1. Low Rates of Inflation/ Stable Price Levels (Causes)
1.1. Demand-PULL inflation
1.1.1. Autonomous (non-income) increase in AD components (C, I, G, (X-M))
1.1.1.1. Consumption
1.1.1.1.1. Increased Consumer optimism about future Y, economy conditions -> expect continued increase in inflation -> spend now
1.1.1.2. Investment
1.1.1.2.1. Higher expected return rates
1.1.1.3. Govt
1.1.1.4. Net export Y
1.1.1.4.1. Increasing national income of trading partners -> buy more exports -> increase export Y
1.1.2. Expansionary monetary policy of banking system (e.g. money supply increase) [COVERED IN CHPT 8]
1.1.3. Economy approaches full NT/excess AD, ALL available res nearly/fully employed, LITTLE/NO spare capacity, Firms face intense competition for res due to shortage, X increase output sufficiently to meet increased dd, GPL increases
1.1.3.1. At full NT, an increase in AD (additional spending) will only cause a rise in GPL = purely inflationary
1.2. Cost-PUSH inflation
1.2.1. General exp for Increase COP
1.2.1.1. Persistent increase in COP for reasons independent of dd -> firms respond - Increase prices -> pass to consumers - partly decrease production -> decrease SRAS -> increase GPL, decrease RNY
1.2.2. Import price push
1.2.2.1. Foreign countries infl -> increase cost of imported inputs -> increase COP -> SRAS decrease -> GPL increase
1.2.3. Increase in structural rigidities
1.2.3.1. Disallows efficient reorganisation of resources
1.2.3.1.1. Increase COP
1.2.3.2. e.g.
1.2.3.2.1. Minimum wages raised by legislation
1.2.3.2.2. increased monopoly
1.2.3.2.3. Contract agreements
1.2.4. Wage push
1.2.4.1. Trade unions' power allow cost of labour be independent of labour demand
1.2.4.1.1. Wage-price spiral
1.2.5. Currency
1.2.5.1. Depreciation
1.2.5.1.1. Increase price of imported raw mat
1.2.5.2. Appreciation
1.2.5.2.1. Decrease price of imported raw mat
1.2.6. ss-side shocks (causes stagflation)
1.2.6.1. Short run
1.2.6.1.1. Decrease FOP -> shortage -> decrease ss -> increase COP -> Decrease SRAS -> Increase GPL, Decrease output
1.2.6.1.2. e.g. natural disasters, epidemics
1.2.6.2. Long run
1.2.6.2.1. Severe loss to productive resources/change in QQT, decrease productive capacity, LRAS decrease, Increase GPL, Decrease output
1.2.7. Profits push
1.2.7.1. Monopoly power -> firms set higher prices independent of consumer dd in order to increase profits
1.2.7.1.1. Higher prices -> Increase COP -> decrease SRAS
2. Low Rates of Inflation/ Stable Price Levels (Effects)
2.1. Factors
2.1.1. Anticipated -> No severe effects
2.1.1.1. Firms
2.1.1.1.1. build infl forecast into price decisions, plan cost ahead with confidence
2.1.1.2. Workers
2.1.1.2.1. Index nominal wage to infl rate -> Xchange in RY -> protect purchasing power -> maintain mat SOL
2.1.1.3. Govt
2.1.1.3.1. Adjust taxes, pensions, benefits, increase civil servants pay according to infl rate
2.1.1.4. Unanticipated
2.1.1.4.1. Uncertain of future prices
2.1.2. Extent (Severe / Mild)
2.1.3. Extent relative to other countries
2.2. Effects on Investment
2.2.1. Severe Infl
2.2.1.1. diversion towards speculation than productive activity
2.2.1.2. Large, inordinate increase in GPL, uncertain about future input & output prices, uncertain profits / returns, decrease investment
2.2.1.3. Businesses see increasing future prices, firms tend to hoard materials & finished goods in order to increase profit
2.2.1.3.1. Increase infl pressures
2.2.1.4. More spending on non-productive wealth (precious metals, properties) for protection, decreasing investment,
2.2.1.5. Decrease Investment
2.2.1.5.1. Short run
2.2.1.5.2. Long Run
2.2.2. Mild Infl
2.2.2.1. Increase rate of return, increase investments
2.2.2.1.1. Increase confidence
2.3. Effects on Net Exports
2.3.1. BOF = BOT = Net Exports
2.3.2. Relatively higher infl rate domestically, Relatively expensive domestic G&S, decrease price competitiveness as domestic price of ouput relatively higher & if PEDx>1, decrease in export and its revenue
2.3.2.1. Increase import demand, decrease export demand, decrease net exports
2.3.2.1.1. Decrease BOP (balance of purchase)
2.3.3. If country adopt: Flexible exchange rate system
2.3.3.1. Relatively higher rate of infl, decrease external value of currency
2.4. Effects on Allocative Efficiency
2.4.1. Distort relative prices, misallocation of res to goods that doesn't reflect the actual needs of the demographic
2.4.1.1. Speculative activities/structural rigidities, Increase prices @ diff rates; does not reflect long term dd conditions, res diverted to such goods, allocative ineff
2.4.2. Examples
2.4.2.1. e.g. Increasing infl -> people buy more fixed assets (gold, property) as a hedge against infl -> Increase prices of gold, property -> Increase profits of real estate developers -> build more houses
2.4.2.2. e.g. Prices of essential good (rice, oil) depressed by govt -> Xreflect actual increase in long term dd due to population growth -> little res allocated
2.5. Effects on Welfare
2.5.1. Fixed nominal Y
2.5.1.1. Increase in nominal wages<infl rate
2.5.1.1.1. erode purchasing power
2.5.1.2. e.g. pensioners
2.5.1.3. Solution: Index social security benefits
2.5.2. Force low Y households work harder -> maintain SOL
2.5.2.1. higher stress, decrease leisure -> decrease non-mat SOL
2.6. Menu Cost of Infl
2.6.1. Cost involve -> constantly revising price list
2.7. Shoe-leather Cost of Infl
2.7.1. Time, effort -> counteract infl effects
2.8. Redistributive effects of Infl
2.8.1. Effects on fixed nominal Y receivers
2.8.1.1. Decrease purchasing power on the fixed money they receive
2.8.2. Effects on flexible Y receivers
2.8.2.1. workers
2.8.2.1.1. Increase in nominal Y >/= infl rate, increase real Y
2.8.2.2. Firms
2.8.2.2.1. Product prices > res prices, Increase in revenue > increase in cost, Increase in profits
2.8.3. Effects on savers
2.8.3.1. fixed nominal value
2.8.3.1.1. Increase GPL, Decrease real value/purchasing power of savings
2.8.3.2. e.g. saving accounts, insurance policies, annuities
2.8.4. Effects on debtors & creditors
2.8.4.1. Debtors: take loans on nominal terms, repaid @ later date
2.8.4.1.1. Investment rate < infl rate -> amt repaid is worth less in terms of purchasing power -> easier to repay debt
2.8.4.2. Creditors: receive debt payment in same amount borrowed
2.8.4.2.1. Investment rate < infl rate -> decrease in purchasing power
2.9. Benefits of a low & stable infl rate
2.9.1. Consumers
2.9.1.1. Prevent decrease in SOL
2.9.1.1.1. Trade unions negotiate increase in nominal wage >/= infl rate
2.9.1.1.2. Individual take steps to minimise effects
2.9.1.2. Interest rate > infl rate -> encourage savings
2.9.2. Producers
2.9.2.1. Increase profits
2.9.2.1.1. Firms make long terms plans
2.9.2.2. Decreased anticipated costs (e.g. menu costs)
2.9.2.3. Increase profits from net exports
2.9.3. Economy
2.9.3.1. Certainty of future prices increase investments -> increase AD
2.9.3.1.1. Economic growth
2.9.3.1.2. decrease UNNT
2.9.3.2. Infl relatively lower than other countries -> increase price competitivness -> PEDx>! -> increase X
3. Sustained Economic Growth (Definition, Measurements, Causes)
3.1. Definition: sustained increase in real national output of a country
3.1.1. sustainable growth
3.1.1.1. - rate of growth that can be maintained without creating other significant economic problems eg. depleted resources + environmental issues - for future generations
3.1.2. inclusive growth
3.1.2.1. - rate of growth sustained over a period of time - broad-based across economic sectors - creating productive employment for majority of the population - in SG: not contribute to worsened income inequality
3.1.3. measurements
3.1.3.1. real GDP = current year GDP X (base year index/current year index)
3.1.3.1.1. eg. Consumer Price Index
3.1.3.2. growth rates
3.1.3.2.1. small rates can translate to high absolute values in a country's economy
3.1.3.2.2. increases exponentially with continuous economic growth over years
3.2. Actual VS Potential Growth
3.2.1. Actual Growth
3.2.1.1. percentage annual increase in national output actually produced/eqm national income
3.2.1.2. due to AD Δ
3.2.1.2.1. AD ↑ -> firms ↑ output -> utilise ↑ unemployed resources
3.2.1.2.2. AD ↓ -> firms ↓ output -> ↑ stocks of unsold goods
3.2.1.3. due to SRAS Δ
3.2.1.3.1. COP ↓ -> SRAS ↑ -> excess output at current price level -> price ↓ -> purchasing power ↑ -> spending ↑ -> RNY ↑
3.2.2. Potential Growth
3.2.2.1. percentage annual increase in productive capacity of economy
3.2.2.1.1. outward shift in the PPC
3.2.2.2. increase LRAS
3.2.2.2.1. increase full NT level of output from YF0 to YF1 -> increasing potential EC growth -> RN output increase
3.2.3. Simultaneous Changes (Extent of Growth Rate)
3.2.3.1. Actual Growth Rate > Potential Growth Rate
3.2.3.1.1. amount of idle resources + unemployment ↓ -> excess labour demand -> inflationary pressures build up especially on wages -> real wage growth outstrips productivity growth -> unit labour costs ↑ -> erosion of export competitiveness
3.2.3.2. Actual Growth Rate < Potential Growth Rate
3.2.3.2.1. ↑ spare capacity + unemployment -> growing gap between potential and actual output
3.3. Causes of Economic Growth
3.3.1. Supply Side Factors
3.3.1.1. FOP Quantity ↑
3.3.1.1.1. 1. Labour Force ↑
3.3.1.1.2. 2. Availability of Natural Resources ↑
3.3.1.1.3. 3. Capital Stock ↑
3.3.1.2. FOP Quality ↑
3.3.1.2.1. 1. Labour Productivity ↑
3.3.1.2.2. 2. Land Productivity ↑
3.3.1.2.3. 3. Capital Efficiency ↑
3.3.1.3. Level of Tech ↑
3.3.1.3.1. improvement in machinery and management techniques
3.3.1.3.2. dependent on
3.3.1.3.3. tech advancements -> new capital investment possibilities -> greater productivity -> higher income -> changing demand patterns -> incentive for more R&D -> more tech advancements
3.3.2. Demand Side Factors
3.3.2.1. in the long run, increased consumption can incentivize firms to invest in tech -> indirectly increase productive capacity
3.3.3. Structural Factors
3.3.3.1. legal institutions provide law and order + enforce contracts between parties of economic transactions
3.3.3.1.1. increase in AD -> matches up with increase in productive capacity brought by supply side factors -> narrows gap between potential and actual output
3.3.3.1.2. protect private property rights -> incentive to work hard and accumulate wealth -> farmers can use their land as collateral to gain access to capital to finance improvements in farming methods
3.3.3.2. cultural attitudes towards work and accumulation of wealth
3.3.3.2.1. high level of social mobility based on performance and merit
3.3.3.3. political stability is conducive for economic activities
3.3.4. External Factors
3.3.4.1. international trade opening up markets for exporters to enjoy economies of scale
3.3.4.2. trading partners have fast economic growth -> exports sold from countries with large foreign trade markets will grow quickly -> more opportunity for investment and growth
4. Low Rates of Unemployment
4.1. Unemployment
4.1.1. Definition
4.1.1.1. It refers to the number of people of the legal age who are of the legal age who are willing and able to work at the going wage rate but are unable to find suitable employment.
4.1.2. Nature
4.1.2.1. Voluntary Unemployment (not counted in UNNT cos they aren't willing though able to work.
4.1.2.2. Involuntary Unemployment Unable to find jobs.
4.1.2.3. Underemployment Employed but working below their productive capacity
4.1.2.4. IMPORTANT:: Full employment Sufficient employment to produce economy's potential output.
4.1.3. Measures
4.1.3.1. Unemployment Rate = (No. Unemployed / Labour Force) x 100%
4.1.3.2. Natural Unemployment = Frictional Unemployment + Structural Unemployment
4.1.3.3. Labour Force Participation Rate = (Labour Force / Working Age Population) x 100%
4.1.4. Types of Unemployment
4.1.4.1. Structural Unemployment (more srs than Frictional)
4.1.4.1.1. Mismatch of Jobs (opportunities) and Skills due to change in structure of economy
4.1.4.2. Frictional Unemployment (inevitable)
4.1.4.2.1. Occurs when peeps leave their jobs (voluntarily or unvoluntariliy) or when first timers join the labour market.
4.1.4.3. Cyclic Unemployment
4.1.4.3.1. Unemployment associated with business cycle - booms and slums (unpredictable & irregular)
4.1.4.4. Seasonal Unemployment (not so srs cos having a job for a bit is better than not having one at all)
4.1.4.4.1. Unemployment associated with seasonal fluctuations in level of economic activity level.
4.1.4.5. Real Wage Unemployment
4.1.4.5.1. Associated to when real wages for jobs are forced above the market clearing level
4.1.5. Effects of Unemployment
4.1.5.1. Economic Impact
4.1.5.1.1. Loss of Output of goods and services: Waste of scarce economic resources, fall in production, move of production point to within PPC, LRAS can also decrease if this is permanent as fall in productive capacity.
4.1.5.1.2. Fiscal Cost to government: Less workers, less tax revenue, increased government spending for unemployment benefits, budget deficit.
4.1.5.1.3. Loss of Investment on Human Capital: Erosion of skills with time, depreciation of investment into human capital, deterioration of quality and productivity of workforce, AS shifts left
4.1.5.2. Social Impact
4.1.5.2.1. Lowering of living standard = lowering of mental and physical health = lowered life expectancy (can think of other factors like divorce rates, crime rate, protests, unrest)
4.1.5.2.2. Ageing workforce due to higher geographical mobility of youngsters to a more employed area as areas of high unemployment has a higher poverty rate and income inequality.
5. Low Rates of Inflation/ Stable Price Levels (Definitions and ways to measure)
5.1. Inflation
5.1.1. Types
5.1.1.1. Moderate
5.1.1.1.1. <10% annually, single-digit
5.1.1.2. Galloping
5.1.1.2.1. double/triple rates
5.1.1.3. Hyper
5.1.1.3.1. thousand/triple %
5.1.2. Definition
5.1.2.1. Sustained Increase in GPL
5.2. Measure of De/Inflation
5.2.1. Consumer Price Index (CPI) - measures mkt price of basket of G&S consumed by typical households.
5.2.1.1. Limitations
5.2.1.1.1. Appropriate basket of G&S that is reflective of country. May differ from country to country
5.2.1.1.2. Basket of G&S changes over time
5.2.1.1.3. Base year choice
5.2.1.1.4. X reflect quality
5.2.2. Producer Price Index (PPI) - wholesale prices, measure prices @ pt of first sale; based on raw mat prices and intermediate goods purchased by producers
5.2.3. GDP Deflator - changes in average price level
5.3. Disinflation
5.3.1. Definition
5.3.1.1. GPL increase @ decreasing rate
6. Low Rates of Inflation/Stable Price Levels (Deflation)
6.1. Deflation
6.1.1. Definition
6.1.1.1. Sustained Decrease in GPL
6.1.2. Causes
6.1.2.1. Autonomous (NOT INDUCED) decrease in AD in any of its factor (C, G, (X-M), I)
6.1.2.2. Monetary Factors (like a decrease in money supply) !COVERED IN CHPT 8!
6.1.2.3. Persistent decrease in costs of production not associated with decrease in AD
6.1.2.3.1. Cheaper imports
6.1.2.3.2. Currency appreciation
6.1.2.3.3. Discovery of new resources
6.1.2.3.4. Technological Advances
6.1.3. Effects
6.1.3.1. Effects on Investment
6.1.3.2. Effects on external stability
6.1.3.3. Effects on resource allocation
6.1.3.3.1. Refer to inflation but in reverse direction
6.1.3.4. Effects on welfare
6.1.3.5. Redistributive effects
7. Sustained Economic Growth (Effects)
7.1. Benefits
7.1.1. Material SOL ↑
7.1.1.1. economic growth > population growth -> higher RNY per capita -> consumption ↑ -> material SOL ↑
7.1.2. Society can afford to be ↑ environmentally-conscious
7.1.2.1. affluence ↑ -> people ↓ preoccupied with private consumption -> ↑ concerned to live in a cleaner environment -> stricter regulations of pollution
7.1.3. Alleviate Poverty
7.1.3.1. people earn ↑ income -> move into higher tax brackets -> pay ↑ taxes
7.1.3.1.1. extra tax revenue to fund welfare programmes
7.1.3.1.2. redistribute incomes from rich to poor
7.1.4. Avoid Macroeconomic Problems
7.1.4.1. inflation as workers' demand for ↑ wages to ↑ SOL
7.1.4.2. ↓ net exports as ↑ imports are bought with ↑ income
7.1.4.3. industrial disputes
7.1.4.4. unemployment + inefficient usage of resources
7.2. Costs
7.2.1. Current Opportunity Costs
7.2.1.1. firms invest ↑ on capital goods -> resources diverted away from producing consumer goods
7.2.2. Environmental Costs
7.2.2.1. consumption ↑ -> production of goods ↑ -> pollution and waste ↑, non-renewable resources ↓
7.2.2.2. renewable resources take time to be commonly adopted
7.2.2.2.1. future generations will have a shortage of non-renewable resources
7.2.3. Income Inequality
7.2.3.1. wages increase for workers in expanding industries > those in declining industries
7.2.3.2. wages increase for people with more sources of income (eg. rent) > those who only have one source
7.2.3.2.1. the wealthy tend to have more sources of income, reap a disproportionate amount of rise in income compared to the poor
7.2.4. Loss of Employment
7.2.4.1. growth rate is rapid -> production methods change rapidly -> workers' skills become irrelevant/replaced by automation -> unemployed/forced to take low-paid, unskilled work
7.2.5. Social Costs
7.2.5.1. stress + anxiety + loneliness ↑
7.2.5.1.1. stress-related diseases ↑
7.2.5.2. excessive pursuit of material growth -> ↑ selfish, ↓ caring society
7.2.5.3. violence, crime, suicides, divorce, dysfunctional families ↑
7.2.6. ↓ Net Exports
7.2.6.1. firms invest more on imported machinery
7.2.6.2. consumers spend more on imported goods