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Macroeconomics by Mind Map: Macroeconomics
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Macroeconomics

Chapter 1: Macroeconomics

Macroeconomic Objectives

allocative efficiency/increase living standards

Balance of payments

Low inflation (2%)

Full employment

Economic growth

Output gaps

negative output gap, How it works, AD is lessened = demand for goods and services is weakened, This leads to firms employing less, incomes fall, expenditure therefore falls, can lead to a vicious spiral, Actual growth is less than trend growth, Effects, Worsens Current account, Unemployment rises as firms decide to employ less, inflation falls, falling ouput, Solutions, Monetary, expansionary, BoE lowers interest rates, encourages spending, savings fall and spendings increase, Fiscal, expansionary, Lower taxes and increases spending and quantitative easing, Injections increases and balances out with withdrawls, economy is in equalibirum when W=J

positive output gap, during p. output gap there is an increase in demand, firms increase prices to choke of excess demand, this leads to inflation, this is demand pull inflation, because of the increase in prices workers will bid for higher wages, if firm passes these higher costs of production onto consumers then this is cost-push inflation

Economic Cycle

National income, Income received from firms for factors of production produced by households, J (injections) =, I (Investment), G (Government Spending), X (Exports)

National expenditure, Money spent on goods and services produced by firms, W (Withdrawls) =, S (Savings), T (Taxes), M (imports)

If W > J, then output and income will fall and lead to a recession

Chapter 2: Economic growth

Economic Growth

E.G. is best defined as the increase in potential level of real output the economy can produce of a given period of time. (long-run)

Percentage change in GDP (Short-run)

Short run E.G. uses spare capacity in the economy, movement from F (inside frontier) to G

Long run E.G. increase total productive capacity, Movement from G to H

Supply side policies increase quantity and quality of the economy’s factors of production

This allows an economy to grow at a more rapid rate also reduces risk of accelerating inflation

More capital goods = greater long term growth

However, for an economy to grow there needs to be sufficient demand

Distinguishing between totals(/levels) and rates of change

GDP measures the level/total of national output

GDP growth measures how much real GDP has changed in a given time period

A recession exists when real GDP falls for two economics consecutive quarters

Simple AD/AS analysis and being able

Long run Aggregate supply refers to the total level of output supplied within an economy at any given price level

SRAS is the sum of all individuals firm’s supply curves

AD line is straight because output stays the same in real terms

AD line shows the normal capacity level of output in the economy

aggregate supply refers to the total level of output supplied within an economy at any given price level.

Short run supply is the total of all individual firms supply curves. As price rises firms will supply more in hope of higher profits

Change in the price levels leads to a movement along the long run aggregate demand curve i.e. straight up

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

If any of these increase/decrease the LRAS will shift out/inwards respectively

Output Gaps

An output gap will occur when the growth rate in the economy is either above or below the trend rate of growth/ long term economic growth

A negative gap is when the rate of growth is below the trend rate

A positive gap is when the rate of growth is above the trend rate, this will either decrease the deficit or increase the surplus in the balance of payments on the current account

Output gaps occur when output is greater or less than trend output. A recession or boom. A recession is a fall in real output for 2 consecutive quarters. Running below normal capacity means a fall in output and rising unemployment

Chain of reason (negative), Actual output < trend, Unemployment rising, Inflation falling, Solution, Expansionary monetary and fiscal polcies, BoE lowers interest rates (monetary), this leads to decrease in savings + increase in spendings, So J is increased balancing it with W, Economy is in equilibrium when W = J, Government lowers taxes and raises its spendings (fiscal)

Index numbers

Number in current year/ number in base year

Chapter 3: Unemployment

Definition of unemployed: is officially classed as unemployed if they are in the population of working age, out of work and actively seeking employment

not searching for work: Housewives, People in education, - claimant count and labour force survey are used to measure unemployment, - claimant count is people who eligibly passed for benefits

However, discrepancy between the 2, government holds a bit of manipulation over figures through definition of unemployed pushing figure down, - Changed from those registered at job centres to those actually collecting benefit, - 2 week time lag introduced before someone could be declared unemployed, - Anyone under 18 couldn’t register for benefits and went on training scheme, - Pressure was put on long-term unemployed to accept a place on a training scheme, - People seeking part-time employment became ineligible for benefit

Some people would even argue that it underestimates true unemployment rate, - Benefit cheats, - May not be seeking unemployment even tho benefited, - Moving between jobs

- Labour force survey (LFS) measuremen of 60000 households

Causes of Unemployment

Cyclical, Occurs when there is a negative output gap when aggregate demand is too low, When not enough demand firms will make workers redundant, During recessions unemployment inevitably rises as firms close, Can be solved with demand side policies

Structural, When sector shifts occur and there is a decline in old industry, Workers with now useless skills cannot find a job, Caused by deindustrialisation, Solutions: offer training programs to obtain new skills,example of supply side policy

Frictional, Caused when people move between jobs if earning a lot and then made redundant they wont instantly accept a new low-paid job but wait and search for an equivalently paid job, Labelled as voluntary unemployment, Could be argued that long search periods arise because of the availability of benefits and the real value should be reduced, Individual has imperfect information so will take time to search

Seasonal, Caused from regular change in weather conditions and holidays such as Christmas; higher employment ., Affects tourism agriculture and construction

Classical, When markets fail to clear, Wage price is higher than equilbrium price, usually caused by minimum wage i.e. too much union power

Solutions

Demand-Side, Solves Cyclical, Solution to negative output gap to raise aggregate demand

Supply-Side, Improving available information, cutting unemployment benefits (e increasing incentive to find a job and reducing search time), Increase Geographical mobility by government grants luring investment, infrastructure, housebuilding, Occupational mobility grants education and training, See table in revision booklet

Costs of unemployment

Loss of income for individual and skills if out of work for a long time

Government has to pay benefits and loses tax revenue

Economy loses output as a whole

Chapter 5: Current Account

Balance of payments

Capital account is a balance of lending and borrowing

If it is running a current account deficit the economy’s total spending exceeds its total income, Deficit of the current account can only be financed through a surplus of the capital account

current account composition:, X-M (of goods and services), +/- net income flows, refers to interest, profits and dividends that a country receives each year from its ownership of assets abroad, +/- net transfers, refers to such things like aid donations and payments to institutions like EU and world bank

Factors that affect it

Demand-Side, High aggregate demand, leads to rising incomes some of which is spent more imported goods, current account worsens, firms also import more raw materials

Supply-Side, there will be a deficit if there is a lack of competitiveness in a country, low productivity means high cost per unit, this leads to uncompetitiveness

Inflation, Consistently high inflation means expensive exports = worsening current account

Non-price factors, quality/design/reliability/warranty

Exchange rate

exchange rate

Definition: an exchange rate is the price of one currency expressed in therms of another

S.P.I.C.E.D./W.P.I.D.E.C., Depreciating pound, exports cost less, quantity rises, Imports cost more, quantity falls, Improves current account

value of a currency is determined by the demand for that currency and the available supply, called a floating exchange rate

Affects on macro performance, depreciation of pount shifts AD out, New node, increase in exported goods means unemployment will fall as more labour is needed to produce, higher profits and so could lead to rise in investment, more/better capital leads to an increase in productivity, lower's firms per unit cost and increase competitiveness = more exports, cycle repeats only drawback is possible inflation, increase in price of imported goods leads to inflation, More expensive to import raw materials, cost-push inflation (shift in SRAS up) (if firms pass costs onto consumers)

Improving current account

current account is partly cyclical, if AD needs reducing contractionary monetary+fiscal polcies is needed

Expenditure switching polcies, if depreciation then switch to domestic made products as cheaper

If poor competitiveness then supply-side polcies will be needed, increase productivity, increase non-price competition

place limits on number of goods coming into the country or tariffs, Protectionist policies, this is Prohibited by WTO

Lessons 7

what affects

C, Exchange rate

I, Interest rates, Unemployment, business confidence, Credit

G, debt, bailout banks, unemployment, needed fiscal stimulus

S, Interest rate

Aggregate Demand

Consumption, Personal Expenditure of households

Investment, Interest rate (negative relationship), Household expenditure on new homes, Capital buying

Government spending, salaries of civil servants

Savings

Purchase of financial product (asset)

Chapter 4: Inflation

Definition: Inflation is a general and sustained rise in overall price level over time.

Measured by changes in RPI, RPIX, CPI

RPIX (RPI – mortgage interest payments) is the one used by the government and firms

Demand pull

Aggregate demand shifts out creating a positive output gap. as component is increased, Firms increase prices to choke off excess demand, Leads to pool of unemployed workers diminishing as firms need to produce more, - They demand higher wages, and there is a tightening of the labour market to prevent loosing workers, - Leads to rising firm costs

Cost-push

Caused by increased wages (unless offset by productivity), rising raw material costs, falling exchange rate

Why it is a problem

Affects fair distribution of income as it diminishes value of fixed incomes e.g. pensioners or workers in weak bargaining postion

Redistributes away from savers towards borrowers as diminishes value of debt therefore you will have gained

Inflationary expectations rise, workers bid up wages leading to wage price spiral

If inflation rises faster than other countries it will make us less competitive

Creates uncertainty leading to loss of confidence and therefore investment decreases

Blurs price signals if prices are constantly changing and so reduces efficiency of market

Factors that affect the rate of inflation in the real world

wage growth, affected by union power, immigration, inflation expectation

immigration, increases supply easing supply side constraints

Information technology, increases productivity

Globalisation, reduces power of domestic firms raising their prices during the boom as their are alternatives

New node