Macroeconomic objectives unit 2

Notes from the student room, very detailed!

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  • Created on: 25-03-13 21:16
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A person is unemployed if they are out of work but available and actively seeking work. If you are of 'working
age' this does not necessarily mean that you are employed or wanting employment, such as students and
housewives. Such people are economically inactive and thus they do not form part of the working population.
Cyclical or Keyensian ­ falling aggregate demand and output leads to lower derived demand for
labour. Wages cannot fall and so this creates disequilibrium and involuntary unemployment.
Real-wage or Classical ­ real wages are above market clearing wage because wages are "sticky
downwards" and labour immobile leading to disequilibrium unemployment.
Structural ­ involuntary unemployment due to changing labour demand but a mismatch of skills
and jobs due to the occupational immobility of labour.
Frictional ­ due to people moving between jobs exacerbated by imperfect information.
Seasonal ­ seasonal changes in labour demand, for example in tourism.
Natural rate of unemployment ­ the equilibrium unemployment rate where there is no
involuntary unemployment.
The UK government uses two measures to look at unemployment. The figures can be expressed as a percentage of
the labour force or as an absolute number of unemployed (sometimes figures-for employment are used).
The Claimant Count
This simply counts the number of people who are claiming unemployment benefit (known as the Job Seekers
Allowance) every month. This was the measure used by the Conservative government.
Advantages of the Claimant Count
It uses information that is already being compiled and thus it is cheap and easy to put together.

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Disadvantages of the Claimant Count
It is open to political manipulation. The Conservative government made 30 changes to the benefit system,
of which 29 made it harder to claim the benefit, thus 'reducing' the level of unemployment.
Many seemingly unemployed people are not counted. e.g. people under 18, those entitled to a pension,
married women who would accept a job but are not allowed to claim because their husbands earn too
much.…read more

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Inflation is defined as a sustained rise
in the general price level. It is
generally measured in percentage
terms. The Monetary Policy Committee
of the Bank of England aims for an
inflation target of 2% ± 1% using the
Measurement - Retail Price Index
The RPI is a weighted index, based on
the spending decisions of 6785
households (taken from across regions
and income levels) surveyed via the
Expenditure & Food Survey.…read more

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Shoe Leather Costs - As inflation increases, the opportunity cost of holding cash increases. People will hold
more money in interest-bearing accounts, and more trips to the bank will become necessary.
Costs of Unanticipated Inflation
Confusion of Market Mechanism - Consumer sovereignty relies on producers responding to changes in
prices. Inflation means that producers may believe that demand for their good has risen (and hence increase
production) when, in fact, only the general price level has increased.…read more

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Actual Economic Growth: A percentage increase in Real Gross Domestic Product over time ­ illustrated by a
rightward shift in the AD curve.
Potential Economic Growth: An increase in the productive potential of an economy illustrated by a rightward
shift in the LRAS.
Measurement of Gross
Domestic Product
Gross Domestic Product is defined as
the total output of goods and services
produced by domestic factors of
production in a given period of time,
usually one year.…read more

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Structural Unemployment: As an economy grows its structure changes and demand for certain skills decreases,
resulting in structural unemployment.
Stress & Psychological problems: Professor Yew Nwang Ng has suggested that Economic Growth can create
competitive pressures between families trying to outdo each other materially. This can result in, suicide, stress
and depression.…read more

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This is a record of all monetary payments between one country and the rest of the world over a period of time.
The balance of payments account is split into 3 sections, the Current, Capital and Financial Account. You need to
be mostly concerned with the Current account.
Current Account:
1. Trade in Goods: e.g. export of medicine to South Africa [ + or credit] whilst import of food from France [ - or
2. Trade in Services: e.g.…read more

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Capital Account
This is a minor part of the Balance of Payments, and includes government investment grants, and the purchase or
sale of non-produced, non financial assets such as patents, trademarks and land for foreign embassies.
Net errors and omissions
Formerly known as the balancing item, this figure is included to ensure that the current account, plus the capital
account plus the financial account equals zero.…read more




This is an 8 page summary which fully covers the use, measurement and determinants of the macro economic indicators.

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