greater income equality

protection of the environment

balanced government budget

low and stable rate of inflation

PEAK OR BOOM: national income is high, the economy may be working past full employment, consumption and investment will be high, tax revenues will be high, wages rising and profit increasing high imports, inflation.

RECESSION, DEPRESSION, TROUGH OR SLUMP: economic activity is at a low, high unemployment, consumption, investment and imports will be low, deflation.

Bank of England: operates monetary policy on an independent basis- most important decisions made by the monetary policy committee. main role is to control inflation rates, between 1-3%, if it exceed either the Governor must write to the Chancellor of the Exchequer why this happened and what the BOE will do.

2008 Financial Crisis: the poor were encouraged to buy their own homes, interest rates very low for the first few years, more sales= bonuses and so more risky mortgages sold. when IR increased, many homes were repossessed, prices fell. used expansionary monetary policy, USA looser fiscal policy than UK

The Great Depression: 15% unemployment 1932- 25% 1933. the banking system was not robust enough to cope with bad debts, allowed too much lending creating an unsustainable credit boom, banks were allowed to fail .

Fiscal policy: government spending and taxation.

direct taxes: a tax levied directly on individuals or companies. eg income tax.

indirect taxes: a tax levied on goods and services. eg VAT.

a government surplus is when tax revenues are higher than the money spent by the government.

Monetary policy: interest rates, asset purchases to increase money supply (quantitative easing).

interventionist policies: policies designed to correct market failure, government intervening in a free-market to change the outcome.

market-based policies: policies designed to remove barriers to the efficient working of free-marketers, these limit output and raise prices.

Privatisation: the sale of government organisations or assets to the private sector. ( argued that organisations have a decreased profit incentive).

education, training, healthcare, minimum wage, benefits, trade unions, infrastructure.

Deregulation: the process of removing government controls from the market. aims to encourage more firms to provide goods, but instead encourages "creaming" of markets, only producing the most profitable goods.

types on unemployment

frictional: when workers are unemployed for short lengths of time between jobs.

hidden: those who would take a job is offered but are not in work or seeking work.

classical/real wage- when workers are unemployed because real wages are too high and inflexible, leading to insufficient demand for workers.

cyclical- due to a low level in consumer demand.

regional- due to job vacancies in a different geographical location to the job seeker.

structural- when the pattern of demand and production changes leaving workers unemployed in labour markets where demand has shrunk.

seasonal- those who are unemployed at certain times of the year.

inactivity rate- the number of those not in work and not unemployed divided by the working age population.

underemployed: those who would work more hours if available or are in jobs which are below their skill levels.

MEASURING UNEMPLOYMENT:

Claimant count: counts the number claiming unemployment benefits, main measure in the UK until 1997.

LFS-labour force survey: survey of 44,000 household every month, covers economic activity, household structure, sex, age etc.

classifies unemployed as those without a paid job, could stare work in a fortnight, have looked for a job in the last 4 weeks or are waiting for an obtained job.

comparison: LFS>CC: females looking for work are not entitled to benefits, older males may be collecting pensions or are supported by a spouse- not entitled to benefits but are not seeking work, a time lag on registering as unemployed and actually being made unemployed (no delay with LFS), CC may include those in a hidden economy collecting benefits.

IMMIGRATION AND SKILLS:

outwards movement: relieves unemployment, pressure off benefits, less demand for housing, political pressure, reduction in LRAS, reduce tax revenues.

Immigration: take lower paid jobs, creates further jobs, reduce labour shortages by increasing the labour force, higher tax revenue, depresses wage rates,, increases cost of services, less UK workers=less motivation.

COSTS OF UNEMPLOYMENT:

loss of output, shown by a reduction in RGDP from Y1 to Y2.

lost tax revenue reducing the ability of governments to spend due to a reduction in national income.

BENEFITS?

stops rising wages

controls inflation

creates new businesses as the unemployed
are forced to set up their own businesses

opportunity to retrain

leisure time/family time more valuable than income?

loss of productive capacity due to hysteresis- reduction in the LRAS.

lower unemployment, more growth vs low inflation

sustainable growth vs equality

growth vs protection of the environment

repaying debt vs government budget

Current Account

where payments for the purchase and sales of goods and services are recorded.

Visibles: trade in goods. visible exports result in an inward flow of money and are recorded as a +. visible imports are -. VALUE OF ALL VISIBLES=BALANCE OF TRADE.

trade in services

trade in intangibles therefore, invisibles. bought by foreigner the money goes into the UK called export credit in services, if bought by the UK known as debits.

Primary and Secondary Incomes

PRIMARY: loan of factors of production abroad. in the UK mainly from interest, profit and dividends on assets owned abroad.

SECONDARY: a range of transfers to and from overseas organisations. example of an invisible.

current account imbalances: high economic growth is often associated with low unemployment and increased inflationary pressures.

the multiplier effect: an increase in investment or other injection will lead to an even greater increase in income. 1/MPW

MPS: the increase in saving divided by the increase in income that caused it.

MPW: the increase in withdrawals from the circular flow (S+T+M) divided by the increase in income that caused them.