1
Q
5 indicators of Macroeconomic performance
A
- Growth
- Inflation
- Unemployment
- BOP
- Productivity
2
Q
What is doughnut economics?
A
- The idea that constant growth of economies is not ideal for humanity, leaving shortfalls and overshoots as a result
3
Q
Examples of ‘Shortfalls’ in UK economy
A
- 8 Million homes said to be energy inefficient
- Many long term sick, disabled etc- effects income and work, costs huge amounts in UC
- 12% don’t get full secondary education
4
Q
Examples of ‘overshoots’ in UK economy
A
- Pollution- 427 Megatons of CO2e produced in 2021
- UK contributes roughly 1% of global emissions
5
Q
What causes Short run growth
A
- Increase in AD
- Increase in SRAS
6
Q
What causes Long run growth
A
- Increase in productive capacity- increase in LRAS, leading to potential growth
- Change in quantity/quality of FOP
7
Q
Specific determinants of Long run growth
A
- Investment in Capital
- Innovation- products and processes
- Migration
- Birth rate changes
- Productivity changes
- Export-led growth
8
Q
Evaluation of growth
A
- Balance of short run and long run policies needed, as both demand side and supply side are important- increasing only demand side leads to inflation, and increasing only supply side leads to spare capacity
- Enhancement of supply side of economy has significant time lags
9
Q
What is potential (trend) output
A
- Economy working at full capacity over the long term- all FOP working efficiently
- Pressure of FOP makes this unsustainable in long run
10
Q
What is an output gap
A
- Difference between the trend rate and actual rate of economic growth
11
Q
How can output gaps be shown
A
- LRAS curves
- Economic cycle diagram
12
Q
When do positive output gaps occur
A
- During periods of high growth- associated with inflationary pressure and low unemployment
- current account deficit worsens as demand for imports increases
13
Q
When do negative output gaps occur
A
- During periods of low or negative growth- associated with deflationary pressure and high unemployment
- Current account deficit improves as there is less demand for imports
14
Q
What does a BOOM look like?
A
- High rate of growth
- High demand
- Low unemployment
- Inflationary pressure
- Skills shortages
- High confidence- investment
- High capital investment
15
Q
What is a recession
A
- When real GDP falls for 2 quarters (6mo) consecutively
16
Q
What does a recession look like
A
- Demand falling
- Inflation falling (usually demand pull)
- Unemployment rising
- Firms going bust
- Low confidence
- Less investment by firms
17
Q
What is a slump
A
- Sustained low or negative growth
- Low demand and inflation
- High unemployment
- Low confidence
- High business failure
18
Q
What is a recovery
A
- Growth beginning to rise- looks similar to a boom, just in earlier stages
19
Q
what caused the financial crisis in 2007/08
A
- US banks made big increase in sub-prime mortgage loans in years leading up to it, which were very risk but there was lots of ‘irrational exuberance’ that house prices would continue to rise
- US mortgage companies sold these ‘risky mortgage bundles’ to banks around the world
- As US interest rates rose, homeowners in US began to default their risky mortgages
- US banks lost money, and banks around the world saw a big fall in liquidity and value of their assets
20
Q
What are asset price bubbles
A
- Price of an asset is predicted to rise, so it is traded more
- D>S, so prices rise beyond intrinsic value
21
Q
What usually happens to Asset price bubbles
A
- Bubble ‘bursts’ when price steeply and suddenly falls to original level, causing panic selling
- This results in loss in confidence, and potentially economic decline
22
Q
What does Keynes mean by ‘animal spirits’
A
- Instincts and emotions of human behaviour drive confidence in an economy
- If firms expect a high rate of return, they will invest more
23
Q
What is herding
A
- Reacting to behaviour of other economic agents, rather than the market
- ‘If everyone else is doing it, so should I’
- Causes instability in the market
24
Q
What is the inventory cycle
A
- How changes in inventory levels held by businesses may leads to exaggerated increases or decreases in output
25
Why does inventory cycle 'cycle'
- In recessions, businesses run inventory levels low, whereas in booms they build up an inventory in anticipation of future sales
26
Benefits of growth
- Higher living standards
- Increased employment
- Improved social indicators eg. crime
- Increase tax revenue
- Reduced welfare spending
- Lower poverty levels
- International status- confidence rise
27
Costs of growth
- inflation
- Depletion of resources
- Increased inequality
- Increased negative externalities
28
Rate of growth in Brazil
- 2.8% in 2024
- Moderated to 2.2% in 2025
29
Unemployment in Brazil
- 41-49% in recent years
30
UK employment rate in aug-oct 2025
- 5.1%
31
UK Inactivity rate for people aug-oct 2025
- 21.0%
32
UK claimant count in Jan 2025
- 1.75 Million
33
What is employment
- Being in paid work, full or part time
34
What is unemployment
- Willing, able and available to work within 2 weeks but cannot find work
35
What is economically active
- Either have a job or looking for one
- Employed+Unemployed
36
What is economically inactive
- Not in work, nor looking for work (age 16-64)
37
What is full employment
- Everyone who is economically active has a job
38
What is involuntary unemployment
- Workers willing to work at current market wage rates but there are no jobs available
39
What is voluntary unemployment
- Workers choose to remain unemployed and refuse job offers at current wage rates
- This leads to benefits being taken away
40
What is the rate of unemployment
- Number of people unemployed as a % of labour force
- Unemployed/labour force x 100
41
What is the claimant count
- The number of people claiming job seekers allowance and Universal credit
42
What is the labour force survey
- Quarterly survey by ONS of 25,000 households
- Has become less reliable due to low response rate
43
Why could UK's labour market become its 'Achilles heel'
- Barriers to hiring have mounted as a result of the Budget's policy changes
- Job postings in almost all sectors have seen falls this year
- Increased prevalence of zero-hours contracts and less signing bonuses- shows employers gaining more bargaining power
- Generative AI tools increasingly used- could replace certain jobs
44
How may claimant count UNDERestimate unemployment
- not everyone eligible signs up- pride, too much effort
- Temporarily unemployed tend to not claim
- U18s and over 60s don't count
45
How may claimant count OVERestimate unemployment
- Some claim without actively seeking work (govt trying to reduce this)
- Some have jobs in black economy (illegal) but continue to claim
46
Pros of labour force survey
- Internationally recognised, allowing for comparison
- More specific- finds trends in sectors
- generally more accurate
47
Cons of labour force survey
- Costly
- Sampling and extrapolation
- Recent collapse in response rate
48
What is underemployment
- When you can't find a job suitable for qualifications and experience or cannot find hours to work
- become increasingly common due to increase of zero hour contracts
49
What is hidden unemployment
- Workers lose their jobs and don't actively seek a new job as the costs are not worth it
- Or when people choose to stay in education instead of seeking employment
50
When can employment and unemployment both rise
- Increase in population, boosting economically active population
- Fall in inactivity rate
51
What are the impacts of high unemployment
- Reduced demand- negative multiplier effect
- Lower living standards
- Social costs- crime, health
- De-skilling of human capital
- Reduced investment
- Reduced tax revenue
- Increased welfare spending
52
What is demand side unemployment
- Due to lack of AD
53
What is supply side unemployment
- Inability of workers to supply their labour to firms
54
Types of unemployment
- Structural (S side)
- Frictional (S side)
- Seasonal (D side)
- Cyclical (D side)
- [Real wage (s side]- MICRO
55
What is structural unemployment
- Long term economic shifts leading to long term unemployment
- Occurs as a result of occupational and geographical immobility
- Exists at YFE- result of technological advancements
- Supply side
56
What is occupational immobility
- Lack of skills for available jobs
57
What is geographical immobility
- Inability to locate where jobs are
- Linked to transport infrastructure
58
What is frictional unemployment
Workers moving between jobs
- Short term- workers do not have perfect and immediate information about every job opportunity
- Exists at YFE- always likely to exist
- Supply side
59
What is cyclical unemployment
- Linked to economic cycle- workers in derived demand, so drops in AD lead to increased unemployment
- Occurs when there is negative output gap
- Demand side
60
What is seasonal unemployment
- Unemployment at different times of year
- Affects specific regions and industries- eg tourism
- Demand side
61
What is the Natural rate of Unemployment (NRU)
- The rate at which markets are in equilibrium
- Occurs at YFE
- Residual levels of frictional and structural unemployment only, but no cyclical unemployment
62
What is inflation
- Continuous increase in general price level over a period of time
63
What is deflation
- Continuous fall in general price level over time
64
What is disinflation
- When rate of inflation is falling, but still positive
- Prices still rising, just at a slower rate than previously
65
What is hyperinflation
- Large increases in price level, value function of money fails to hold
- EG Germany 1930s
66
What is demand pull inflation
- Excess AD leads to increase in general price level
67
What is cost push inflation
- Increased COP leads to firms increasing their prices, leading to higher price level
68
What is consumer price index (CPI)
- Family expenditure survey carried out to judge average spending habits
- Regularly updated, representative basket of goods
- attaches weight to items based on importance
69
Limitations of CPI
- Households experience different rates of inflation
- Doesn't recognise quality of goods and services
- Slow to respond to new products
70
What is CPIH
- CPI plus owner-occupier housing costs
- ie costs associated with owning, living and maintaining a home
71
What causes demand pull inflation
Excess demand
- Reduced taxation
- Lower interest rates
- High confidence- more C and I
- Increases in incomes
- Availability of credit
- Increased demand for exports due to growth elsewhere
72
What causes cost push inflation
Response to rising COP
- Wage demands rise- wage price spiral
- Higher raw material cost
- Higher import costs
- External shocks- may disrupt supply chains
- Higher taxes
73
What is liquidity
- How easy and quick it is to turn financial assets into money
74
What are bonds
- Fixed incomes financial assets which provide the holder with a srteam of income on an annual basis
75
What is the face value of a bond
- Amount received by bondholder when the bond matures
76
What is the maturity date on a bond
- Date on which the govt will repay the bondholder
- Often 2, 5 or 10 years
77
What is the coupon value of a bond
- The amount of interest that will be paid on the bond
78
What is the coupon date of a bond
- The date on which the interest will be paid
79
What is the yield of a bond
- The interest at a % of the market price
80
What is the relationship between price of bond and yield on bond
- Inverse
81
What is the fisher equation
MV = PQ
82
What does M equal (Fisher)
- Money supply
83
What does V equal (fisher)
- Velocity of circulation
- ie how many times the money circulates the economy/changes hands
84
What does P equal (fisher)
- Avg price level
85
What does Q equal (fisher)
- National income/output/expenditure
86
What do monetarists argue about V and Q
- They are constant
- Therefore only M can influence prices
87
What are the costs of inflation
- Reduced confidence and therefore investment
- Real value of savings decrease
- Consumers and businesses on fixed incomes lose out
- Harms trade (reduces UK competitiveness)
- Wage price spiral
- Higher interest rates- disincentivise I and C
- Menu costs and shoe leather costs
88
What are shoe leather costs
- the real costs of individuals and businesses incur to reduce cash holdings in response to inflation
- in theory, the effects of 'wearing down' shoes due to walking to the bank more often to deal will effects of inflation
89
What are menu costs
- The cost of companies constantly adjusting their prices
- Eg printing new menus
90
Benefits of inflation
- Sustainable rate of inflation suggests growth
- Less risk of deflation
- Erodes real value of debts
91
Costs of deflation
- Holding back on spending as people expect prices to fall more
- Real cost of borrowing increases, so debts increase
- Lower profit margins
- Wealth decreases and hits confidence- business investment may decrease
92
What is Malign deflation
- 'Bad deflation'- persistent fall in prices due to decrease in AD
93
What is Benign deflation
- 'good deflation'- Fall in prices due to outwards shift in SRAS
94
What is imported inflation
- Commodities making up a large part of UK economy (eg oil and food) having big impact on prices
- Therefore a world rise in commodities feeds through to UK inflation
95
How can changes in other economies affect UK inflation
- Emerging markets create growing demand- demand pull inflation
- Increasing productive capacity in emerging markets leads to lower costs, therefore lower prices
- Economic performance of major trading parters impacts demand and therefore inflation
96
How can demand pull inflation be tackled
- Increasing interest rates
- Higher taxes
- Lower govt spending
97
Issues with tackling demand pull inflation
- Time lags in terms of how long it will take for policy to be effective
98
Why is cost push inflation harder to deal with
- Increases in costs are not directly within government control
- Often accompanies by slowdowns in economic growth and falling confidence (like 2022), therefore contractionary policy would hit right when expansionary policy would b e appropriate
99
Where is there currently persistent deflation
- China
- Expansionary policy underway to boost AD, but structural factors hold back consumer spending are struggling to be solved in the short term
100
What is the trade off shown by the Phillips curve
- Unemployment and inflation
- Can also be shown on AD/AS/LRAS diagram
101
What does the short run Philips curve show
- As unemployment falls, workers feel more confident asking for higher wages, so COP increases and so prices rise
- If AD increases this reduces unemployment at the expense of inflation
102
What causes people to criticise SRPC theory and propose LRPC
- Stagflation in the 1970s- High inflation with slow growth, causing unemployment
103
What do monetarists proposing the LRPC argue
- Only consequence of expansionary demand policy is to create inflation, because economy always returns to equilibrium at full employment (remember classical LRAS)
104
Explanation of the LRPC
- If the govt tries to reduce unemployment, they can use expansion fiscal or demand side policy
- This will increase inflation and reduce unemployment, BUT ONLY IN THE SHORT RUN
- Eventually unemployment will rise again
- Increasing AD will push SRPC back out in the long run back to the NRU, however at higher rate of inflation
105
What happens to move along SRPC from point A to point B
- Govt increases AD reducing unemployment, but increasing inflation
106
What initially happens at point B on the SRPC
- Workers have money illusion and don't realise their real wage is falling, so they don't demand higher wages
107
What happens to shift SRPC outwards and to new equilibrium at point C
- Workers get adapting expectations, so demand higher wages to match inflation rates
- This increases COP for firms, so they get rid of workers, therefore increasing unemployment
- Therefore we are now back on LRPC (NRU) however with higher inflation
Freakonomics (macro)
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Decks in class (9)
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