Economic growth :)
Increased GDP Leads to:
- Increased emplyment (Fall in negative output gap creating a fall in social and economic problems e.g. crime leading to a fall in spening on police etc.)
- Fiscal Dividend i.e. Increased GDP leading to increased tax revenue and decreased spending on benefits leading to increased govt spending on e.g. Education and training thus creating a shift Increased tax and decreased govt spending can help balance the budget.
- Could lead to increased material standard of living (higher incomes lead to increased consumption) creating a fall in poverty.
Economic growth :(
- If SR growth exceeds LR growth, as AD reaches yfe, there will be increased demand pull inflation. (which disproportionally affects people of fixed incomes e.g. Pensioners)
- The increase may not be sustainable and may lead to increased negative externalities. e.g. Depletion of natural resources can lead to increased pollution whihc compromises future generations ability to meet their needs.
- If the benefits aren't equally shared, then there will be even greater income inequality.
Macro economic policy objectives
- Steady and sustainable economic growth
- Low unempolyment
- Low inflation
- Equilibrium in the current account of the balance of payments
- Frictional u/e (moving between jobs)
- Structural u/e (occupational and geographical immobility) (Technology and structual changes meaning many workers have insufficient skills)
- Cyclical u/e (When the the economy is below full capacity e.g. A recession will lead to decreased consumption and therefore decreaed output and emplyment. i.e u/e rises)
- Loss of incomes leading to a decline in consumption and their standard of living.
- Decreased tax revenue and increased govt spending on u/e may lead to a cyclical budget deficit.
- Increased negative output gap
- Social costs such as crime and health problems.
Demand pull inflation: Increased AD leads to increased price level with no/little increase in real GDP
Cost push inflation: Increased cost for firms creating a shift out in LRAS e.g.:
- Labour market (trade unions pushing wages up)
- Import prices (devaluation of the currency)
- Increased costs of production
How is it measured?
- CPI and RPI
- Base year is selected
- A survey is carried out e.g. Household expenditure survery
- Items are weighed which is times by price changes. They're totalled to find the inflation rate
Costs of inflation
- International competitivness (Increased inflation leaseds to decreased competitiveness and decreased exports. Can be offset by a fall in the XR)
- Confusion and uncertainty (Confusion over C and I)
- Menu Costs (Cost of changing prices. Tech. has helped)
- Income redistribution (Decreased value of savings. Depends on IR.)
- Fiscal drag (Increased tax as incomes increase but tax brackets don't)
Balance of payments
- Exports - Imports
- Transfers - Transfers
- Interest from foreign investments - Interest from the UK to foreign firms
- Profits from businesses owned abroad - Profits from businesses owned by foreigners
- Investments from foreign businesses - Investments from UK businesses abroad
- Change in XR
- Economic growth
- Decrease in competitvness
- Increased inflation
- Recessions in other countries
Determinants of AD
- Consumer Confidence (e.g. increased u/e makes people concerned about job saftey leading to increased savings and decreased consumption)
- Disposable income (If yd increases people can afford to buy more so C increases. This depends on MPC)
- Interest rates (Decreased interest rates will discourage savings and increase borrowing for consumption)
- Business Confidence (e.g. if the economy is expected to prosper in future years then businesses may be more likely to invest as they expect a return on them)
- Interest rates (If IR are low then businesses are more likely to borrow to invest)
Determinants of AD
- War (During times of war the government spends more on defense and welfare)
- Tax intake (During a boom, when emplyment is high, income tax revenue may be increased so the govt can increase spending)
- Exchange rates (If the XR depreciates then exports will become more competitive and will increase)
- Trade barriers (For example if Quotas or Tarrifs are in place then trade and therefore exports will be reduced)
- Increased AD (Increased G and decreased T leading to increased C) -> budget deficit
- If GDP increases u/e will fall leading to a fall in G on benefits and Increased taxes.
- However: Time lags..., Consumers may save instead of consume (MPC)..., Depends on the extent...
- Cutting IR: Borrowing costs fall then disposable incomce of consumers with mortgages will increase and there is no incentive to save therefore I and C will increase -> increased AD
- However: More effective in the SR, Liquidity trap, Depends on the extent...
Supply side policies:
- Education and training (Increasing skills and therefore productivity of the labour forces leads to an shift out in LRAS)
- Decreasing trade union power (Increased efficiency as workers can't strike along with lower costs as wages aren't held up too high creating an shift out in LRAS)
- Privatisation and derregulation (Increased incentive for efficiency leads shift out in LRAS)