Economics Unit 2 

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  • Economics Unit 2
    • Economic Growth
      • Increase in a Country's Capacity to produce goods  and services
      • Measured by Real Gdp
        • volume of goods and services produced
        • Actual GDP can be above or below productive possibility of economy at a point in time
          • Benefits of GDP
            • Real GDP is adjusted for inflation, nominal is not
              • Actual GDP can be above or below productive possibility of economy at a point in time
                • Benefits of GDP
                  • Real GDP is adjusted for inflation, nominal is not
                    • data is most quickly available
                    • movements in GDP similar to those in other measures over time
                    • Easy to understand and used for international comparison
              • data is most quickly available
              • movements in GDP similar to those in other measures over time
              • Easy to understand and used for international comparison
          • Problems of GDP
            • doesn't take income distribution into  account
            • national income accounts have various degrees of inaccuracy in statistics (constantly being revised & lack of data
            • UK has its own currency- exchange rate $:£ affects GDP value
        • CAUSES
          • Increase in Land or greater amount of resources
          • LABOUR:
            • More young people enter workforce leads to more opportunities and increased participation rates
            • Immigration- Increases labour force
              • More young people enter workforce leads to more opportunities and increased participation rates
          • TECHNOLOGICAL PROGRESS
            • cuts average cost of production and creates new products (extra consumer spending)
          • EFFICIENCY- deregulation and privatisatiom
            • cuts average cost of production and creates new products (extra consumer spending)
        • BENEFITS
          • increased standard of living, firms get more profit, gov gets higher tax revenue
        • Costs
          • environment, balance of payments, income inequality,opportunity cost of growth
            • EV: are benefits greater than costs?difficult to measure, costs change over time
        • CONSTRAINTS
          • instability of government, poor infrastructure, poor human capital, limited exports, income inequality,
      • Measures of Development
        • Problems of GDP
          • doesn't take income distribution into  account
          • national income accounts have various degrees of inaccuracy in statistics (constantly being revised & lack of data
          • UK has its own currency- exchange rate $:£ affects GDP value
        • HDI - human development index has 3 components- 1) GDP at PPP 2) life expectancy at birth 3) literacy rates
          • ADVANTAGES
            • 1) UN measure of development 2) reliable 3) easy to calculate 4) data easy to obtain 5) shows what GDP is spent on
            • DISADVANTAGES
              • 1) Small richer countries have higher HDIs but may not be as developed 2) inaccurate if data is unavailable 3) GDP is still 1/3  so is still influenced by market fluctuations 4) doesnt take into account cultural identity and political freedom
            • PPP- Purchasing Power Parity exchange rate between 1 currency and another is in equilibrium when their domestic purchasing powers at that exchange rate are equal
            • HPI- Human Poverty Index measures level of deprivation rather than development cos deprivation slows it down
              • measures survival, knowledge and living standards and theres seperate indicators for developed and undeveloped
              • ADVANTAGES
                • 1) doesn't use GDP 2) shows what needs to be addressed
              • DISADVANTAGES
                • 1) doesn;t show number of people living in poverty 2) not useful for SR analysis cos 2 components are LR
            • % of males in agriculture
              • As GDP increases this falls cos labour is replaced by machine
              • Data hard to obtain  1) rates generally unknown/ for political reasons 2) indicators may overlap to some  aspects have higher weightings
                • school Enrolment
                  • high in developed literacy rates affect countries ability to grow
            • school Enrolment
              • high in developed literacy rates affect countries ability to grow
          • Inflation
            • Sustained Increase in the Average price level
            • Measured by annual % change in level of prices
              • CPI
                • Surveyors sent to different areas , prices averaged, figures weighted
                • CPI 2% target CURRENTLY AT 2.8% (MARCH)
                • based on weighted basket of goods and services (has a geometric mean)
              • RPI measure of prices in UK over 60 years
                • CPI used because it doesn't discriminate against those who don't have a home
                  • CPI
                    • Surveyors sent to different areas , prices averaged, figures weighted
                    • CPI 2% target CURRENTLY AT 2.8% (MARCH)
                    • based on weighted basket of goods and services (has a geometric mean)
            • CAUSES
              • DEMAND PULL- excess demand without change in supply
              • COST PUSH - increased production costs, narrow profit margins so prices increase, price of M increases, increase in indirect tax rate, limited supply, spiralling wage rates
            • Controlling Inflation
              • High Interest Rates
              • Higher Taxes
              • Increased Exchange Rate
              • Controlling Wages
                • COST PUSH - increased production costs, narrow profit margins so prices increase, price of M increases, increase in indirect tax rate, limited supply, spiralling wage rates
              • Increase AS
            • COSTS
              • people shop around more- shoe leather cost
              • value of cash falls, people transfer money to maximise interest paid = time=cost
                • people shop around more- shoe leather cost
              • psychological-people feel poorer
            • Deflation
              • reduction of general price level
              • COSTS
                • spending decreases- people wait for prices to fall further
                • value of income increases so debts increase so people can pay them off
                • lower investment lack of business confidence and low profit margins
                • real cost of borrowing is high if interest rates do not fall in line with prices
            • Hyperinflation
              • Inflation >50% theoretically 20-10. people lose confidence in value of monry as a medium of exchange
          • Unemployment
            • ILO (international measure) higher fig than JSA PEOPLE WITHOUT JOB ACTIVELY SEEKING FOR PAST 4 WEEKS AND ABLE TO WORK IN 2
              • FEB 2013 = 2.56 MILLION =7.9% of economically active
            • Claimant Count of Job Seekers Allowance
              • FEB 2013= 1.53 MILLION
            • Types
              • frictional (transitional)
              • cyclical (DEMAND DEFICIENT)
              • Structural (lack of transferable skills)
              • Regional & Seasonal
              • technological
              • Voluntary
            • COSTS
              • Economic
                • Lost output, lower GDP
              • Fiscal
                • less tax revenue from income tax, higher welfare
                  • BUT HIGHEST SPENDING IS ON PENSIONS
              • Social
                • Antisocial behaviour, rising inequality
            • Youth
              • human capital deficit-poor workers and literacy rates
              • reluctant employers, cost of hiring plus no experience
              • retirement rates fall bad pensions, old people take youth's jobs no new jos being breated
            • policies
              • fiscal
                • 1) cut income tax 2) increase tax free allowance-(increases disposable income increase MPC) 3) cut basic rate of income tax (CURRENTLY 20%) (boosts AD MULTIPLIEDEXPANSIONOF AD)
                  • work incentives
                • 1) increase G on projects that directly create jobs (infrastructure) (CONSTRUCTION PROJECTS HAVE HIGH MULTIPLIEREFFECTS) 2) increase spending on education and training (increases human capital increased D for UK labour
                  • boosts labour demand
                  • EV: Time lags, needs money, austerity-gov cant afford to cut taxes and increaseG, no guarantee of sucess, WON't WORK IF CONFIDENCE IS LOW
                  • welfare reforms, make it harder to claim benefit increases labour, APPRENTICESHIP increases human capital and decreases outh unemployment firms get bonuses e.g. tax incentives. ENTERPRISE ZONES low taxes superfast broadband low levels of regulation -creates jobs helps geog immobility
                    • EV: youth need more jobs (aren't any) risky time lag (enterprise zones increase inequality
                      • Youth
                        • human capital deficit-poor workers and literacy rates
                        • reluctant employers, cost of hiring plus no experience
                        • retirement rates fall bad pensions, old people take youth's jobs no new jos being breated
                • GOVERNMENT SPENDING AND TAXATION
              • monetary
                • Manipulation of interest rate and quantitative easing
                • cut interest rates (save less spend more borrow more) (2components of AD increase shifts it out creates jobs
                  • EV: 0.5% SINCE 2009 already low even with QE banks not lending WILL NOT COMPENSATE FOR A LACK OF CONFIDENCE
              • Supply Side
                • welfare reforms, make it harder to claim benefit increases labour, APPRENTICESHIP increases human capital and decreases outh unemployment firms get bonuses e.g. tax incentives. ENTERPRISE ZONES low taxes superfast broadband low levels of regulation -creates jobs helps geog immobility
                  • EV: youth need more jobs (aren't any) risky time lag (enterprise zones increase inequality
            • Balance of payments
              • Records ALL financial transactions made between consumers, firms and gov. in 1 country with others
                • i.e. how sucessful X is and how much is spent on M
              • 2 Components:1) Current Acount (payments recorded) 2) capital & financial account (flows of money-S,I, speculation & currency is recorded)
                • Current Account= Balance of trade in goods & services, income and transfers
                  • BALANCE OF TRADE IN GOODS & SERVICES 1) goods (tangible)= visible for X/M 2) services (intangible)= invisible for X/M 3) BALANCE OF TRADE = VISIBLE X- VISIBLE M
                  • NET INVESTMENT INCOME: interest payments, profits, dividends from external assets outside of uk MONEY FLOWING IN=CREDIT ON CURRENT ACCOUNT MONEY GOING BACK TO OTHER COUNTRIESFROM UK=DEBIT
                  • TRANSFERS: payment where you don;t necessarily get anything in return (THIS IS ALWAYS NEGATIVE COS UK ALWAYS PAYS FOREIGN AID AND CONTRIBUTES TO EU BUDGET
                    • Why? 1) better trade links, 2) reputation 3) combat religious extremism
                  • CAUSES OF CHANGE
                    • 1) exchange rate 2) price in national currencies may change (increased Y costs decrease P decreases) 3) non-homogenous goods and services=firms improving their product 4) level of AD in world economy
              • £120.6bn for the 2012-13 UK DEFICIT
            • National Income
              • =circular flow
                • Households
                  • expenditure on goods and services
                    • Money flow- pays for real flow
                  • Rent Wages Interest Profits
                    • Firms
                      • expenditure on goods and services
                        • Money flow- pays for real flow
                      • X,G,I
                        • Injections money enters circular flow
                  • S,T.M
                    • Leakages, take money out of circular flow
                • XGI >STM =GROWTH XGI <STM= ECONOMY IS SHRINKING
                • in equilibrium if XGI=STM
              • Assuming no money leaves economy Y=E=O
              • MPC- marginal propensity to consume- how much any extra pound is respent in an economy
              • MULTIPLIER : Initial injection leads to a multiplied expansion in GDP
                • EV: takes time to come into place, difficult to measure size, depends on size of leakages
              • WEALTH= SUM OF ALL ASSETS
                • Wealth= stock concept & Income=flow of money
                  • WEALTH DOES NOT AFFECT CIRCULAR FLOW BUT A CHANGE IN WEALTH AFFECTS SPENDING & INCOMES (richer you feel the more you spend)
            • Aggregate Demand
              • TOTAL PLANNED EXPENDITURE OF GOODS AND SERVICES IN AN ECONOMY
              • C+G+I+(X-M)
                • Consumption
                  • 65% AD
                  • 1) consumer confidence 2) real disposable income 3) interest rates 4) housing market
                    • housing market if prices incr. owners extract more equity from house. house value incr. feel richer confience incr. mortgage equity release when loan is spent=injection in circular flow
                • Investment
                  • INTEREST RATES- high cost of borrowing high so less I
                  • driven by: 1) confidence in sales patterns 2) competition 3) gov. incentives 4) regulation & future interest rates
                  • accelerator effect: increase I = Increase AD= increase I= increase AD
                • Government Spending
                  • 40% of all spending
                  • if spending> tax revenue difference=budget deficit
                    • £120.6bn for the 2012-13 UK DEFICIT
                  • Gov can manipulate AD through fiscal policy
                    • NATIONAL DEBT=accumulation of budget deficits. this increases over  time cos of interest payments
                    • KEYNESIAN: fiscal shifts AD & is more effective cos of multiplier
                      • fiscal
                        • 1) cut income tax 2) increase tax free allowance-(increases disposable income increase MPC) 3) cut basic rate of income tax (CURRENTLY 20%) (boosts AD MULTIPLIEDEXPANSIONOF AD)
                          • work incentives
                        • 1) increase G on projects that directly create jobs (infrastructure) (CONSTRUCTION PROJECTS HAVE HIGH MULTIPLIEREFFECTS) 2) increase spending on education and training (increases human capital increased D for UK labour
                          • boosts labour demand
                          • EV: Time lags, needs money, austerity-gov cant afford to cut taxes and increaseG, no guarantee of sucess, WON't WORK IF CONFIDENCE IS LOW
                        • GOVERNMENT SPENDING AND TAXATION
                      • in the time unemployed are employed they will be past employment age
                    • CLASSICAL: purely inflationary
                      • fiscal manipulationhas an impact in SR if wage demands and other cost pressures are kept in check
                        • only supply side will achieve long term employment
                          • in the time unemployed are employed they will be past employment age
                • X-M=NET EXPORTS
                  • 1) exchange rates- strong£ fall in net exports
                    • BUT PED for X&M is inelastic in SR 1) contracts already signed 2) M small % of total costs 3) lack of available substitues
                    • worsens current account
                  • value of X-M in world economy
                  • Nonprice factors e.g. quality & innovation
              • downward sloping cos a fall in P increases internat. competitivesness. c=whether prices are high/low. real balance is= cos same amount of money to spend. high prices means IRincres. so I & S increase
            • Aggregate Supply
              • Volume of goods and services produced at a given price level
              • AFFECTED BY: costs of production, investment, availability of factors of production,efficieny, supply side policies
                • if AS shits out productivity gap closes, inr output, low exchange rates as price falls,
                  • Aggregate Supply
                    • Volume of goods and services produced at a given price level
                    • AFFECTED BY: costs of production, investment, availability of factors of production,efficieny, supply side policies
                      • if AS shits out productivity gap closes, inr output, low exchange rates as price falls,
              • Macroeconomic Objectives
                • BIGUP
                  • Balance of payments- paying off the deficit
                  • Inflation-keeping it at 2%
                  • Growth-sustainable
                  • unemployment-reduction
                  • paing off the debt-accumulated deficits
                • Untitled
            • Households
              • Rent Wages Interest Profits
                • Firms
                  • X,G,I
                    • Injections money enters circular flow
              • S,T.M
                • Leakages, take money out of circular flow
            • Provides goods and services
              • Provides Factors of Production
                • real flow- actual goods and services and labour
              • SRAS
                • CLASSICAL: upward sloping cos in SR all variables except for labour are fixed so to incr. Y you need to incr. wages but this incr. price
                • KEYNESIAN: curve= 1) spare capacity you you can incr. Y without an incr. in P 2) bottlenecks shortages of resources so to incr. Y P incr (wages) THIS CAUSES INFLATION 3) full capacity just like LRAS

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