Macro-economics - How the economy works

Inflation
1. Problems
  1. Hyperinflation
    1. Inflation rates increase by 1000+% per annum
2. Measured with the Consumer Price Index (CPI)
3. Best inflation rate is about 2-3% per annum
4. The rise in the general price level
Unemployment
1. Measured with
  1. Claimont Count
    1. Measures number of people claiming Job Seekers Allowance (JSA)
  2. Labour Force Survey
    1. Survey of a sample of households, counting people as unemployed if they are actively seeking work but don't have a job
2. Types and causes of unemployment
  1. Voluntary
    1. People choose not to work
  2. Seasonal
    1. Types of workers not needed at certain times of the year
  3. Frictional
    1. Workers moving between jobs
  4. Structural
    1. Long-term changes in the structural industry. Workers will have wrong skills to do certain jobs
  5. Technological
    1. Capital takes the place of labour. Workers lose their jobs to robots
  6. Cyclical
    1. Fall in total (aggregate) demand in the economy
3. Problems
  1. Labour resources wasted
  2. Lower living standards
  3. Excluded workers
  4. Costs to taxpayers
  5. Budget defecit
  6. Regional problems
Government Objectives
1. Economic Growth
  1. Growth of the country's output over time
    1. Value of output = Value of incomes for workers
  2. Government want to achieve steady rate of growth
    1. Avoid cyclical changes in GDP
  3. Output measured as GDP
    1. The value of all goods and services produced within the country in a year
  4. GDP per Capita
    1. GDP Divided by the population
    2. Average output (income) which each person in the country has
    3. If GDP grows faster than the population growth, GDP per capita will rise
  5. Causes of economic growth
    1. Factors of production
      1. Investment
        Spending on capital goods eg. premises, machinery, equipment
        More investment means the economy has the capacity to produces more goods in the future
      2. Changes in technology
        Technical improvements means quality of capital goods increases
        Meaning a given quantity of capital can now produce more output than before
      3. A larger workforce
        Economy make produce more if there are more workers
        Maybe due to immigration or population increase
      4. Education and training
        The more educated, trained and skilled the workers are, the higher the output of the country's likely to be
      5. Natural Resources
        If a country discovers or develops natural resources, potential stimulus for economic growth eg. the middle east and their oil
      6. Government policies
        Government takes responsibility for macro-economic management for the economy
  6. Benefits of economic growth
    1. Rise in material living standards
      1. 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
    2. Rise in welfare of the population
      1. AS the capacity of the economy grows
      2. 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
    3. Rise in employment and fall in unemployment
      1. As output rises, more workers are needed to produce it
    4. Reduction in poverty
      1. 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
  7. Costs of economic growth
    1. Environmental costs
      1. More output and consumption can lead to more pollution
    2. Congestion
      1. Economic growth often concentrated in urban areas which may cause them to be overcrowded
    3. Loss of non-renewable sources
      1. Economic growth uses non-renewable sources eg. coal, oil, natural gas
    4. Lower quality of life
      1. People become materially better off but their, lifestyles may change in a bad way
    5. Inequalities of income and wealth
      1. Benefits of growth are unevenly spread, meaning some people get better off and others left behind
        The gap between rich and poor becomes wider
    6. Inflation
      1. Sometimes, the rate of economic growth is too fast for economy to respond without a rise in general price level
2. Price Stability
  1. Keeping inflation low
  2. UK Government aims for inflation rate of 2% not 0%
3. Balance imports and exports
  1. Does NOT mean value of imports = value of exports each year
4. Government policies
  1. Fiscal Policy
    1. Aimed at changing the level of total (aggregate) demand in the economy
      1. Can be done by
        Changes in taxation
        Changes in government's own spending
    2. Used if government objectives are
      1. Increase employment and economic growth
        In order to increase total (aggregate) demand
      2. Reduce imports and inflation
        In order to reduce total (aggregate) demand
  2. Interest Rate Policy
    1. Aimed at changing the level of total (aggregate) demand in the economy
      1. Can be done by
        Changes in interest rates
      2. Not operated by the government but by the Bank of England
    2. Decrease rates if government objectives are
      1. Increase employment and economic growth
        Total (aggregate) demand increases
    3. Increase rates if government objectives are
      1. Reduce inflation and reduce imports
        Total (aggregate) demand decreases
  3. Supply-side Policies
    1. Aim is to increase the economy's capacity to produce more goods and services

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	Created by Harnaam Jandoo about 11 years ago