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Chapter 1: Macroeconomics

Demand for goods and services are unlimited, but supply of goods is limited.

Can increase the economy's ability to produce goods through supply-side policies and initiatives., Investment in capital goods, Research and Development, Innovation, Skills, Education, Training, Competition, Lower income tax, Population Growth

Actual and trend output

When actual goes above trend, there is a positive output gap. When it goes below there is a negative output gap

Recession when actual output is decreasing, recovery when increasing but still under trend, boom when increasing and above trend.

Positive output gap = Falling unemployment, Rising inflation

Negative output gap = Rising unemployment, falling inflation

Circular flow of income

Households - Expenciture and Factors of production - Firms

Firms - Incomes and Goods & services - Households

Savings out, investment in

Equations -, Withdrawals (W) = Savings (S) + Government Takes (T) + Imports (M), Injections (J) = Investment (I) + Government spending (G) + Exports (X)


Fiscal Policy - effects TAXES and GOV SPENDING

Monetary Policy - effects INTEREST RATES

Chapter 2: Economic Growth

National output=National expenditure + National Income

GDP + NPIFA (Net property income form abroad) = GNP

Domestic economy, use GDP. Domestic and overseas assets, use GNP

A real measurement is the nominal minus inflation.

NOMINAL sometimes known as 'money terms'

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

Long term growth can only occur if productive capacity increases, Use supply side policies and initiatives. (Increase the quantity and quality of the economy's factors of production)

Short term growth - Percentage change in REAL GDP.

Long term growth pushes a PPF out, whereas short term growth is illustrated by a movement from inside the PPF to the boundary of the PPF.

Recession exists when GDP growth is negative for atleast two consecutive quarters.

AD and AS

Governemnt controls AD through demand-side policies such as fiscal and monetary., Change in price level, MOVEMENT ALONG LRAS curve, Change in C+I+G+(X-M) leads to a SHIFT in LRAS curve

Governemnt and firms control AS through supply side policies and initiatives, Shift in AD means movement along SRAS. If AD moves out, positive output gap + inflation. If AD moves in, negative output gap + deflation

Chapter 3: Unemployment

Defined as someone of the working age, out of work and has actively seeked a job within the past 4 weeks

Unemployment RATE is the percantage of the working age population unemployed

LEVEL of unemployment is the total number of people of working age unemployed

CYCLICAL unemployment occurs when there is a negative output gap because AD is too low

Cured with demand-side policies

STRUCTURAL unemployment exists when the structure of the economy changes and the decline in old industries creates a mismatch between the workers with outmoded skills looking for jobs and the vacancies available in new industries

Cured by offering training in new skills and education so that a new industry can be learnt by the worker. (This is a supply-side policy)

FRICTIONAL unemployment is when a worker is 'in between jobs', spending time looking for, or moving between jobs.

SEASONAL unemployment results from regular fluctuations in weather conditions (therefore demand at that time) eg. Tourism or agriculture

Unemployment figures for a certain time period are usually seasonally adjusted

CLASSICAL unemployment occurs when the real wage is above the labour market equilibrium

Demand will not be equal to supply, caused by minimum wages or union pressure

Chapter 4: Inflation

Defined as a genral rise in the price level of over a certain period of time.

DEMAND PULL inflation occurs when AD rises above trend output so firms respond by raising prices

COST PUSH inflation is when the cost of production for firms increases so they must increase their prices

Inflation is a problem because:

1. A fair distribution of income can not be achieved

2. Redistributes away from savers and towards borrowers as savers are less inclined to save as their money is becoming worth less.

3. Makes that country less competitive as prices are higher.

4. Creates uncertainty so businesses become less confident.

Demand pull inflation can be cured with fiscal and monetary policies. Cost push can be cured with supply side policies that raise productivity

Fiscal policy tightened to reduce governemnt spending and increase taxation

Monetary policy tightened to increase interest rates

Deflation is a sustained reduction in the price level. The figure must be negative for deflation, if the number is positive but getting lower, it is still inflation at a lower rate.

One cause would be a fall in AD so a high level of spare capacity.

Deflation can be bad due to:, 1. Nominal income drops, debt payments remain constant, 2. Consumers defer their purchases leading to a deflationary spiral., 3. Firms unwilling to hold stocks as they lose value.

Chapter 5: The Current Account

THE BALANCE OF PAYMENTS is a record of transactions between one country and the rest of the world.

Current account measures trade in goos and services.

Capital account measures activity in borrowing and lending.

Exports of goods and services - Imports of goods and services = Balance in trade of goos and services.

+/- Net investment inflows +/- Net transfers = Current account balance

Net investment inflows refers to interest, profits and dividends received from assets abroad. Net transfers refers to things such as foreign aid and payments to institutions such as the IMF, World Bank, EU and NATO

Factors affecting the current account:

AD grows, incomes rise. This means we can spend more freely on imports of goods and services from abroad. Not only from households, but from firms for raw materials, etc.

Weakness of the supply side, low productivity, less competitive.

Rate of inflation could be persistently high leading to a high price of exports.

Success of the countries international investments.

The Exchange Rate is defined as the price of one currency expressed in the terms of another currency

SPICED: Strong Pound, Imports Cheap, Exports Dear

WPIDEC: Weak Pound, Imports Dear, Exports Cheap

A currency is stronger, or has appreciated, if you can 'buy' more of another currency for less of your own currency.

Pound depreciates., Price of UK exports falls, Quantity of UK exports rises, Price of UK imports rises, Quantity of UK imports falls

Currency DEPRECIATES: Growth and inflation rise, Unemployment falls. CURRENT ACCOUNT IMPROVES