Economics Econ4 AQA A* condensed notes

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The growth of modern macro-economics

       Major aims of macro economy: low inflation, low unemployment, balance of payments deficit and GDP growth.

       Free market economists believe the market is a self-adjusting mechanism whereas Keynesian economists argue intervention is needed. Free market believes unemployment is caused by too high wages which the market will sort out however if this occurs in whole economy wages fall and so does consumption decreasing demand. Keynesians argue that unemployment is a result of deficient demand which can be solved with extra government spending. The Keynesian period from 1945 to 70 involved controlling government spending to maintain high unemployment and low inflation. This theory was challenged when stagflation occurred in mid 70’s with falling output, high unemployment and a rise in inflation along with social conflict. Friedman or monetarist policies were then implemented it was believed the money supply in the economy negated the level of inflation and supply should only be increased at same rate of growth. The prime policy was inflation even at the cost of unemployment, public spending was also reduced. There was however issues with monetarists policy that even when money supply controlled inflation existed. Supply die economics was therefore used to improve the economies production potential.

       In 2008 aftermath monetary policy was used to alter interest rates along with quantitive easing and increasing spending however it we realised the growth in borrowing wasn’t sustainable.

Economic growth, the economic cycle and living standards

       Economic growth can refer to increase in production potential or rise in short term growth. A recession is when there’s 2 quarters of negative growth.

       Economic growth can be brought about by investment along with supply side policies.

       Economic cycles last between 4-12 years with fluctuations in growth. A speculative bubble can be created due to rapid growth which bursts and recession occurs, political business cycle can occur where government spends to produce growth at end of 5 year in power and demand/ supply shocks can occur at any point in the cycle. Fluctuations in economic activity can also be caused by seasonal fluctuations due to climate or new technologies becoming available like internet.

       Stabilising the economic cycle can be done with Keynesian methods of government spending but in reality interest rates are used more in UK now. Interest rate changes have to be timed perfectly to work and unexpected rises or falls can affect competiveness and long term growth.

       Economic growth leads to improved economic welfare and improvements in standards of living, this is measured by growth in real national output. Economic development is however measured by improvement in living standards, opportunities, access to resources and reduced environmental impact. Sustainable economic growth involves use of renewable energy and technologies reducing pollution.

       National income isn't the best indicator of living standards as prices and population size changes and even when GDP per capita is used things like non market goods such as

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