Macroeconomics

• ✩Employment: create & maintain full or low unemployment (3%)

• ✩Economic Growth: improved living standards & levels of economic welfare

• Fair Distribution of Income & Wealth: between regions & different income groups

• ✩Inflation: limited & controlled (CPI target 2%), to achieve measure of price stability

• Balance of Payments: avoidance of external deficit stabalising exchange rate (imports=exports) Uk deficit

Monetary (bank): interest rates, exchange rates & money suppy

Fiscal (government): taxation levels, government spending & budgetary position

Suppy-Side: gov making industries/markets more efficient & competitive

• Policy Conflict: 2 objectives cannot be achieved at the same time
• Trade Offs: worsening one objective to better another

 employment/economic growth <-------> balance of payments/exchange rate

                 employment/economic growth <-------> inflation

                                       economic growth <-------> income equality 

• National Income Equilibrium: planned saving (leakage) is equal to planned investment (injection)

• Economic Growth: increase in potential level of real output the economy can produce over a period of time (long-run growth)
• Measured by: 
  • PPF: shifting outwards PPF1    > PPF2
  • % Annual Increase in RNO: total of all goods & services produced over time period with inflation subtracted
  • National Income/Output: flow of new output produced by the economy in a particular period with INFLATION
  • GDP: value of all goods & services produced within country within specific time period
  • GNP: GDP with goods & services value from other countries added
• Causes of Economic Growth: Investment & Technological progress
• Economic Development: living standards, access to resources, access to opportunities, environmental sustainability
• Seasonal Fluctuations: caused by changes in weather & climate e.g building & tourism
• Cyclical Fluctuations: caused by fluctuations in AD or supply-shocks e.g technological progress
• UK's trend rate of growth: 2.25%
• Recession: falling GDP (negative economic growth) for 6 months or more

Reasons for this cycle:

• Role of Speculative Bubbles: rapid economic growth    > speculative bubble (spike in asset value)    > people sell assets    > speculative bubble bursts    > destroys consumer confidence    > spending stops    > recession occurs
• Political Business: election approaches    > political party  'buys votes' engineering pre-election boom    > after election party deflates AD to prevent overheating    > next election           > AD expanded
• Outside Shocks: e.g war effecting demand    > collapse in consumer/business confidence and effecting supply    > increased oil price
• Stabilising: fiscal: tax/spending (automatic stabiliser) or monetary: interest rates
• Output gap: difference between actual output & trend

AD= C✩+ I + G + (X-M): total planned spending on goods & services produced by economy

• Determinants of Consumption & Saving: Interest rates, Disposable income level, Expectations of wealth, Wealth, Consumer Confidence, Avaliablity of Credit
  
• Determinants of Investment: Entrepreneurs & Investors expectations, Interest rates, Savings, Techonoligcal progress, Prcie of capital & labour
• Leakages: unspent income/withdrawal from circular flow (savings, tax, imports)
• Injections: investment into capital goods (investment, gov spending, exports)

• Aggregate Supply: level of Real National Output that producers are prepared to supply at different average price levels
• Factors Affecting SRAS: (depends on average price level in economy)
  • Wage Rates
  • Interest Rates
  • Import Prices (raw materials)
  • Corporation Tax
• Reason SRAS slopes upward: maximise profits & cost of producing extra output increases as more output produced
• Factors Affecting LRAS: (reflects economy's production potential) (equilibrium on LRAS= full employment) (PPF=LRAS)
  • Techonological Progress
  • Attitudes & Enterprise
  • Macroeconomic Policies
  • Productivity (Labour)
  • Capital Investment

• Full Employment: 3%> unemployed, people wishing to work = number of jobs
• Measuring Unemployment:
  • Claimant Count: counts unemployment benefit seekers, overstates unemployed due to people not looking for work & not actually unemployed ---> LOWER
  • Labour Force Survey: quarterly sample of 60k households in UK, unemployed= actively seeking work in last 4 weeks ---> HIGHER
• Types of Unemployment
  • Frictional/transitional: 'between jobs' caused by frictions in labour market, georgraphical/occupational immobility of labour, search theory of unemployment ---> improve georgraphical/occupational IOL & reduce worker's search period between jobs
  • Structural: decline of industries, unable to compete with demand or new products, more competition abroad ---> increase AD
  • Seasonal/Casual: laid-off on short term basis due to season/weather e.g tourism
  • Cyclical: demand-deficient Keynesian (when point is inside PPF)
• Consequences of Unemployment: economy's productive resources aren't being fully utitlised (fails to operate to full potential), reduce economy's international competitiveness, 
  

• Inflation/Deflation: persistent or continuing rise/fall in the average price level
• Reflation: increase in level of real output following an increase in AD
• Consumer Price Index (exludes housing): Collects price of 650 goods and services ---> next month collects same 650 items & new price ---> measures difference
• Retail Price Index: the same, including housing
  • Not always correct: different income groups buy different items, can't show improvements in items = inflation overstated
• Prices of services rise faster than goods due to more cheaply imported goods than services
• Causes of Inflation:
  • Excess AD: demand-pull inflation to convince firms to keep up with extra demand
  • Increased Costs of Production: cost-push inflation by growth of monopoly power
• Stagflation: rising prices & falling output (supply)
• Inflation Disadvantages
  • Distibutional effects: fixed income lose, barganing positions gain
  • Distortion of Normal Economic Behaviour: hoarding of goods
  • Breakdown in Fuctioning of Money: goods worth more, hyperinflation
• Inflation Advantages: growing markets, healthy profits, business optimism
• Whether benefits exceed costs depends on: rate of inflation, stability & anticipation of rate

• All currency flowing into and out of a country made of 2 components: 
• Capital Flows: capital assets/investment in other countries e.g factories, office blocks 
• Current Account: measuring income currency flows, made up of:
  • Exports - Imports
  • Investment Income from abroad (factories, interest payments)
  • Transfers between countries (aid payments)
• UK Current Account: deficit
  • Goods (visible): deficit (manufactured)
  • Services (invisible): surplus (financial)
  • Investment Income: surplus
  • Transfer Payments: deficit 
• Deficit = Decrease AD
• Surplus = Increase AD
• Problems of Deficit: problem if long run, uncompetitiveness of industries, lowers living standards, may become means for 'champagne lifestyle' of elite in poor countries
• Problems of Surplus: one countries surplus is another's deficit, can be inflationary