F585 Macroeconomic Performance

Part 1 of F585 The Global Economy

Short Run Growth
A Rise in AD => Increase in GDP
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Long Run Growth
Increase in economy's productive capacity
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Benefits of Growth
Increase D(L)=>lower n, Increase Wages=>increase SoL, I in tech, LREG, increase X=>SREG
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Costs of Growth
Income inequality, (up) Stress (down) Productivity, as (up) wages and responsibility
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Output Gaps
Difference between actual and potential growth
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Positive output gap
actual > potential
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Negative output gap
actual < potential
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What is Boom
GDP growth is rising quickly, AD high, n is low, inflation is rising
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What is recession
negative growth for 2 consecutive quarters
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What is Recovery
Growth goes from negative to positive, towards boom
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What causes Flux in economic cycle?
Demand Side Shocks (Change in AD) & Supply side shocks (Change in AS)
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Causes of SR EG
increase AD (C/I/G/(X-M) ), Economic Cycle, Multiplier and accelerator effects
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Causes of LR EG
Changes in quantity or quality of resources
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How to increase quantity of resources
Labour; increase Size of LF, increase participation rate, increase working age. Capital; capital accumulation
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How to increase quality of resources
labour; increase productivity, Capital; increase capital productivity
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Multiplier Effect
Inital J/W in CFY => further rounds of income, output, C. Hence greater final change in GDP
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Determinants of Multiplier
1/(1-MPC) Greater the MPC, the greater the multiplier
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Accelerator Effect
Level of I depends of rate of change in GDP, helps explain why I is volatile, minimises role of other factors affecting business decisions
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Impact of Multiplier and Accelerator at the end of Recession
Firms increase I, multiplier => increases rate of change in GDP, hence accelerator leads to increase I, leading to growth and recovery
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Impact of Multiplier and Accelerator at the height of Boom
rate of change in GDP falls, negative accelerator, fall in I, negatvie multiplier, leads to recession
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Impact of stock on slowdown
low expectations => fall in stock, so less I=> negative mulitplier. Fall in Output, n increases, leads to recession
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Impact of Stock during Recovery
high expectations lead to increase Stock, increase I, Multiplier. Output increase and n falls, hence leads to boom
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Consequences of EG on n
As D(L) is derived, employment anf GDP are linked proportionally. Depends on type of n and nature of EG. Fricitonal & Structual n not solved by EG, Cyclical n solved by EG
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Consequences of EG on Inflation
SR: Demand Pull Inflation if no increase in AS. LR: Reduction in inflationary pressure. If SREG=LREG, there is non inflationary GDP growth
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Consequences of EG on BoP
SR: increase Ad=>increase D(M)=> Increase C/A deficit. LR: increase productivity, new tech => Increase of International comp, (X-M) improves.
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Thirwall's Law
rate of growth needed for stable BoP = rate of growth of X / YED of I
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Budget Position
Deficit= G>T (Paid for by PSNB). Surplus= G
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Consequences of EG on Tax
In boom; Tax Revenue increase(without change in tax rates) Due to higher Economic activity, (increases in output/ employment/ C). Recession is opposite
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Consequences of EG on G
Boom: fall in G due to high activity hences U/E benefits and Means Tested Benefits fall
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Economic Stability
Absence of volatility in the macroeconomic indicators. Allows other goals to be achieved, as certainty and confidence increase (I encouraged and C rises from stable EG)
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Policies to encourage stability
Fiscal Stabilisers: Floating FX rate, flexible labour market; MP
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How do Fiscal Stabilisers encourage Stability
Shock Absorber; fiscal drag during boom; fiscal boost during recession, demand side shocks stabilised by stabilisers built into tax/benefit system
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How do Floating FX rates encourage Stability
similar to automatic stabilisers but effect (X-M), -ve shock leads to depreciation, fall in X prices improving (X-M). opp for positive shock
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How does a Flex LM encourage Stability
Demand side shock => fall in D for products, flex allows change in L to match change in D to stop recession
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How does MP encourage Stability
SR stability maintained by changing MP, (small changes in interest rates and money supply)
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Constraints of Stability policies
Globalisation; increased economic shocks, harder to achieve stability due to interdependance
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What is Fiscal Policy
Using G & T to influence level of AD
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Contractionary Fiscal Policy is…
increase T and reduce G =>Budget Surplus => Net leakages and fall in AD
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Expansionary Fiscal Policy is…
Increase G and reduce T => Budget Deficit => net injection and AD rises
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Uses of Fiscal Policy include;
Managing AD; Influencing AD to tackle market failure; Redistribute Incomr (progressive tax and benefits); Pay for public goods
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What are Automatic Stabilisers?
G & T change automatically due to changes in economic activity
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What is discretionary fiscal policy?
When the government manipulate G & T
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Problems of fiscal policy?
Disincentives of Tax cuts (rise T => discentivises work); Side effects on public spending (Low G low inflation can cause MF); Poor information=>wrong decisions; Time Lags; Budget deficits=>Crowding out; effect on C,I,X,M; policy trade off
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What is crowding out?
when increased G => reduction in size of private sector
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Monetary Policy is…
using interest rates, exchange rates and money supply to influence AD
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What is the price stability target
2% based on price index
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What is contractionary MP
high interest rate, restrict money supply and strong exchange rate
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What is expansionary MP
low interest rate, money supply expanded, weak exchange rate
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What is QE
When Gov/Central Bank increase money supply to boost AD, by creating money and using to buy assets owned by financial institutions. Banks spend/lend this money
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When is QE used
used if inflation is too low or negative, and base rate is as low as possible
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Issues with MP
Transparency (decisions understood and communicated with all economy); Expectation (behaviours change as expectations of meeting targets change); Flexibility (reliability on MP to control inflation is bad); Credibility; time lag; opp cost
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Aims of Supply side policy (SSP)
Increase productivity, incentives and efficiency
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Types of SSP
Labour market; product market; financial market; enterprise
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Labour Market based SSP are…
Done by increasing quality and quantity of labour. Inc; increase skills by training and edu; increase mobility of L, remove barriers that stop wage E; flexible working practices.
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Product Market based SSP are…
encourage Private sector firms and promote competition by; privatisation;deregulation; tax relief to increase I
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Finance market based SSP are
increase access to finance for I, by Alternative investment market (AIM) allows firms not ready to be list to raise share capital
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Enterprise based SSP
encourage enterprise by; low corp tax; reduced business reg; patent law
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Benefits of SSP
Increase Trend growth rate, causes LREG
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Costs of SSP
Time lag; equitability of LM policies
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International Competitiveness (IC) is…
the ability of a nation to successfully compete overseas and sustain improvements in living standards
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IC is measured by…
Price Competitiveness; non price competitiveness; ability to attract FDI
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Factors that influence IC are…
ULC’s; Labour flexibility; labour skills; tax regimes; innovation; infrastructure; regulation; economic stability.
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Policies to improve IC
SSPs like; G on infrastructure; tax incentives on I; deregulation; G on education
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Issues with Policies to improve IC
Cost/opp cost; no guarantee it will work; time lag; targeted policies; relativity of policies to other economies
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Macro Trends: Economic Cycle
Boom 2003 to Q1 2008; Recession Q1 2008 to Q3 2009; Recovery Q1 2010 to Now
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Macro Trends; Inflation
Between 2% and 5% 06-13; fall to 0% 13 to dec 14; around 0% dec 14 to oct 15; slow increase oct 15 to now
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Macro Trends: Output Gaps
Negative 08 to Now, closing between Q3 2011 to Now
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Macro Trends: Labour Productivity
Lowest of all big economies except for Japan. Due to; low capital I; Banking crisis stopped lending; slow rates of innovation; skill shortages;low market competition; low Ad; High spare capacity
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Macro Trends; Unemployment
Fall in recent years; Problem:-Reducing long term structurally unemployment; all age groups falling, 18-49 falling fastest, rise of zero hours contracts from 0.75% to 2.5% from 2008 to Now
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Macro Trends: Economic Inactivity
Falling since 2011
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Macro Trends: Trade Balance
Around -2% of GDP since 2001
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Macro Trends: Current Account Balance
FDI only positive component of C/A since 2009 until 2015 where FDI=-0.2%. FDI falling since 2009
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Macro Trends: Interest Rate
0.5% since 2009
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Macro Trends: Effective Mortgage Rate
08-09 almost 6% to around 3.5% with Base Rate fall. Since 2009 around 3.5% to 3% now.
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Other cards in this set

Card 2


Long Run Growth


Increase in economy's productive capacity

Card 3


Benefits of Growth


Preview of the front of card 3

Card 4


Costs of Growth


Preview of the front of card 4

Card 5


Output Gaps


Preview of the front of card 5
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