Macro - Economic Growth

National economic performance
Based on different criteria - how much is being produced - more producde = better economic performance- resources fully utilised if so is max output achieved
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Other criteria
- Rate of the rise of prices = if its high = disrupt the economy - Must live within its means: long period of time the value of what it buys from other economies must roughly equal what it sells
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Economic Growth
Rate of change of output
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What is it?
Desirable Periods when the economy fails to grow at all – output shrinks in a recession Leads to increase unemployment and poverty Boom = period where the economy is doing well – economic growth above its long run average
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Allows output to be compared between countries over time
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1. Represents a waste of scarce resources 2. Output higher if the unemployed where employed 3. Leads to poverty – those out of work 4. Indicator of poor national economic performances
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Fast growing economies
low unemployment Need more output of goods and services Technological change allows an economy = produce more = fewer workers Negative growth = recession = firms will lay off workers
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Increase in average price in an economy Low is better than high = adverse effects Rise in prices = fall in savings Disrupts the knowledge of prices in a market 5% limit Deflation = falling prices – make it more difficult or a country to grow GDP
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Therefore deflation and __________ are linked.
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The current balance
Household: spends more than it earns = debt Must repay that debt Failure to do so may lead to seizure of assets by bailiffs and being banned from future borrowing Applies to nations as well – nations spends on foreign goods and services = value of m
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Value of imports > greater than exports
must be financed Can be done through borrowing or using saving held abroad Exports larger than imports = current account surplus Vice versa = current account deficit Deficits = problem for foreign banks = lender refuse to lend money
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How does this affect a country
→ Countries have to restore confidence – involve cutting domestic spending = less demand for imports → This may also lead to reduced economic growth and rising unemployment → Current account position of a country = important factor of performance
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Spending on consumer goods and services over a period of time Ways of classifying consumption: spending on goods or services Spending on durable goods or non-durable goods
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Durable goods
– good which continue to provide a stream of services over a period of time
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Non - durable goods
goosds or service, which are used up immediately or over a short period of time
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What are savings?
→ Not spent out of income → Savings may take the form of increasing stock of cash/increase in money/ form of stocks and shares = DISPOSABLE INCOME
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What is the relationship called between consumpution how much a household consumes?
Consumption function
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Determination of consumption
= disposable income
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Wage rise = ___________ consumption
a rise in consumption
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Rise measured using
Marginal propensity to consume (MPC)
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(change in consumption (C))/(change income (Y))
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Average Propensity to consume
): measures the average amount spends on C out of total Y: (Consumption (C))/(Income (Y))
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When APC less than 1 consumers will....
start to save part of their earning
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Theory orgin
John Maynard Keynes devised the above theory Founder of modern macroeconomics Keynesians: suggested incomes raise – households would prefer to save more Higher income households – save a larger proportion of income -
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Other determinants of consumption
Households rarely finance expenditure on non durables (e.g. food) by borrowing. Much of money to buy durables (e.g. cars) comes from credit finance. Increase interest rates = prices of goods has increased. Household reduce demand for durables
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More determinants
Many households have borrowed money to buy houses (e.g. mortgages) – directly cut spending = discourage households from borrowing money Rise interest rate = reduce stock value and value of household wealth = fall in consumption
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Consumer confidence
Purchases of durables affected by consumer confidence Detoriate during a recession May worry that banks will refuse to lend them money Increases during a boom
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Wealth effects
Wealth of a household = made up of two parts Physical wealth: e.g. house/cars Monetary wealth: compromised of items e.g. cash/money If wealth increases consumption = increases= wealth EFFECT
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How can wealth of a household change?
A change in the price of houses – decrease consumers can increasing spending A change in value of stocks and shares: households react to an increase in real value of household’s portfolio of securities - selling part of portfolio= spending the procee
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Avaliabilty of credit
Rate of interest determines price of credit Gov have often imposed restrictions on credit Imposed maximum repayment periods and minimum deposits Restrictions abolished = households increase debt and spend more
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raise in general level of prices
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2 effects on consumption
1st = households expect prices =higher in the future = tempted to bring forward purchases 2nd: outweighed by effect of inflation on wealth Rising inflation tend to erode real value of money Household react = restore real value of wealth save more
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The consumption of household
Young and old = spend a higher proportion of their income Young = spend all their income = move in to debt to finances homes Middle age == cost of homemaking declines More income available = household choose to build up stocks/savings for retiremen
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The determinants of saving
Factors the affect consumption also affect savings Savings function: links with income/wealth/inflation/rate of interest of the population with level of saving
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Average propensity to save (the proportion of a total income which is saved (s/y) in western countries
Western European countries = incomes less important in determining saving than it is determining consumption
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Marginal propensity to save (the proportion of a change in income, which is saved (%change in S/ %change in Y):
equally unstable for these reasons
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: flow of concept which takes place over a period of time Added to stocks of savings fixed at a point in time Households stock of savings – accumulation of past saving – saving function explains relationship between flow of savings and its determinan
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addition to the capital stock of the economy – factories, machines, office used to produce other goods and services Investment, are both by public and private sector Public sector investment – constrained by complex political considerations
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Gross investement and net investement
different Value of capital stock = depreciates over time wears out ad is used up = depreciation Gross investment: measures investment before depreciation Net investment: gross investment less value of depreciation
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Physical Capital
investment in factories/ investment component in aggregate demand
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Human Capital
investment in education and training of workers
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Rate of Interest
Some investment = financed by firms by borrowing money from banks Interest paid on a loan = then part of cost of an investment project Higher rate of interest = lower profit made from all other things equal
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in terms of investement
Some point t= interest rates will be so high that investment = unprofitable Firms = invest less Some investment = financed by retained profit = savings that firms keep = do not distribute to owners
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Higher rate of interest = banks and money markets offer on savings = more attractive it is for firms to save rather than invest in physical capital Lower rate of interest = greater incentive for firms to run down their savings = use to buy investeme
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Rate of economic growth
accelerator theory Firms will invest to replace capital – e.g. machines that have worn out Economy = expand= firms need to increase investment Economy = shrinking (recession) = firms will not replace all their investment = lower output = less capital
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Accelerator theory
investment is linked to change in output or income in the economy
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= It = a (yt – yt-1) = It = investment in a time period (yt – yt-1) - change in real income during year t A = accelerator coefficient = capital – output ratio
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Capital output ration
amount of capital needed in an economy = produce a given quantity of goods
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Private sector firms = need to make a profit Have to be able to sell products made from an investment Have to keep their cost per unit lower than selling price Increase in costs = reduce profitability or rate of return on investment
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Costs and predictions of fluctuating costs over a life time = important to firms considering whether or not to invest
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Business expectation and confidence
Firms expect sales to increase = more likely to invest in new capital equipment Boom – investment likely to rise Keynes = ‘animal spirits’ – describe mood of manager and owners of firms
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Argued that ‘animal spirits’ or confidence cannot be easily measured If firms = confident = investment will increase sufficiently to raise income and output in the whole economy
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The World Economy
If it is booming: demand for exports – increase Rise in domestic investment = increase sales and increase willingness to investment Vice versa
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Acess to credit
Some investment financed through borrowing = amount borrowed varies After a financial crisis – banks = more rise averse
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What affects access to credit
= Less willing to give loans = feared firms would not be able to pay the money back with interest Firms = may want to borrow money to buy capital equipment = turned down by banks
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Retained profit
70% industrial an commercial investment in UK = financed from retained profit Profit = kept back by firms not distributed to shareholders Small firms do not invest = interest lost from lending out
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Firms can be risk averse = not wanting to borrow money = investment fails to make a profit
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The influence of gov and regualtions
Governments can influence investment across the economy and in particular sector Cutting tax on profits (cooperation tax) = increase investment Raises the rate of return profitability
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Governments can target cut in profits ta better by allowing any investment made by firms to be offset against the profits tax they pay Government can influence investment by guaranteeing loans made by banks to firms for investment
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Firms = fail to pay back money = government pays the bank instead Encourages banks to lend money on higher risk projects Regulations can affect investment Some economists = argue high regulated economies discourage investment
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How do regualtion affect investement
Regulation can also directly prevent a firm investing in a project because = not permitted by regulation
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Measure of NI
National income measure the size of an economy Key measure of national income: GDP Total market value of all goods and services produced over a period of time Measured at market prices = includes indirect taxes like VAT
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Indirect taxes?
Indirect taxes not part of the output of the economy – measure inflates the actual value of national income
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GVA: Gross value added at basic prices
This is GDP minus indirect taxes plus subsidies on goods Indirect taxes minus subsidies = basic price adjustment
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GNP: Gross National Product at market prices
Market value of good and services produced over a period of time through labour property supplied by citizens of a country both domestically and overseas
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GNI: Gross National Income at market prices
Value of the goods and service produced by a country over a period if time plus net overseas interest payment and dividends
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What do these measure
Similar measures of domestic output of the country Net national income at market prices: Each year = existing capital stock/physical wealth of the country depreciates in value because of use Like depreciation on a car = gets older = individuals run
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Real = data must be adjusted for inflation over the period
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Nominal = measuring data at the prices of the day
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Real value of NI
volume of national income = Basket of goods bought with a given amount of money Value of national income = measures monetary cost of the basket of goods and services at a given level of prices Value equal to volume x current price level
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Total and per capita
Compares national income per person or per head or per capita = Divided national income by size of population
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Transfer Payments
Not all types of income are included in the final calculation of national income Some incomes = received without any corresponding output in economy Government pays NI and social security benefits to individuals = recipients produce nothing in return
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Why is NI measured
Measure of output, expenditure and income of an economy Used in different ways: → Academic economists use them to test hypotheses and build models of the economy = increases our understanding of how an economy works
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→ Government, firms and economists = use figures to forecast changes in economy = forecasts help govs plan for the futures → NI = used to make comparisons over time and between countries → Used to make judgment about economic welfare
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The accuracy of NI statistics
Statistical inaccuracies: NI statistics calculated from millions of different return to the gov Mistakes
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Mistakes made
Mistakes are made: return is inaccurate or simply not completed The hidden economy: Taxes such as VAT, income tax and NI contributions and gov regulations= impose a burden on workers and businesses Some = tempted to evade taxes (black economies)
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Home produced services
Poorest developing countries = GDP less than £100 Impossible to survive if this = true value of output in the economy Large part of production = agricultural sector = not traded therefore does not appear in NI statistics
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Public sector
1. Valuing the output of much of the public sector = difficult not bought and sold 2. Valuing non- marketed output 3. NI accounts will shows a fall in output) e.g. teachers
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Tend to increase over time = increase in NI over period doesn’t indicate an increase in goods and service produced in the economy Rate of NI measured in money terms = greater than increase in price = increase in output Consider real and nominal chan
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Accuracy and presentation of statistic
NI statistics = inaccurate and therefore impossible to give a precise figure for the change in income over time Change in real income over time = affected by inflation rate Method of calculating NI and rate of inflation = change over time
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Changes in population
NI statistics = often used to compare living standards over time Essential to compare NI per capita
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Quality of goods and services
May improve over time = advance in technology = may fall in price NI shows fall in price by a fall in NI wrongly implying that living standards had fallen Pay across the economy tends to increase in line with economic growth
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Increased pay = reflected in both higher nominal and real NI = may well be not extra goods and service produced Defence and related expenditures: GDP of UK = higher during WW2 Difficult to argue = people enjoyed a high SOL during war
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Proportion of NI devoted to defence = taken into account when considering SOL of population
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consumption and investement
Possible to increases SOL today = reducing investment and increasing consumption Reducing investment – likely to reduce SOL = from what they might’ve been in the future Externalities: NI = takes no account of externalities
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Other cards in this set

Card 2


Other criteria


- Rate of the rise of prices = if its high = disrupt the economy - Must live within its means: long period of time the value of what it buys from other economies must roughly equal what it sells

Card 3


Economic Growth


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Card 4


What is it?


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