macroeconomics

  • Created by: amyylanc
  • Created on: 22-04-19 10:27

THE OBJECTIVES OF GOVERNMENT ECONOMIC POLICY

- the government has six main objectives that it's trying to achieve

- these are referred to as economic indicators as they show how well or badly an economy is performing

- the key indicators are:

  • sustainable economic growth, which means that total spending in an economy is growing at a rate that can be maintained in the long-term
  • price stability, which means that inflation is kept at a low level whilst still avoiding deflation
  • low unemployment, which means that as many of the working population are employed as possible
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THE OBJECTIVES OF GOVERNMENT ECONOMIC POLICY

  • a stable balance of payments, which means that, ideally, the value of exports would be greater than the value of imports
  • to improve the government's financial budget position, which is calculated by minusing government spending from tax revenue recieved
  • to redistribute wealth, which is achieved through the tax and benefit system
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CONFLICTS BETWEEN ECONOMIC OBJECTIVES

- inflation and economic growth:

  • extra demand causes inflation but also creates growth after a recession

- low inflation and low unemployment:

  • extra demand causes need for more workers, but also increases inflation

- improved budget position and equal distribution of income:

  • taxing low earners less improves the distribution of income, but reduces tax revenue and therefore worstens the budget position
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CONFLICTS BETWEEN ECONOMIC OBJECTIVES

- low unemployment/improved economic growth and the balance of payments:

  • as people become better off, they buy more foreign goods, which worstens the balance of payments

- economic growth and the budget position:

  • if there is a recession, the government may either decrease taxes in order to encourage spending, or increase their own spending to create demand in the economy, both of which worsten the government budget position
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MACROECONOMIC INDICATORS

- a macroeconomic performance indicator provides policy-makers with information about the state of the economy at the time

- they also provide information about whether current policy is working to bring the economy towards the economic aims of the government

- the main macroeconomic indicators are:

  • GDP
  • the CPI and RPI
  • measures of unemployment
  • productivity
  • the balance of payments on current account
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GDP

- GDP (Gross Domestic Product) is a measure of the output, income or expenditure within an economy

- all three measures of GDP should give the same answer, as output = income = expenditure

- real GDP means that the figures have been adjusted so that the impact of inflation has been taken into consideration

- GDP per capita is used to describe the GDP per person, which is calculated by dividing GDP by the population

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THE CPI AND RPI

- the CPI and RPI are both measures of inflation

- the CPI is the Consumer Prices Index

- the RPI is the Retail Prices Index

- the official measure of inflation is the CPI, but the RPI is also published

- the difference between the two measures is that the RPI includes house prices, mortgage costs and council tax, whereas the RPI doesn't

- both of the measures of inflation are calculated from a weighted basket of goods and services

- the weighted basket takes 650 goods and services that the average household spends their income on, in which greater importance is given to goods and services that people the larger proportion of their income on

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MEASURES OF UNEMPLOYMENT

- there are three measures of unemployment:

  • the claimant count, which is a measure of the people who are claiming job seekers' allowance
  • the labour force survey, which is an independent figure calculated by the International Labour Organisation, and also includes people who are ineligible for jobseekers' allowance but are still looking for work
  • the unemployment rate, which is the percentage of the working population that doesn't work, but are actively seeking employment
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PRODUCTIVITY

- productivity measures the output of goods and services per unit of input

- labour productivity is the measurement of output per worker in a particular period of time

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THE CIRCULAR FLOW OF INCOME

- the circular flow of income model shows how money flows between firms and households

- firms pay workers wages in return for their labour

- individuals spend their wages on goods and services provided by firms

- injections enter the circular flow, whilst withdrawals leave it

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NOMINAL INCOME AND REAL INCOME

-nominal income is the measurement of the value of national output at current prices, with no adjustments for the effects of inflation

- real income measures the volume of output, and is adjusted for inflation and is measured at constant prices

nominal national income = real national income x general price level

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INJECTIONS AND WITHDRAWALS

- injections are additional money entering the circular flow

- injections include:

  • government spending
  • investment
  • exports

- withdrawals are variables in an economy that leak out of the circular flow

- withdrawals include:

  • taxes
  • saving
  • imports
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THE EFFECT OF INJECTIONS AND WITHDRAWALS ON NATION

- national income measures the monetary value of the flow of output of goods and services produced in an economy over a period of time

- injections increase the size of national income

- withdrawals reduce the size of national income

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THE ACCELERATOR PROCESS

- the accelerator process explains how an increase in national income leads to an increase in business investment with a percentage increase of investment greater than the percentage increase of national income

- this occurs because, when firms see that the economy is growing at a quicker rate, their confidence levels increase, as they see the opportunities for profits with greater amounts of demand in the economy

- the reason the percentage increase is greater is because, during times of low or negative economic growth, firms' investment levels will have been relatively low, meaning that any significant increase is likely to be a bigger percentage increase

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AGGREGATE DEMAND

- aggregate demand is the total amount of demand in the economy as a whole

- the formula for calculating aggregate demand is: 

AD = C + I + G + ( X-M )

C = consumer spending

I = investment

G = government spending

X = exports

M = imports

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THE DETERMINANTS OF CONSUMER SPENDING

- real wages:

  • if real wages rise, consumer spending will increase

- income tax:

  • if income tax falls, people will have more disposable income, which leads to increased consumer spending

- interest rates:

  • higher interest rates mean that there's more incentive to spend and mortgages are more expensive, so there is less consumer spending

- consumer confidence:

  • increased confidence leads to increased consumer spending
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THE DETERMINANTS OF INVESTMENT

- corporation tax:

  • a fall in corporation tax will mean that businesses keep a larger proportion of their profits, meaning that they have a greater amount to spend and reinvest in their business, causing investment to increase
  • also, the lower the rate of corporation tax gives businesses an extra incentive to spend as they know that they'll keep more of their profits

- business confidence:

  • the greater confidence that business have, the more investment will occur
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THE DETERMINANTS OF GOVERNMENT SPENDING

- government spending decisions are usually made based on political motives and the need to provide public services

- government spending is rarely based on the amount of tax revenue that the government recieves as governments frequently continue to have deficits, even when they recieve more tax revenue

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THE DETERMINANTS OF EXPORTS AND IMPORTS

- exports are largely determined by the state of economies of our main training partners:

  • if the European economy was in a boom, their consumers would have more income, which would mean that they demand more goods, so British exports increase

- imports are largely determined by the state of the domestic economy:

  • if the economy is booming, consumers have more money, and so import more foreign goods
  • if we're in a recession, consumers are worse off, and so we import less foreign goods
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THE DETERMINANTS OF SAVINGS

- interest rates:

  • the higher interest rates are, the greater savings will be, as consumers get a greater reward for saving their money in banks

- consumer confidence:

  • the less confident consumers are in their future financial prospects, the greater savings will be, as they wish to put more of their money aside incase it's needed in the future when their economic status may be less stable than it is now
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THE DIFFERENCE BETWEEN SAVING AND INVESTMENT

- saving is when money is set aside and kept in banks for future situations that will require it

- investing is when capital goods are bought by businesses that will then be used in the future to produce goods and services to sell

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HOW AD AFFECTS THE LEVEL OF ECONOMIC ACTIVITY

- economic activity comprises the production and consumption of goods and services in the economy, along with the employment of labour, capital and other inputs that produce output

- as aggregate demand increases, firms often increase production to keep up with this, which will see a rise in economic activity as more people and resources have to be employed

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THE MULTIPLIER PROCESS

- the multiplier process explains how an increase in injections into the economy leads to an increase in national income greater than the size of the original injection

- eg:

  • if the government increased spending on road improvements, then the firm that they are paying would create jobs and demand resources
  • the workers would then go out and create additional demand when they spend their wages, and firms who the businesses buy from would also create jobs and additional demand
  • therefore, if government spending increased by £1 billion, it might lead to GDP increasing by £1.5 billion, in which case the value of the multiplier would be 1.5
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THE DIFFERENCE BETWEEN THE ACCELERATOR AND MULTIPL

- in the accelerator: increased % national output causes increased % injections leading to increased % national output

- in the multiplier: increased injections causes increased national output leading to increased injections 

- there are three main differences between the two:

  • cause and effect are the other way round
  • multiplier is any injection, accelerator is only investment
  • multiplier is in monetary terms, accelerator is in percentage terms
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THE REVERSE MULTIPLIER EFFECT

- the reverse multiplier effect explains how a reduction in injections into the economy leads to a decrease in national income greater than the size of the original reduction

- eg:

  • reduced spending by businesses would mean that other businesses have less demand, which could cause job losses and a reduction in spending on materials, creating even further falls in demand
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AGGREGATE SUPPLY

- aggregate supply is the total amount of supply in an economy as a whole

- there are two types of aggregate supply:

  • short-run aggregate supply (SRAS)
  • long-run aggregate supply (LRAS)
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THE DETERMINANTS OF SHORT-RUN AGGREGATE SUPPLY

- wage rates:

  • increased wages lead to increased costs, leading to reduced profits for businesses, so there's less aggregate supply

- productivity:

  • an increase in productivity will lead to reduced costs per unit, leading to increased profits for businesses, so there's more aggregate supply

- oil prices:

  • increased oil prices will lead to reduced costs for businesses, which leads to increased profits, so there's more aggregate supply
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THE DETERMINANTS OF SHORT-RUN AGGREGATE SUPPLY

- interest rates:

  • an increase in interest rates would increase costs for businesses, which reduces profit and therefore the incentive to supply, thereby reducing aggregate supply

- VAT:

  • increased VAT on goods would mean that the business has to give a higher percentage of their revenue to the government, which means that for any given price level, there's less profit incentive, so aggregate supply falls
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THE DETERMINANTS OF LONG-RUN AGGREGATE SUPPLY

- productivity

  • increased productivity due to a better skilled workforce, through education or training, leads to increased LRAS

- population

  • an increase in the population leads to increased LRAS

- technology

  • improvements in technology lead to increased LRAS

- investment

  • increased investment leads to increased LRAS
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THE DETERMINANTS OF LONG-RUN AGGREGATE SUPPLY

- infrastructure:

  • improved infrastructure leads to increased LRAS

- natural disasters:

  • natural disasters destroy resources, and will therefore cause a fall in LRAS

- war:

  • war destroys reasources and reduces the workforce, causing a fall in LRAS
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ECONOMIC SHOCKS

- an economic shock is an unexpected economic event that has a large impact on either aggregate supply or aggregate demand, and therefore, the economy as a whole

- examples of supply-side shocks include:

  • wars
  • natural disasters
  • a sudden increase in oil prices

- examples of demand-side shocks include:

  • a sudden, unexpected, significant rise in business rates
  • Brexit
  • a sudden, significant fall in the housing market or stockmarket
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ECONOMIC GROWTH

-  economic growth is the annual percentage change in real GDP

- nominal GDP growth is the measure of economic output without inflation taken into consideration

- real GDP growth takes the inflation rate into account

- eg:

                    GDP                        inflation = 2%

          2017:  £40 billion

          2018:  £41 billion

nominal GDP growth = 2% (1/40 x 100)

real GDP growth = 0.5% (2.5% - 2%)

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NEGATIVE ECONOMIC GROWTH

-  when economic growth is negative, this is called a recession

- technically, a recession is two consecutive quarters of negative economic growth

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THE DIFFERENCE BETWEEN SHORT-TERM AND LONG TERM GR

- short-term economic growth occurs when there are unemployed resources in the economy, which are then used up, resulting in a movement from a point inside the economy's production possibility frontier to a point on the frontier

- long-run economic growth occurs when there is an increase in the economy's potential level of real output and an outward movement of the production possibility frontier

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SUSTAINABLE ECONOMIC GROWTH

- sustainable economic growth is when the rate of economic growth can be maintained in the long-term

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WHY UNSUSTAINABLE ECONOMIC GROWTH IS A PROBLEM

- growth is often caused by additional demand in the economy

- if there's more demand in the economy, firms are likely to increase their prices, which causes inflation

- inflation will result in real incomes falling, resulting in less demand in the economy, which would cause economic growth to fall in the long-term

- the inflation caused by economic growth may also lead to a loss of international competitiveness, which can cause a fall in exports, causing a fall in economic growth in the long-term

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RATES OF SUSTAINABLE ECONOMIC GROWTH

- the exact rate of economic growth that is sustainable differs from country to country

- eg: China's rate would be much higher than that of a country like the UK, as they still have so much potential for further growth whereas the UK is already very industrialised

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THE ECONOMIC CYCLE

- boom is a period of high levels of economic growth

- recession is a period of negative economic growth lasting at least two quarters

- depression is a period of large significant falls in GDP, and mass unemployment

- recovery is when economic growth returns to a positive amount, following a period of recession where growth is negative

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THE USE OF INDICATORS IN THE ECONOMIC CYCLE

- in a boom:

  • growth in GDP 
  • increase in inflation
  • low unemployment
  • high investment

- in a recession:

  • fall in GDP
  • fall in inflation
  • high unemployment
  • low investment
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POSITIVE AND NEGATIVE OUTPUT GAPS

- output gaps occur when the level of actual real output in the economy is greater or lower than the trend output level at a particular point in time

- a positive output gap is when the level of actual output in the economy is greater than the trend output level, which leads to inflationary pressures on the economy

- a negative output gap is when the level of actual real output in the economy is lower than the trend output level

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WHY THE ECONOMY MOVES FROM BOOM TO RECESSION

- during a boom, there are high levels of demand, which causes demand-pull inflation, leading to people's real incomes falling, which causes demand to fall and the economy to enter a recession

- inflation during a recession also causes a loss of international competitiveness, as, if domestic inflation is greater than inflation rates in other countries, this will lead to a fall in exports, which then reduces demand and leads to a recession

- recession could also be caused by the government or Bank of England taking action to slow down the economy in order to avoid the problems of unsustainable economic growth

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WHY THE ECONOMY MOVES FROM RECESSION TO BOOM

- during a recession, there are low levels of demand, leading to lower rates of inflation, which leads to people's real incomes rising in the long-term

- with rising real incomes, demand will increase and the economy will experience a boom

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UNEMPLOYMENT

- a person is unemployed when they aren't working, in training or in full-time education, and are actively seeking employment

- unemployment is measured by the claimant count, the labour force survey, and the unemployment rate

- unemployment only applies to the working population, which is anybody between the ages of 18 and retirement age

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THE IMPACT OF UNEMPLOYMENT

- employed people have more income and can therefore enjoy greater welfare and prosperity

- employed people also have more spending power, which creates demand for goods and services within the economy

- unemployed people recieve government benefits and don't pay income tax, which worstens the government budget position

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EMPLOYMENT AND UNEMPLOYMENT

- the employment rate is the percentage of people who are in employment

- HOWEVER, the unemployment rate and employment rate don't sum to 100%

- this is because some people are economically inactive (eg. full-time university students or people who choose not to work)

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TYPES OF UNEMPLOYMENT

- cyclical unemployment is when people are unemployed due to the economy being in recession:

  • this is because, if there's less demand for goods and services, then there will be less demand for workers

- structural unemployment is when a whole industry declines, which causes unemployment:

  • this is because, workers will often lack the skills to transfer to other indutries

- seasonal unemployment is when workers carry out jobs that are only available at certain points in the year:

  • this is because, workers aren't needed at the points in the year when such businesses aren't open (eg. a summer waterpark)
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TYPES OF UNEMPLOYMENT

- frictional unemployment is when a person is unemployed whilst inbetween jobs:

  • this is because, certain jobs have workers who frequently move from one short-term contract to another (eg. construction labourers)

- geographical immobility is when the jobs available are in the wrong place:

  • this is because, there are jobs available in one part of the country, but the unemployed people are in another part of the country

- occupational immobility is when there are job vacancies in the wrong industries:

  • this is because, the unemployed people lack the relevant skills to carry out th jobs available in the industries looking to hire staff
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OTHER CAUSES OF UNEMPLOYMENT

- the poverty trap, which is when a person becomes worse-off by taking a job than if they remained unemployed

- benefits are too easy to claim or too generous

- there is a lack of education and skills, which makes some people unemployable

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INFLATION

- inflation is the annual percentage increase in the general price level

- its' measured by the CPI and the RPI

- there are three main causes of inflation:

  • cost-push inflation
  • demand-pull inflation
  • expectations of inflation
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COST-PUSH INFLATION

- costs are the amount that a business spends on making a product

- price is the amount that a business charges for selling their product/service

- cost-push inflation occurs when businesses spend more on their costs, so therefore increase their prices in order to maintain their profit margins

- there are four types of cost-push inflation:

  • increased commodity prices
  • wage price spiral
  • imported inflation
  • increased indirect taxes
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INCREASED COMMODITY PRICES

- if there's an increase in global commodity prices (eg. sugar, oil), businesses face additional costs so they increase the prices that they charge for their products in order to maintain their profit margins

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WAGE PRICE SPIRAL

- an increase in wages will increase a business' costs, so they will increase their costs to compensate for these increased costs

- this then contributes to an increase in the general price level, causing cost-push inflation, which reduces people's real wages to wages have to be increased again, which leads to the business increasing their prices even further

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IMPORTED INFLATION

- if inflation is high in countries with which the UK does trade, as the price of imports increase, prices of domestic goods using imports as raw materials also increase, causing an increase in the general prices of all goods and services

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INCREASED INDIRECT TAXES

- higher indirect taxes (eg. VAT), mean that a business gets to keep a smaller amount of their revenue, leading to reduced profits

- as a result, they increase their prices in order to maintain their original profit margins, which causes the general price level to rise, and inflation to grow

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DEMAND-PULL INFLATION

- demand-pull inflation is inflation caused by an increase in the amount of demand in an economy

- if firms are able to increase their prices, due to high amounts of demand, then they may take advantage of the willingness of some individuals to pay more

- other firms will increase prices due to a lack of spare capacity in the economy, which means that they can't increase output quick enough to meet demand

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EXPECTATIONS OF INFLATION

- as businesses expect inflation to happen, they start to plan for inflation

- since they expect their costs to rise, they plan to put up their pricess in readiness for this

- therefore, the expectation of inflation has caused actual inflation, and this becomes a self-fulfilling prophecy

- the biggest influence on peoples' expectations of inflation is the current rate of inflation

- therefore, past inflation indirectly causes future inflation

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DEFLATION

- deflation is a negative annual percentage change in the general price level

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THE PROBLEMS CAUSED BY DEFLATION

- the big problem caused by deflation is that it may make people and businesses more reluctant to spend if they believe that prices will continue to fall in the future

- with less spending, the economy could fall into a recession

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THE BALANCE OF PAYMENTS ON CURRENT ACCOUNT

- the balance of payments is a record of the money flowing into and out of a country's economy

- it's made up of the balance of trade, the primary balance, and the secondary balance

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THE BALANCE OF TRADE

- the balance of trade is the overall position of all goods imported and exported

- it's the sum of the invisible balance and visible balance

- the visible balance is the difference between the value of goods imported and exported:

visible balance = value of goods exported - value of goods imported

- the invisible balance is the difference between the value of services imported and exported:

invisible balance = value of services exported - value of services imported

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THE PRIMARY AND SECONDARY BALANCE

- the primary balance is the difference between profits entering and leaving the UK:

primary balance = profits from UK companies based abroad - profits from foreign companies based in the UK

- the secondary balance is the money coming into and going out of the UK, which has no corresponding trade (eg. the payments that the UK makes to the EU)

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WHY A BALANCE OF PAYMENTS DEFICIT IS A PROBLEM

- a country will always prefer to have a balance of payments surplus to a deficit

- a deficit means that more money is leaving the economy than is coming into it

- this means that, rather than money being spent by British firms in Britain, and creating more demand in the economy, the more money leaves the economy and creates wealth in other countries

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FACTORS INFLUENCING THE BALANCE OF PAYMENTS ON CUR

- if demand for British exports abroad increases, but demand for imports into the economy remains the same, there is a net injection of spending into the circular flow of income, and the current account moves into surplus wherein exports exceed imports

- if demand for imports increases within the UK, and demand for exports in foreign countries remains the same, then the balance of payments on current account will have a deficit

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MONETARY POLICY

- monetary policy is government policy to achive its economic objectives, which is achieved through:

  • exchange rates
  • interest rates
  • controlling the money supply
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THE OBJECTIVES OF MONETARY POLICY

- a monetary policy objective is the target or goal that the Bank of England aims to hit, which include:

  • controlling inflation
  • reducing interest rates to stimulate output and employment
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THE ROLE OF THE MPC

- the Monetary Policy Committee are a group of nine economists chaired by the governor of the Bank of England, who meet once a month

- their jobs include:

  • setting the Bank Rate
  • deciding which other aspects of monetary policy need changing
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FACTORS AFFECTING THE BANK RATE

- economic growth rate vs underlying trend rate, as if the current growth rate is above the underlying trend rate then inflation will be likely to grow and so the bank rate will be increased to reduce demand

- the exchange rate, as a depreciation in the exchange rate will cause inflationary pressures, and so cause an increase in the bank rate

- consumer confidence, as increased confidence leads to greater spending and so increased inflation, so the bank rate will be increased

- the availability of spare capacity, as a lot of spare capacity will keep inflationary pressures low which leads to a lower bank rate

- unemployment rates, as high unemployment keeps inflationary pressures low, so bank rates will be kept lower

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INTEREST RATES AS MONETARY POLICY

- interest rates affect household consumption:

  • higher interest rates encourage people to save by increasing the incentive to do so
  • they also increase mortgage payment costs, which leaves people with less disposable income to spend
  • so, inflation can be controlled by increasing interest rates

- interest rates affect business investment:

  • higher interest rates will cause businesses to reduce investment due to the higher borrowing costs
  • therefore, to increase investment and growth, the interest rate can be reduced

- interest rates affect exports and imports through the exhange rate

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EXCHANGE RATES AS MONETARY POLICY

- exchange rates are controlled by interest rates

- a higher interest rate causes the pound's exchange rate to rise, which makes exports less competitive and therefore reduces them, and as exports are a component, this causes AD to fall, so can be used to control inflation

- a lower interest rate will cause a fall in the exchange rate, which causes exports to become cheaper and therefore increase, so demand increases, which can be used to stimulate economic growth

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CONTROLLING MONEY SUPPLY AS MONETARY POLICY

- increasing the money supply means that there's more money which can be spent in the economy, growing the economy

- reducing the money supply means that there's less money which can be spent in the economy, slowing the economy down

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HOW INTEREST RATES AFFECT THE EXCHANGE RATE

- the exchange rate is the price of one country's currency in terms of other currencies

- as an exchange rate is determined by the supply and demand of its currency, a change in interest rates will affect the exchange rate:

  • if interest rates increase, it's more desireable to hold the pound, so demand increases, and the pound becomes stronger
  • if interest rates fall, it's less desireable to hold the pound, so demand decreases, and the pound becomes weaker
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FISCAL POLICY

- fiscal policy is government policy to achive its economic objectives, which is achieved through:

  • government spending
  • taxation
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GOVERNMENT SPENDING AS FISCAL POLICY

- as expansionary fiscal policy, the government can increase spending on benefits, to mean that the poorest in society can go out and enjoy slightly more spending power than before, which increases consumption and therefore AD, and leads to economic growth

- as contractionary fiscal policy, the government can reduce spending on benefits, to mean that certain groups in society now have less money to spend in the economy, which reduces consumption and therefore AD, and will slow down economic growth

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TAXATION AS FISCAL POLICY

- as expansionary fiscal policy, taxes such as income tax can be cut, which means that people take home more of their salary annually and then spend this in the economy, increasing consumption and therefore AD, which increases economic growth

- as contractionary fiscal policy, taxes can be raised to reduce the amount of money that consumers have at their disposal to spend, which reduces consumption and AD within the economy, and slows down economic growth

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DIRECT AND INDIRECT TAXES

- direct taxes are taken at source (from wages or profits), and are paid to the government

- they include:

  • income tax
  • corporation tax
  • National Insurance

- indirect taxes are a tax on spending

- they include:

  • VAT
  • excise duties (eg. cigarettes, alcohol)
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PROGRESSIVE, PROPORTIONAL AND REGRESSIVE TAXATION

- progressive taxation is where high earners pay a larger percentage of their income as tax (eg. income tax)

- proportional taxation is where everyone pays the same percentage of their income as tax

- regressive taxation is where high earners pay a smaller percentage of their income as tax (eg. VAT)

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THE GOVERNMENT BUDGET POSITION

- the government budget position is the difference between tax revenue recieved and government spending, in a given financial year

- government budget position = tax revenue recieved - government spending

- if the government budget position is positive, there is a surplus

- if the government budget position is negative, there is a deficit

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THE NATIONAL DEBT

- the National Debt is the total debt of the government 

- every year that the government has a budget deficit, the size of the National Debt increases

- every time that there's a budget deficit, the government has to borrow money in order to finance it

- this additional borrowing causes the debt to increase

- when the government borrows money, most of it is borrowed from financial institutions such as pension funds

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LEVELS AND PATTERNS OF ECONOMIC ACTIVITY

- the term 'level' of economic activity means the amount of real output in the economy

- the term 'pattern' of economic activity refers to how money is spent and which goods are produced

- tax can influence the level of economic activity (eg. if the government lowered income tax resulting in spending increasing and output rising)

- tax can also influence patterns of economic activity (eg. if a sugar tax on soft drinks reduced the amount purchased, and increased the amount of bottled water purchased)

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EXPANSIONARY AND CONTRACTIONARY POLICY

- expansionary is a policy that seeks to encourage economic growth or combat inflationary price increases by expanding the money supply, lowering interest rates, increasing government spending, or cutting taxes

- contractionary is a policy that seeks to combat rising inflation by reducing government spending or reducing the rate of monetary expansion

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TIGHTENING AND LOOSENING POLICIES

- tightening is a policy that seeks to slow the growth of the economy, meaning that people have less money

- loosening is a policy that seeks to increase the growth of the economy, meaning that people have less money

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DEMAND-SIDE POLICIES

- demand-side policies use monetary or fiscal policy to influence aggregate demand

- with demand-side policies, there's a conflict between economic objectives (eg. policies that increase growth will reduce unemployment, but will also cause demand-pull inflation)

- in contrast, using supply-side policies to increase growth helps to reduce inflationary pressure in an economy

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SUPPLY-SIDE POLICIES

- a supply-side policy is an action taken by the government to increase the amount of aggregate supply in the economy

- a large amount of supply-side policies concentrate on labour, although they can also look at other factors of production

- DON'T CONFUSE supply-side effects with supply-side policies (eg. a fall in the global price of oil would increase supply, but it's not a supply-side policy as the government doesn't control it)

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SHORT-TERM SUPPLY-SIDE POLICIES

- reducing the poverty trap by increasing the incentive to work through a bigger difference between low-paid work and benefits:

- make cheaper childcare available to give people a greater reason to go to work and contribute rather than staying at home to care for the children

- implement laws to give workers better flexibility, as people are more keen to work if they can fit it around their personal lives

- introduce laws to reduce trade union powers, to reduce wasted output time from strike action

- de-regulate markets to reduce barriers to entry and make it easier for new businesses to enter markets

- introduce schemes to encourage enterprise, such as financial support or advice to new prospective businesses

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LONG-TERM SUPPLY-SIDE POLICIES

- improve education by spending more money on educational institutions or by changing the curriculum

- improve infrastructure, such as transport and communication networks, so that goods and people move quicker

- introduce policies that encourage investment (eg. apprenticeship schemes), in economic sectors that need development, such as electric cars

- improve training, and provide financial incentives for firms taking on and training apprentices

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SUPPLY-SIDE AND FISCAL POLICIES

- some government policies can be classed as both fiscal and supply-side polciies, and therefore affect both AS and AD

- examples of such policies affecting LRAS include:

  • increased government spending on infrastructure
  • increased government spending on education
  • reduced tax for businesses operating in technology
  • reduced tax for businesses training the unemployed

- examples of such policies affecting SRAS include:

  • increased personal allowance
  • reduced income tax
  • reduced National Insurance
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EVALUATING INTEREST RATES AS MONETARY POLICY

- when the Bank of England changes interest rates, there is no guarantee that banks will pass these changes on to their customers

- if a significant proportion of people have fixed-rate mortgages, then the impact of interest rate changes will be smaller because those with fixed-rates won't notice any changes until their fixed-rate deal ends

- with interest rates in the UK currently very low (0.75%), there isn't much potential to lower interest rates any lower

- consumers and businesses may not react to interest rate changes because other factors (eg. confidence levels) have greater significance in affecting spending patterns

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EVALUATING FISCAL POLICIES

- fiscal policy is often used for political reasons, and governments may not wish to make changes due to the political significance of such changes

- decisions on public spending are made on the need for public services, which may be negatively affected by cuts to government spending

- fiscal decisions have an impact on the government's budget position, and the size of the National Debt

- other influences on consumer spending and investment will impact how effective fiscal policy is (eg. confidence)

- fiscal policy is usually only set once or twice a year, so it's not as flexible as monetary policy and can't be changed as easily

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EVALUATING SUPPLY-SIDE POLICIES

- long-run supply-side policies take a long time to have an impact (eg. changes to the education system may take years to affect the economic output of the workforce)

- most long-run supply-side policies are expensive to implement and have a negative effect on the government's budget position (eg. spending on infrastructure)

- many supply-side policies are looking to improve things that the government are already trying to do, meaning that their impacts are fairly small

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INCREASING ECONOMIC GROWTH THROUGH INJECTIONS AND

- to increase injections, the government can:

  • increase government spending
  • increase investment by reducing interest rates or corporation tax
  • increase exports by weakening the pound

- to decrease withdrawals, the government can:

  • reduce taxation
  • reduce saving by reducing interest rates
  • reduce imports by weakening the pound
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REDUCING ECONOMIC GROWTH THROUGH INJECTIONS AND WI

- to reduce injections, the government can:

  • reduce government spending
  • decrease investment by increasing interest rates
  • decrease exports by strengthening the pound

- to increase withdrawals, the government can:

  • increase taxation
  • increase savings by increasing interest rates
  • increase imports by strengthening the pound
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DEFINITIONS

- investment is the purchase of capital goods by a business that are then used to produce goods and services and generate a profit in the future

- consumer confidence is how optimistic individuals are about their future financial prospects, which is heavily influenced by their view of the state of the economy currently

- business confidence is how optimistic and how certain businesses are about their future profit prospects, based on their belief about the future state of the economy

- interest rates are the cost of borrowing expressed as a percentage of the amount borrowed, and the reward to savers expressed as a percentage of the amount saved

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THE DETERMINANTS OF INVESTMENT

- interest rates:

  • an increase in interest rates will mean that investment will fall because there's less incentive for the business to spend as profits will be less due to increased costs of borrowing
  • if the business already had existing loans, they may also be required to pay additional interest, meaning that they would have less spare money to spend on investment
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THE USE OF INDICATORS IN THE ECONOMIC CYCLE

- in a depression:

  • fall in GDP
  • fall in inflation
  • increased unemployment
  • reduced investment

- in a recovery:

  • growth in GDP
  • low controlled inflation
  • reduced unemployment
  • increased investment
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