Macro-economics - How the economy works

Macro-economics - How the economy works

1. Inflation

   • Problems
     • Hyperinflation
       • Inflation rates increase by 1000+% per annum
   • Measured with the Consumer Price Index (CPI)
   • Best inflation rate is about 2-3% per annum
   • The rise in the general price level

2. Unemployment

   • Measured with
     • Claimont Count
       • Measures number of people claiming Job Seekers Allowance (JSA)
     • Labour Force Survey
       • Survey of a sample of households, counting people as unemployed if they are actively seeking work but don't have a job
   • Types and causes of unemployment
     • Voluntary
       • People choose not to work
     • Seasonal
       • Types of workers not needed at certain times of the year
     • Frictional
       • Workers moving between jobs
     • Structural
       • Long-term changes in the structural industry. Workers will have wrong skills to do certain jobs
     • Technological
       • Capital takes the place of labour. Workers lose their jobs to robots
     • Cyclical
       • Fall in total (aggregate) demand in the economy
   • Problems
     • Labour resources wasted
     • Lower living standards
     • Excluded workers
     • Costs to taxpayers
     • Budget defecit
     • Regional problems

3. Government Objectives

   • Economic Growth
     • Growth of the country's output over time
       • Value of output = Value of incomes for workers
     • Government want to achieve steady rate of growth
       • Avoid cyclical changes in GDP
     • Output measured as GDP
       • The value of all goods and services produced within the country in a year
     • GDP per Capita
       • GDP Divided by the population
       • Average output (income) which each person in the country has
       • If GDP grows faster than the population growth, GDP per capita will rise
     • Causes of economic growth
       • Factors of production
         • Investment
           • Spending on capital goods eg. premises, machinery, equipment
           • More investment means the economy has the capacity to produces more goods in the future
         • Changes in technology
           • Technical improvements means quality of capital goods increases
             • Meaning a given quantity of capital can now produce more output than before
         • A larger workforce
           • Economy make produce more if there are more workers
           • Maybe due to immigration or population increase
         • Education and training
           • The more educated, trained and skilled the workers are, the higher the output of the country's likely to be
         • Natural Resources
           • If a country discovers or develops natural resources, potential stimulus for economic growth eg. the middle east and their oil
         • Government policies
           • Government takes responsibility for macro-economic management for the economy
     • Benefits of economic growth
       • Rise in material living standards
         • If GDP rises at a faster rate thanthe population, GDP per capita rises. Everyone on average has more output available to consume than before
           • People are materially better off
       • Rise in welfare of the population
         • AS the capacity of the economy grows
         • As the capacity of the economy to produce more grows, the government can devote more resources to health and education services.
           • This can increase life expectancy and a higher rate of literacy
       • Rise in employment and fall in unemployment
         • As output rises, more workers are needed to produce it
       • Reduction in poverty
         • As output and incomes rise, government can take more in taxes from higher-income groups and use revenue to raise living standards for those with lower incomes
     • Costs of economic growth
       • Environmental costs
         • More output and consumption can lead to more pollution
       • Congestion
         • Economic growth often concentrated in urban areas which may cause them to be overcrowded
       • Loss of non-renewable sources
         • Economic growth uses non-renewable sources eg. coal, oil, natural gas
       • Lower quality of life
         • People become materially better off but their, lifestyles may change in a bad way
       • Inequalities of income and wealth
         • Benefits of growth are unevenly spread, meaning some people get better off and others left behind
           • The gap between rich and poor becomes wider
       • Inflation
         • Sometimes, the rate of economic growth is too fast for economy to respond without a rise in general price level
   • Price Stability
     • Keeping inflation low
     • UK Government aims for inflation rate of 2% not 0%
   • Balance imports and exports
     • Does NOT mean value of imports = value of exports each year
   • Government policies
     • Fiscal Policy
       • Aimed at changing the level of total (aggregate) demand in the economy
         • Can be done by
           • Changes in taxation
           • Changes in government's own spending
       • Used if government objectives are
         • Increase employment and economic growth
           • In order to increase total (aggregate) demand
         • Reduce imports and inflation
           • In order to reduce total (aggregate) demand
     • Interest Rate Policy
       • Aimed at changing the level of total (aggregate) demand in the economy
         • Can be done by
           • Changes in interest rates
         • Not operated by the government but by the Bank of England
       • Decrease rates if government objectives are
         • Increase employment and economic growth
           • Total (aggregate) demand increases
       • Increase rates if government objectives are
         • Reduce inflation and reduce imports
           • Total (aggregate) demand decreases
     • Supply-side Policies
       • Aim is to increase the economy's capacity to produce more goods and services

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