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Macroeconomics by Mind Map: Macroeconomics

1. Chapter 1: Macroeconomics

1.1. Macroeconomic Performance:

1.1.1. The study of the economy as a whole

1.1.2. The economy is only able to produce a certain level of goods and services Even though consumer wants are infinite Choices are made Challenge is to use resources as efficiently as possible

1.1.3. The economy grows over time: Average of 2.5% a year since 1945

1.1.4. Partly due to Supply-Side policies Investment Investing in better technology will increase the total capacity from the machine in the long run Research and Development Researching the most efficient ways will save resources and enable firms to reinvest in other areas Innovation Helping ideas to become real Training Increasing skill levels of workers will increase efficiency of production New node Lowering Income tax It incentivises people to stay in the country and also for foreigners to live in the country It also gives people more expendable income to spend on goods and services Competition Increased competiton between other countries will encourage companies to improve efficiency and/or products Immigration Increasing the number of workers in the country will increase production and also increase competition so that a better quality of workers are in work Population Growth More people; more competition for work Reduced Union Power Decreasing the power of unions to strike when they want; also minimum wage can stay reasonably low; people at work more

1.2. Conflict of Objectives:

1.2.1. When actual output deviates from trend output

1.2.2. Trend Output vs Actual Output Normal Rates of Capacity Utilisation Around 80% Capacity Utilisation Positive Output Gap When actual output exceeds trend output 'Boom' Demand for goods and services rises Use factors of production effectively Employ more workers Negative Output Gap When actual output falls below trend output 'Recession' Demand for goods and services falls Firms employ fewer people Level of expenditure falls

1.3. Circular Flow of Income

1.3.1. Actual Output is unstable

1.3.2. Why does it fluctuate? The great depression 1029 led to John Maynard Keynes to write; 'General Theory of Employment, Interest and Money'

1.3.3. Made the Circular Flow of Income Model Two agents; Firms and Households The flow of National Expenditure from Households to Firms With the flow of Goods and services being bought running opposite to expenditure The flow of National Income from Firms to Households With the flow of Factors of Production; People, running opposite to Income

1.3.4. If all income received by households is spent on consumption; as the preliminary diagram indicates, the flow is constant and in equilibrium Unfortunately, this does not happen; there are 'leakages'

1.3.5. I and S Households will save part of their incomes; withdrawals. Therefore the circuit is no longer equal: S To restore equilibrium; Firms expend income; Investment. This improves technology, efficiency. Thus injecting into the opposite side; demand: I If Savings are greater than Investment then the leakage will cause output to fall, there are many factors to cause saving to exceed investment, causing disequilibrium Before Keynes, to cease equilibrium, most economists thought that interest rates would be sufficient, but Keynes disagreed believing that the two factors had many different plans or expectations in the short run.

1.3.6. Other Factors; Government Taxes also take money out of the model Government Spending puts money back into the system through

1.4. New node

2. Chapter 2: Economic Growth

2.1. GDP

2.1.1. The total amount of goods and services produced within a country in a certain time

2.2. GNP

2.2.1. GDP plus Net profit from abroad

2.3. Real/Nominal Values

2.3.1. Nominal = The total growth of GDP in monetary terms

2.3.2. Real = Nominal GDP growth minus the rate of inflation

2.4. Definitions

2.4.1. The increase in the potential level of real output the economy can produce over a given period of time

2.4.2. Long-Term Increase in Productive Capacity of an Economy Supply-side policies and initiatives will boost growth in the long run They increase the quantity and quality of the economic factors of production

2.4.3. Short Term The Percentage change in REAL GDP It uses the spare capacity in the economy to become more productive

2.5. Productive Possibility Curves

2.5.1. If a economy's productive capacity grows the PPF will shift right

2.5.2. Long Run growth is the outward movement

2.5.3. The distance by which the PPF moves to te right is an indication of the level of investment present in the country

2.5.4. Short Run is from a point inside the PPF to on the PPF

2.6. GDP vs GDP Growth

2.6.1. GDP is the level of Real Nation Output

2.6.2. GDP Growth measures by how much the GDP level grows/shrinks from the previous quarter

2.6.3. A RECESSION occurs when GDP Growth is negative for two or more quarters

2.7. Aggregate Demand/Aggregate Supply

2.7.1. Governent control Aggregate Demand through Demand-Side policies

2.7.2. Government attempts to control Aggregate Supply by Supply-Side Policies

2.7.3. Changes to both Aggregate Demand and Aggregate Supply both will affect economic goals

2.7.4. To shift Long-Run Aggregate Supply, both AD and SRAS will need to move

2.7.5. Total Demand for goods in an economy = Consumption + Investment + Government Spending + (Exports - Imports)

2.7.6. Or C+I+G+(X-M)

2.8. Index Numbers

2.8.1. Some figures, due to differences in size are difficult to compare

2.8.2. So to compare a set of figures, indexes are used

2.8.3. Number in the current year / Number in base year x100

3. Chapter 3: Unemployment

3.1. Definition

3.1.1. Someone who is out of work, within the population of working age and actively looking for work

3.1.2. People who are economically inactive are not counted

3.2. Measurement

3.2.1. Claimant count Number of people who have passed the governments tests and claiming benefits Flaws Government Re-definitions Benefit Cheats Those unemployed but not looking for employment People between jobs not classed

3.2.2. Labour Force Survey

3.3. Causes

3.3.1. Cyclical Demand-deficit unemployment Negative output gap Aggregate demand is low; when it dips below the underlying trend growth No demand for work; people made redundant

3.3.2. Classical When the real wage is above the market equilibrium. Demand for labour not equal to supply of labour Caused by minmum wage and/or union pressure

3.3.3. Structural The decline in old industries creates a mismatch between workers skills and the skills needed for the jobs e.g. 1980's deindustrialisation Workers lack necessary skills to move into new sectors

3.3.4. Frictional When people are 'in between' jobs Due to delays or time lags

3.3.5. Seasonal Results from fluctuations in weather conditions or demand e.g. Agriculture, Tourism, Construction Most unemployment statistics are seasonally adjusted

3.4. Reducing Unemployment

3.4.1. Demand-Side Policies Purely for cyclical unempoyment Loosen Fiscal Policy Increase Government Expenditure Less Taxation

3.4.2. Supply-Side Policies Structural Increase Mobility of workforce Frictional Improve Information available More job centres Classical Reduce Union Power Reduce Minimum Wage

4. Chapter 4: Inflation

4.1. A general and sustained rise in the general price level over time

4.2. A devaluing of the purchasing power of money

4.3. Measured by CPI and RPI

4.4. Measuring

4.4.1. Retail Price Index

4.4.2. Retail Price Index Excluding Mortgge Interest Payments (RPIX)

4.4.3. Consumer Price Index 87% of the goods in the RPI But also cars, computer hardware, air fares are measured

4.4.4. All take a 'basket of goods' and measure the price with which each one rises per year

4.4.5. RPIX is the common statistic used to increase government benefits and for companies to use

4.5. Causes

4.5.1. Demand-Pull When the rate of growth of aggregate demand exceeds the trend rate of growth Positive output gap Too much demand for goods relative to the potential capacity of firms to produce them Firms will raise prices to choke off excess demand and raise profits

4.5.2. Cost-Push Rising production costs in firms causes prices to increase Higher wages/Raw material cost/Falling Exchange rate (due to import expense) If coupled with a time of little or no growth, stagflation occurs

4.6. Problems

4.6.1. Has a impact on some social groups whose incomes are fixed.. No fair distribution of income

4.6.2. Money is redistributed from savers to borrowers; debt is payed by nominal terms so debt will diminish in real terms

4.6.3. If inflationary expectations rise, higher wages called for; leading to cost-push inflation

4.6.4. Price of exports will rise; UK will become less competitive comparatively to other coutries

4.6.5. Inflation could lead to less investment as business' uncertainty to predict future costs

4.6.6. Inflation causes costs for example people have to adjust to the changing prices/firms have to change price tags

4.7. Stopping Inflation

4.7.1. Demand-Pull: Slow the level of economic growth

4.7.2. Cost-Push: Supply-Side policies can reduce costs by raising production and productivity

4.7.3. Interest Rates can affect inflation

5. Chapter 5: The Current Account

5.1. The Balance of Payments

5.1.1. A record of transactions between one country and the rest of the world

5.1.2. Current Account Trade in goods (visibles) and services (invisibles)

5.1.3. Capital Account Borrowing, Lending, Assets and Dividends

5.1.4. Constituents Balance of Trade in Goods + Exports of Goods - Imports of Goods Balance of trade in Services + Exports of Services - Imports of Services Current Account Balance +/- Net Income Inflow +/- Net Transfers

5.1.5. Factors Affecting Current Account Balance Short Term Demand-Side Long Run Supply-Side AD growing: Incomes increasing, Property Value up, Imports increase As Actual Growth Increases Domestic Firms Import more Lack of Competitiveness between countries Supply Side Low Productivity Loss of comparative advantage Leading to deindustrialisation as domestic firms experience less demand Rate of Inflation Export prices rise in comparison Current Account worsening Non-Price Factors Quality, Design, Reliability.. Assets from abroad Exchange Rate

5.1.6. Exchange Rate The price for one unit of one currency in terms of another e.g. $2:£1 Value of a currency is determined by the demand for it relative to supply SPICED Strong Pound Imports Cheap Exports Dear WPIDEC Weak Pound Imports Dear Exports Cheap Both can be good and bad for the UK Strong Pound Weak Pound

5.1.7. Current Account and Macroeconomic Performmance Exchange Rate (all other things being equal) can effect the level of AD If a depreciation; Exports boost Imports decrease: AD shifts right due to a change in (X-M) Increase in growth due to Depreciation Firms have higher profits Higher levels of Investment Productivity raised Increased inflation

5.1.8. Economy's External Performance Depreciation Growth Up Unemployment Down Inflation Up Current Account Improves Appreciation Growth Falls Unemployment Rises Inflation Falls Current Account Worsens Current Account Deficit Reducing AD Supply Side Policies Protectionist Policies

6. Chapter 6: Aggregate Demand and Supply

6.1. Macroeconomic Performance

6.1.1. Governments attempt to control Aggregate Demand through Demand-Side Policies

6.1.2. Governments attempt to conrol Aggregate Supply through Supply-Side Policies

6.1.3. AD/AS model shows us how real life policy dilemmas can be illustrated

6.2. Aggregate Demand Curve

6.2.1. The total spending on goods and services within an economy at any given price level

6.2.2. AD = C + I + G + (X - M)

6.2.3. Inverse Relationship between the price level and real national output Positive wealth effect If prices across an economy fall, a given stock of money will be able to purchase more output If price level falls, interest rates fall Low interest rates; rise in investment Competitiveness of the Domestic Economy Relative to foreign economy's

6.2.4. Change in price level causes movement along AD curve

6.2.5. Factors causing shift in AD Consumption Consumer confidence Interest Rates The level of saving Income Investment Business Confidence Interest Rates Government Spending Government Spending Plans The state of the Output Gap Net Exports Growth in other countries The exchange rate non-price factors

6.3. Short Run Aggregate Supply Curve

6.3.1. Total level of output supplied within an economy at any given price level

6.3.2. SRAS: The level of output firms are prepared to produce at each price level

6.4. Macroeconomic Equiulibrium

6.5. Equilibrium in the Short and Long Run

6.6. Shape of the LRAS curve

6.6.1. Monetarist Perspective

6.6.2. Keynesian Perspective