F585 Macroeconomic Performance

Part 1 of F585 The Global Economy

?
Short Run Growth
A Rise in AD => Increase in GDP
1 of 74
Long Run Growth
Increase in economy's productive capacity
2 of 74
Benefits of Growth
Increase D(L)=>lower n, Increase Wages=>increase SoL, I in tech, LREG, increase X=>SREG
3 of 74
Costs of Growth
Income inequality, (up) Stress (down) Productivity, as (up) wages and responsibility
4 of 74
Output Gaps
Difference between actual and potential growth
5 of 74
Positive output gap
actual > potential
6 of 74
Negative output gap
actual < potential
7 of 74
What is Boom
GDP growth is rising quickly, AD high, n is low, inflation is rising
8 of 74
What is recession
negative growth for 2 consecutive quarters
9 of 74
What is Recovery
Growth goes from negative to positive, towards boom
10 of 74
What causes Flux in economic cycle?
Demand Side Shocks (Change in AD) & Supply side shocks (Change in AS)
11 of 74
Causes of SR EG
increase AD (C/I/G/(X-M) ), Economic Cycle, Multiplier and accelerator effects
12 of 74
Causes of LR EG
Changes in quantity or quality of resources
13 of 74
How to increase quantity of resources
Labour; increase Size of LF, increase participation rate, increase working age. Capital; capital accumulation
14 of 74
How to increase quality of resources
labour; increase productivity, Capital; increase capital productivity
15 of 74
Multiplier Effect
Inital J/W in CFY => further rounds of income, output, C. Hence greater final change in GDP
16 of 74
Determinants of Multiplier
1/(1-MPC) Greater the MPC, the greater the multiplier
17 of 74
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
18 of 74
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
19 of 74
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
20 of 74
Impact of stock on slowdown
low expectations => fall in stock, so less I=> negative mulitplier. Fall in Output, n increases, leads to recession
21 of 74
Impact of Stock during Recovery
high expectations lead to increase Stock, increase I, Multiplier. Output increase and n falls, hence leads to boom
22 of 74
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
23 of 74
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
24 of 74
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.
25 of 74
Thirwall's Law
rate of growth needed for stable BoP = rate of growth of X / YED of I
26 of 74
Budget Position
Deficit= G>T (Paid for by PSNB). Surplus= G
27 of 74
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
28 of 74
Consequences of EG on G
Boom: fall in G due to high activity hences U/E benefits and Means Tested Benefits fall
29 of 74
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)
30 of 74
Policies to encourage stability
Fiscal Stabilisers: Floating FX rate, flexible labour market; MP
31 of 74
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
32 of 74
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
33 of 74
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
34 of 74
How does MP encourage Stability
SR stability maintained by changing MP, (small changes in interest rates and money supply)
35 of 74
Constraints of Stability policies
Globalisation; increased economic shocks, harder to achieve stability due to interdependance
36 of 74
What is Fiscal Policy
Using G & T to influence level of AD
37 of 74
Contractionary Fiscal Policy is…
increase T and reduce G =>Budget Surplus => Net leakages and fall in AD
38 of 74
Expansionary Fiscal Policy is…
Increase G and reduce T => Budget Deficit => net injection and AD rises
39 of 74
Uses of Fiscal Policy include;
Managing AD; Influencing AD to tackle market failure; Redistribute Incomr (progressive tax and benefits); Pay for public goods
40 of 74
What are Automatic Stabilisers?
G & T change automatically due to changes in economic activity
41 of 74
What is discretionary fiscal policy?
When the government manipulate G & T
42 of 74
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
43 of 74
What is crowding out?
when increased G => reduction in size of private sector
44 of 74
Monetary Policy is…
using interest rates, exchange rates and money supply to influence AD
45 of 74
What is the price stability target
2% based on price index
46 of 74
What is contractionary MP
high interest rate, restrict money supply and strong exchange rate
47 of 74
What is expansionary MP
low interest rate, money supply expanded, weak exchange rate
48 of 74
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
49 of 74
When is QE used
used if inflation is too low or negative, and base rate is as low as possible
50 of 74
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
51 of 74
Aims of Supply side policy (SSP)
Increase productivity, incentives and efficiency
52 of 74
Types of SSP
Labour market; product market; financial market; enterprise
53 of 74
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.
54 of 74
Product Market based SSP are…
encourage Private sector firms and promote competition by; privatisation;deregulation; tax relief to increase I
55 of 74
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
56 of 74
Enterprise based SSP
encourage enterprise by; low corp tax; reduced business reg; patent law
57 of 74
Benefits of SSP
Increase Trend growth rate, causes LREG
58 of 74
Costs of SSP
Time lag; equitability of LM policies
59 of 74
International Competitiveness (IC) is…
the ability of a nation to successfully compete overseas and sustain improvements in living standards
60 of 74
IC is measured by…
Price Competitiveness; non price competitiveness; ability to attract FDI
61 of 74
Factors that influence IC are…
ULC’s; Labour flexibility; labour skills; tax regimes; innovation; infrastructure; regulation; economic stability.
62 of 74
Policies to improve IC
SSPs like; G on infrastructure; tax incentives on I; deregulation; G on education
63 of 74
Issues with Policies to improve IC
Cost/opp cost; no guarantee it will work; time lag; targeted policies; relativity of policies to other economies
64 of 74
Macro Trends: Economic Cycle
Boom 2003 to Q1 2008; Recession Q1 2008 to Q3 2009; Recovery Q1 2010 to Now
65 of 74
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
66 of 74
Macro Trends: Output Gaps
Negative 08 to Now, closing between Q3 2011 to Now
67 of 74
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
68 of 74
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
69 of 74
Macro Trends: Economic Inactivity
Falling since 2011
70 of 74
Macro Trends: Trade Balance
Around -2% of GDP since 2001
71 of 74
Macro Trends: Current Account Balance
FDI only positive component of C/A since 2009 until 2015 where FDI=-0.2%. FDI falling since 2009
72 of 74
Macro Trends: Interest Rate
0.5% since 2009
73 of 74
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.
74 of 74

Other cards in this set

Card 2

Front

Long Run Growth

Back

Increase in economy's productive capacity

Card 3

Front

Benefits of Growth

Back

Preview of the front of card 3

Card 4

Front

Costs of Growth

Back

Preview of the front of card 4

Card 5

Front

Output Gaps

Back

Preview of the front of card 5
View more cards

Comments

No comments have yet been made

Similar Economics resources:

See all Economics resources »See all Macroeconomic indicators resources »