Macroeconomic indicators

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  • Macro economic indicators
    • The Economic Cycle and Economic growth
      • Economic Growth
        • Definition
          • Economic growth is an increase in the potential output an economy can produce.
          • Long run economic growth is shown by an outward movement in the PPF caused by an increase in capacity and trend growth rate
          • Short run economic growth is an increase in output that results from making use of spare capacity they are caused by an increase in AD or SRAS
        • Causes
          • Short run economic growth
            • An increase in aggregate demand
          • Long run economic growth
            • Increased labour productivity
            • Investment
            • Technical progress
            • Innovation
            • Increased population
            • Increased training
          • Technical progress increases the rate of growth of total factor productivity it measures how much more productive the factors of production have become
        • Costs
          • It can increase income inequality
          • Higher wages often mean an increase in responsibility which can increase stress and reduce productivity
          • It can cause demand pull inflation as demand increases faster.It can cause cost push inflation as economic growth increases demand for resources.
          • It can create a balance of payments deficit as peoples increased incomes mean they import more. This happens with firms aswell
          • Industrial expansion can cause negative externalities like pollution
        • Benefits
          • It will increase demand for labour causing a fall in unemployment and an increase in income
          • This increase in income causes a rise in living standards as long as prices don't increase more than wages
          • Firms earn greater profits and can therefore increase investment
          • Increase in employment and wages increases governments tax revenue which increases benefits for citizens
        • Sustainable growth
          • Sustainable growth is difficult to achieve as it relies on an economies ability to:
            • Expand output every year
            • Find a continuous supply of raw materials
            • Find growing markets for the increased output
            • Reduce negative externalities
            • Do all of these at the same time
          • To achieve sustainable growth countries will need to develop renewable resources they also need to innovate and create new technology
      • Economic Development
        • Measures of economic development
          • Improved living standards
          • Access to resources
          • Access to human development opportunities
          • Sustainability and regeneration
        • Economic development is a better indicator of improved human welfare and the ability to improve welfare economic growth.
        • Resource depletion occurs when finite resources are used up
        • Resource degradation is pollution of air water and land. To benefit in the long run growth and development must be sustainable.
      • The economic cycle
        • Explanation
          • The economic cycle is a period between 4 and 10 years in which actual output fluctuates above and below the trend growth line
          • Actual growth is measured by % change in real GDP
          • A positive output gap is when there is a gap between the trend rate and a peaking economic cycle.
          • A negative output gap is when there is a gap between the trend growth rate and a troughing cycle
          • Economic potential growth rate is the rate at which output can grow on a sustained basis with out putting pressure on inflation
        • Factors that effect the cycle
          • Climatic factors
          • Speculative bubbles
          • Inventory changes
          • Exogenous shocks
          • Supply side causes of recession
          • Political business cycle theory
        • Demand side shocks
          • If a countries major trading partners go into recession this can significantly reduce exports
          • If consumer confidence is boosted e.g. due to rising house prices, wealth effect
        • Supply side shocks
          • The discovery of a new major source of raw material it will reduce its price and increase its supply increasing capacity
          • A poor harvest reduces supply and increases price therefore reducing capacity
        • Recession - negative economic growth for at least 2 consecutive quarters ad falls and unemployment rises.
        • Fluctuations in the economic cycle can be caused by demand and supply side shocks
    • Uses of national income data
      • Gross Domestic Product
        • Economic growth is measured by changes in national product over a period of time it is calculated as changes in GDP
        • Economists use GDP per capita to measure living standards which is calculated by dividing the total GDP by the countries population
        • GNI can be used to measure economic growth and living standards it is GDP + net income
      • Using national income statistics to measure living standards
        • GNP and GDP are often used as indicators of economic growth and economic social welfare, changing standards and comparison with other countries
        • Rising GDP indicates rising living standards and increases income distribution
        • Problems using national income statistics to measure living standards
          • The non monetised economy - when there are goods and services produced without money being dealt its not measured as GDP/GNP
          • The hidden economy- This is economic activity undertaken illegally so economic activity is conducted in cash and are not recorded in the statistics e.g. black markets
          • The quality of goods and services - these change over time and is therefore not accounted for
          • Negative externalities - national income statistics over estimate living standards because of the effect of negative externalities.
      • Standards of living and the quality of life
        • The average standard of living can be defined as consumption per head of population of purchased goods and services
        • Standard of living = economic welfare from goods and services + economic welfare from public goods and merit goods+ economic welfare from quality of life factors
        • National income figures fail to reflect the effect of resource depletion and environmental degradation.
        • There are other measures of living standards to GDP and GNP
          • The united nations human development model
            • This is an average of 3 indicators: living standards, life expectancy, educational attainment. The maximum value is 1 so the closer the country to 1 the better the human development. It ignores the distribution of income and the expenditure on health care
          • The index of sustainable economic welfare
            • This attempts to capture the effects of externalities upon human happiness and welfare. Its good for showing how sustainable economic welfare changes over time
          • The genuine progress indicator
            • This attempts to measure whether a countries growth has actually resulted in economic welfare it distinguishes between good and bad growth
    • Unemployment
      • Definitions
        • An economies ideal level of unemployment is 3%
        • In order to try and decrease unemployment the economy can increase AD but this can increase inflationary pressures.
        • Full employment can be defined as when 3% of the labour force are in employment
        • Equilibrium unemployment is the level of unemployment when AD of labour = AS with no tendancy to change
      • Measurements
        • The labour force survey
          • This estimates unemployment by surveying 60000 households to see if they are looking for work. This includes those who are unemployed by choice.
        • The claimant count
          • This measures the number of people claiming unemployment related benefits, this is higher than the labour force survey
        • Discouraged workers are workers that have been out of work for a long time and there fore have stopped searching
        • Economically inactive are those that aren't looking for work
      • Types of unemployment
        • Frictional unemployment
          • This is transitional unemployment as people move between jobs
          • Imperfect information in the labour market can make frictional unemployment worse
          • Incentive problems can also cause frictional unemployment as people feel better off on benefits
        • Structual unemployment
          • This occurs when there is a long term deciline in an industry leading to fewer jobs being availabe
          • It occurs when there is a mismatch between skills and the skills required.
          • Technological unemployment is a special case of structural unemployment resulting from the growth of industries using labour saving techniques
        • Classical unemployment
          • This is a form of disequilibrium unemployment that occurs when the aggregate labour market fails to clear. It is caused by real wage rates being too high
        • Seasonal unemployment
          • This results in seasonal fluctuations in the demand for labour
      • Natural rate of unemployment
        • Determinants of the natural rate of unemployment
          • Availability of job information
          • Skills and education
          • Degree of labour mobility
          • Flexibility of labour market
          • Hysteresis (rise in unemployment caused by recession can cause NAIRU to increase)
        • The natural rate of unemployment is the rate of unemployment when the labour market is in equilibrim
        • It is the difference between those who would like a job and those who are willing and able to take a job
        • It is unemployment caused by supply side factors rather than demand side factors. It can be shown on the philips curve where the curve crosses the x axis and is known as NAIRU
        • Disenfranchised workers - are workers who feel the wage rate is too low to supply their labour
    • Inflation and Deflation
      • Inflation
        • Monetarist view of inflation
          • Monetarism is the economic theory that believes inflation is always a moneytary phenomenon
          • The key features are:
            • The main cause of inflation is an excess supply of money
            • Tight control of money and credit is required to maintain price stability
            • Attempts by the government and banks to use fiscal and moneytary policy to change the rate of AD are ineffective.
            • The key is for moneytary policy to be credible so that peoples expectations of inflation are controlled
        • The quantity theory of money
          • The quantity theory of money can be developed from the fishers equation - MV=PT or PY (money supply x velocity of circulation = price level x total transactions in the economy or x real GDP
          • Changes in the money supply lead to changes in the GPL
          • The money supply - there are a variety of ways of measureing th emoney supply
            • M0 (narrow money) - Comprises notes and coins in all banks in the uk. It reflects changes in the economic cycle but does not cause them
            • M4 (broad money) - Is a wider definition of what constitutes money. It includes time and sight deposits saved with banks and building society also money in the forms of loans and over drafts
            • M4=M0+Current accounts +Savings accounts
          • Velocity of circulation
            • This represents the number of times that a unit of currency is used in a period of time when used as a medium of exchange to buy goods and services
            • Velocity of circulation = money value of national output/ money supply
        • How a surge in the amount of money can feed to higher inflation
          • Excess money balances can affect demand on output in several directions
            • Consumers will increase their demand for goods and services adding to AD
            • Some of the excess money is invested into the housing market pushing up house prices and creating a wealth effect
            • Some of the excess balances will be saved in bonds and other financial assets. An increase in demand for bonds causes a downward movement in interest rates causing more investment
        • Measurements of inflation
          • CPI
            • This is a measure that examines  the weighted average of prices of a basket of consumer goods and services
            • Its calculated by taking price changes for each item in the predetermined basket of goods and averaging them they are then weighted according to importance
            • It excludes mortgage interest payments and housing costs
          • RPI
            • This is the official measure of inflation in the UK. It's calculated by taking a sample of goods and services a household might buy. The more important the good the higher the weight it is given. They include mortgage prices
          • RPI-X
            • This is the same as RPI but without mortgage interest payments
            • The government prefer to quote inflation as the annual change in RPI-X
            • When its felt future inflation will rise above the governments target the MPC will raise interest rates to reduce AD and reduce inflationary pressures. This directly effects RPI hence the government use RPI-X as mortgage interest payments are excluded
          • RPI-Y
            • This is the same as RPI-X  but excludes indirect taxes. This is something the government directly change there fore can change the inflation level.
        • Phillips Curve
          • William Philip showed the explicit link that when inflation is high unemployment is low and vice versa
          • The trade off between inflation and unemployment is only a short term phenomenon as long run inflationary policies don't effect unemployment
      • Deflation
        • Explanation
          • Deflation is a continuous persistent fall in the price level and an increase in the value of money
          • Reflation is an increase in real output and employment following an increae in aggregate demand
          • It is associated with falling AD causing a negative output gap
          • It can be caused by an increase in productive potential leading to excess aggregate supply
        • Costs
          • Discourages consumer spending (falling prices means people delay big purchases as they will be cheaper in the future reducing consumption and economic growth)
          • Lower profit margin (it can mean reduced revenue and profit for business increasing unemployment and decreasing investment)
          • Increase real value of debt ( It increases the real value of money and the real value of debt. Its harder for people to pay off loans decreasing disposable income)
          • Real wage unemployment (real wages rise in deflation due to sticky wages)
          • Increased real interest rates ( deflation increases interest rates encouraging the tightening of moneytary policy leading to more unemployment and higher growth)
        • Benefits
          • Deflation from increased efficiency and lower costs of production (good deflation occurs through lower prices caused by increased productivityand better technology it also improves real GDP
          • Improved international competitiveness ( if one country has deflation and the others have inflation it becomes more internationally competitive leading to a rise in exports)
        • Types of deflation
          • Benign deflation (If falling prices are caused by higher productivity due to improving technology or better managerial practice how long it stays beign depends on how people react
          • Malign deflation (This occurs when prices fall because of a lack of demand making companies go out of business and sack people)

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