Macro, unit 2

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  • Created by: Sian
  • Created on: 21-04-16 11:12
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  • Macro
    • Balance or surplus on the current account
      • Current Account = Exports of  goods and serices - imports of goods and services + net cash transfers + factor incomes
        • visible  invisible balance
        • exports, sale of surplus
      • improve exports
        • supply side
          • education and training
            • more productive, and quality is better so people want the goods.
          • infrastructure increase PPF, reduce cost to transport goods, reduce business cost, so can focus on more production and invest to increase prodcution
            • resource allocation, mobility of factors of production,
        • monetary
          • decrease interest rates, devaluing the pound so deflate and hence SPICED
            • expenditure switching
        • fiscal
          • decrease business tax
            • cheaper to engage in business increase porduction
      • reduce imports
        • fiscal (contractionary)
        • supply side
          • direct controls, quotas, tarrifs, embargos,
            • expenditure switching
      • is it bad to have a deficit
        • No: increases standard of living, world peace, depends if goods or services as ,maybe more proffessional work force not manual, may satisify domestic deman via own economy
          • surplus,buy mor ein fuutre, High AD ijmplies Higher inlfation
        • Yes: security, reliance, poor productivty
      • J- Curve and reserve J- Curve
      • Marshall Lerner Condition
      • balance of payments, if surplus need a deficit on the capital account
        • capital account= change in foriegn ownership of doemstic assets - change in domestic ownership of foeeign assets
          • capital flows
            • short term= hot money flows, speculative capital flows
            • long term = direct overseas investment, portfolio overseas investment
    • Unemployment
      • Cyclical (diagram)
        • Solve
          • Keynesianism, stimulate AD,
            • fiscal (expansionary)
              • decrease tax
                • more dispoable income to spend, increase consumption
                • propensity to consume greater than 0
              • Increas gov spending
                • crowd out of private sector borrowing as need to get money from somewhere
                • increase AD more money in circular flow
            • monetary
            • supply side
              • lower interest rates
                • monetary
                • increase loans, investment in labour, increase employment
                • increase consumption, stimualting demand for the market and thus employment for more workers
        • insufficent AD
        • disequilibrium unemployment
      • frictional
        • Inadequate info between jobs to fill the requirement
          • increase info, job seeker centers more aware
          • education and training (supply side, fiscal)
            • more skilled for various employment sectors when need to be emoployed
            • can you fix it
              • want to enjoy leisure time from working
              • why not have it, good for students and other people economically inactive the rest of the year
      • seasonal
        • downturn in demand for labour due to the season
          • education and training (supply side, fiscal)
            • more skilled for various employment sectors when need to be emoployed
            • can you fix it
              • want to enjoy leisure time from working
              • why not have it, good for students and other people economically inactive the rest of the year
      • structural
        • supply side
          • education and training
            • increase and alter skill set so can be employed
          • de-regulation
            • housing market, labour contracts = decrease immobility of labour make transition more easily to new industries
      • measure via Claimant Count and ILO survey
        • not capture everyone, lying/pride, change in government criteria may hid those unemployed, black market(hidden employment),
      • want full employment (diagram)
      • classical unemployment (real wage unemployment)
        • cut wages, so profiatble to operaate
          • Insufficent AD, if wages are cut, it could lead to a further fall in AD, as workers have lower wages as consumption is affected.. In this case, cutting wages may be ineffective in solving classical unemployment
    • Highand sustained stable growth
      • economic output GDP, GNP, GDP per capita, real or nominal
        • can look at  non economic measures to show the growth of a country
          • HDI, environment, taxation, social investment
      • long term v short term growth
        • making use of spare capacity
      • Causes
        • fiscal
          • follow Keynesian economics
          • decrease income tax
            • opportunity cost of leisure increase, engage in more work
            • Adam Smith's Canon of ood Tax, EECC
        • supply side
          • new raw materials and labour
          • training and education
          • increase capital and infrastructure
          • de-regualtion
          • government subsidy
        • monetary
          • decrease interest rates
            • increase investment
              • poor investement, mis allocation of resources, waste of resources, sunk costs
            • exchange rates, there is an exchange rase target
              • SPICED
                • Transmission mechanism of monetary policy
      • economic cycles
        • negative or positve output gaps
        • keynesian theory
          • low ad, sticky downwards wages = recession
        • real business cycle
          • natural phenomenono
        • monetarists
          • money supply rate increasing too slow or quick causes ecnomic cycle
        • austrian theory
          • interest rates too low, credit boom, previous unviable investement viable boom is bad
        • counter-cyclical fiscal policy
      • the multiplier
        • K=1/1-C
      • the accelerator
      • international trade, help growth,  (diagram)
        • capital widening and capital deeping
    • Inflation
      • of 2% on the CPI
        • excludes mortgage repayments and council taxes (other housing costs)
      • Can measure on the RPI, but usually higher
        • Political government may not show extend of an economy's inflation if use a lower number/index
        • pesnioners and some of the richest excluded
      • conflicting objective
        • Phillips curve
          • stagflation high inflation, high unemployment
            • Friedman's augmented expectations Phillips cuvre (diagram)
              • money illusion, nominal changes mistaken for real change, revert back to natural rate
              • NAIRU
              • problem: not base actions entirely on past data, does not explain how inflation excpectations intially formed
      • deflation
        • causes
          • good v bad
          • increase in productivity
          • decrease in AD
      • causes
        • monetary, MV=PT, (diagram)
          • increase spending,SRAS increase, moey illusion, firm exp S and prices change once realises, decrease SRAS
            • form of demand pull inflation
          • money multiplier and fractional reserves
            • money aggregates MB, M1, M2, M3
              • quantitative easing
          • control via, quantitative and qualitative controls, base rate of interest, reserve requirements
            • base rate typically follows LIBOR rate
        • cost push
          • inputs' price, commodities oil and labour, firm operate cost  plus pricing model
            • not likely to persist in long run unless natural idsaster
        • demand pull
          • AD increase above economy's growth rate will cause inflation
      • Do we want inflation
        • prevent wage sitckness, stimulate spending as savings are devalued inn real terms
        • HOWVEVER, increase risk, less investment, redce real value of savings, distortion/white noise for businesses, currency collapse, international competiveness, menu costs, redistribute wealth form lender to borrower
        • do we want deflation
          • cost of living falls, encourages saving fund for future investment, competitiveness of exports, real wage increases,
            • HOWEVER, , deflation downward spiral, deferred spending, reduce velocity of circulation
      • price level
    • time period, magnitude

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