Economics - Unit 4 Onwards

Causes of Economic Growth (general)

- For sustainable economic growth to occur, it is necessary for the productive capacity of the economy and the Aggregate Supply to Increase ->This can happen due to 2 main reasons; More resources or better quality resources

Methods of Measuring GDP

- Output method (g+s) - Income (factor incomes) - Expenditure (consumer expenditure) Therefore, GDP = output = income = expenditure.

Leakages In Income and in the Circular Flow

- S + M + T -> Some income is saved rather then spent on output -> Some income is taxed in the form of Direct income taxes, whilst some of the consumer expenditure is indirectly taxed -> Some income is spent on imports so the money escapes the economy

Influences on Consumption (AD)

- This is the spending by households on G&S to satisfy their needs and wants -Increased Disposable Income usually means higher consumption, however those who are poor may have previously spent more disposable income on necessities than they had (known as dissaving) so the first of the disposable income will be spent on paying back -Increased inflation rates lead to more savings and decreased consumer spending -A more equal income distribution will mean the rich spend less but lower classes will spend most of the extra as its proportionally a greater gain -High credit makes buying houses and getting loans easier so total spending increases -Consumer confidence and expectation of the future like confidence in the market, interest rates and job security which may concern big purchases

Degrees of Inflation

-"Creeping Inflation" is a term generally used for inflation rates of 2% which is desirable as firms produce more -Hyperinflation is a high rate of inflation, generally above 50% per month but can be much higher. This may eventually result in the sue of bartering rather than the use of currecy

Changes in the Pattern and Levels of Unemployment

->As an economy develops, so does the distribution of employment by economic sectors -As a country develops, the number of people employed in the primary sector fall and more get employed in the tertiary sector ->In a developed economy, more will receive Tertiary/Higher/ education which delays their entry into the workforce -However a lower employment in the 18-24 age groups allows for a more skilled and therefore productive workforce ->An ageing population will create a smaller labour force but gives opportunity for older workers to return to work through their own will or a raise in retirement age ->Increases in formal sector employment will occur as a country develops and will see a fall in off the book informal sector

Factors affecting the Magnitude of Consequences

->Demand pull inflation is likely to be less harmful than Cost Push Inflation since it is usually associated with rising output and a greater Real GDP, whereas Cost Push Inflation is related to a lack of productive capacity to produce and/or a fall in output ->How the inflation rate compares with the inflation rate of other countries - A country may have relatively high inflation, but lower than others', hence their products become the most internationally competitive as their prices are lower - However the opposite will make it less competitive ->A high rate of inflation is more likely to do harm than a low rate of inflation, as it may develop into Hyperinflation - Consumers and firms lose confidence in currency which may even bring down the government ->Whether the change in the rate of inflation was expected -An unexpected change to inflation rate than to what was expected can create uncertainty in the economy, hence less consumer expenditure and investment -In the case that inflation was anticipated, firms could adjust their prices, interest rates would match the Real Interest Rates, the government could adjust its tax brackets ahead of time and raise pensions and public sector wages

problems of Measuring CPI

->However this process may be affected by sampling errors as different groups will have different spending patterns ->Changes in trends may not be recognised and be unaccounted for due to new products not being included in the "Basket of Goods", which makes up the 100 weight ->It also fully avoids the chances of substitution and changes in quality

The Costs of Economic Growth

->If an economy is producing at full capacity, there will be an effect of opportunity cost as the country if forced to decide between putting resources to consumer goods or capital goods which would allow productive capacity to rise further -This is hence a short term problem as whilst the current production of consumer G&S would have to drop, the investment allows for both consumer and capital goods to be produced more in the future. ->May create structural unemployment as as some industries decline whilst others expand during economic growth -Forces workers to learn new skills which is a temporary fall in the workforce -Some may fully refuse to learn new skills and become economically inactive ->Can lead to the depletion of natural resources as firms use more oil and raw materials

Consequences of Inflation On Firms

->Low interest rates means borrowing and investing is more attractive than saving profits - However during inflation, interest rates are likely to rise so borrowing and investing is less likely ->Workers may demand higher wages to adjust for the loss in purchasing power which increases production costs - This may lead to an Inflationary Spiral, as with higher wages firms are forced to drive up prices even further and hence the cycle continues as the wage increases and price hikes reinforce each other ->Unpredictable inflation lowers producer confidence due to being unaware of costs in the future which will possibly lead to less investment and hence AD and GDP

Further Benefits of Inflation

->May stimulate output and economic activity as a low and stable rate of inflation will make firms feel more optimistic about their future - Since if prices rise more than the costs due to inflation, profits will too rise which promotes investment ->Consumers may experience greater consumer confidence due to the higher wages they are getting, even though in real terms, they are not getting this ->Debt burden may fall as interest rates are not adjusted for the rates of inflation

Further Costs of Inflation

->Net Exports (X-M), will change as products become less competitive internationally due to higher prices - Export revenue will fall whilst expenditure on imports must rise for comparatively the same amount ->Workers may experience "Fiscal Drag", which occurs when the rise in income levels due to inflation causes a person to be dragged into a higher tax bracket as the said corresponding tax brackets to income are yet to be adjusted with inflation ->Inflationary Noise/Money Illusion occurs when firms and consumers confuse price signals as inflation makes it hard to tell what is happening with relative Real prices - As a result consumers may opt to buy another product due to thinking a firm increased their prices when in reality, it was inflation - Firms may misallocate resources and produce more due to thinking the rise in the price of their products is due to Demand Pull inflation and a rise in AD, not inflation

Consequences of Inflation on Workers

->Real incomes will fall with inflation so workers have less disposable income ->If firms experience higher costs, redundancies could be made - hence lower job security

Link between Demand Pull and Cost push inflation

->Some factors can affect both and even cause them to occur simultaneously -->A depreciation of the Exchange rate will cause the prices of importing raw materials to rise, leading to Cost Push Inflation --->Meanwhile the increase in exporting is likely to cause a rise in AD and cause Demand Pull Inflation

Consequences of Unemployment on the Economy

->The government will experience opportunity cost from the high amounts of spending on unemployment benefits, whilst they could have used it for training and education of the workforce ->Tax revenue will also decrease compared to higher levels of employment ->Output will be below its potential level, with less G&S produced then if people were employed along with lower standards of living. This leads to a lower Real GDP, however as per the decreases in price level, products may become internationally competitive -This leads to employment opportunities in the export sector along with a net exportation occurring which may allow for more investment

Calculating the Inflation Rate and Methods

->The inflation rate is the percentage change in the price level from one period to another -The annual average method compares the average Price level during a 12 month period to the average level in the previous 12 months. e.g.: 2020 avg vs 2021 avg -The year-on-year method is calculated as the percentage change in the price level for a given month compared to the same month of the previous year. e.g.: 2021 June price level compared to 2022 June

An increase in the Quantity of Resources (Cause of Economic Growth)

->The supply of labours and entrepreneurs can see an increase over time. This may occur due to natural increase, Net immigration of working age people which is likely to increase the workers and entrepreneurs or as a result of government policy such as raising the retirement age, deregulation and privatisation to promote entrepreneurship ->The quantity of land may increase by discoveries of for example new oil fields or better methods of extraction ->The supply of capital goods will increase if there is Net Investment as firms invest and buy more capital goods than needed to replace the depreciated ones

The Claimant Count Measure

->This measure counts the number of unemployed who have registered for unemployment benefits Advantage: -Is relatively easy and cheap to collect as calculations are based on information already collected by the government Disadvantages: -Some of those who receive it are not truly unemployed but economically inactive as they are not seeking a job -May be Working and claiming benefits illegally -Does not include a number of groups who are unemployed but are not claiming their benefits. E.g.: Those who are simply not claiming unemployment benefits - Those who are too young or too old to claim unemployment benefits - Those who are full time students but are looking for a job -This measure may be accurate for HiCs where people want to claim the generous grants as its worth the time to apply, but in LiCs, the low paying benefits if there are even benefits are not worth the time to apply and people would rather just go to a low paying job or work on their Family's farms

Causes of Inflation - Growth of the Money Supply

->This occurs when the Central Bank prints more money to put into the economy -This will become inflationary if the rate of the money supply growth is greater than the rate of increase in the real output of the economy, which drives up the price level -However, some argue that inflation itself causes the increase in the money supply, as costs increase, firms borrow more from banks, increasing the quantity of money ->This form of inflation is known as "Monetary Inflation"

Causes of Inflation - Demand pull Inflation

->This relates to the demand side of the economy and usually occurs when resources are fully employed but Aggregate Demand is still growing unsustainably but cannot be matched by an equivalent increase in Aggregate Supply due to the already fully in use Resources - As a result, suppliers increase their prices to account for the demand, hence, prices are "pulled up" -The shift in AD will have a greater impact on the Price Levels the closer an economy is to producing at its productive capacity Reasons for why this occurs ->Since it is caused by a shift in AD, any change in the C+I+G+(X-M) can cause demand pull inflation ->It can be induced by Fiscal Stimulus in the form of lower taxes and more government spending, allowing for a higher disposable income and hence a greater consumer expenditure -However not all forms of government spending will be inflationary. e.g.: Spending on education increases the skill of the labour force and their labour productivity and hence the productive capacity of the economy, causing a shift outwards of AS which is deflationary -Net investment spent on capital goods will have the same effect as these also increase the productive capacity ->Use other reasons from causes of shifts in Aggregate Demand due to the changes in C+I+G+(X-M) which may be appropriate in this situation

Causes of Inflation - Cost Push Inflation

->This relates to the supply side of the economy and occurs when firms face rising costs Reasons for why this occurs -Raw materials becoming more expensive due to a supply-side shock or a depreciation of the exchange rate, making the land FOP more expensive to import -Labour may become more expensive through trade unions demanding higher wages or the lack of availability of workers due to high skill. This will cause a shift in the Aggregate Supply when wages increase more than labour productivity, so the cost of labour rises -Monopolies can cause a rise in Aggregate Supply as dominant firms in the market abuse their power and exploit consumers with higher prices On the graphs we see that as prices are pushed up, there is a rise in the cost of production leading to a shift of AS to AS1 up and to the left - This pushes up the price level at all output levels and leads to a contraction on the AD curve and causing a lower Real GDP

Consequences of Unemployment on Firms

->Those firms who want to expand may have a greater and cheaper availability of potential workers ->Frictional Unemployment may allow for the economy to respond to changes in S&D quicker, with workers moving from declining to growing industries ->May benefit from having to pay lower wages as workers are afraid to ask for higher wages along with many simply seeking employment and not high wages ->May suffer from reduced demand for their G&S as a result of fall in incomes and AD along with lowering their current productive capacity available to the firm

Consequences of Inflation on Consumers

->Those on low and fixed incomes will be hit the hardest by inflation due to its regressive effect - The cost of necessities such as food and water rise in price whilst the incomes of consumers fall in purchasing power which impacts the rich the least

Consequences of Unemployment On the Unemployed

->Those who are unemployed are likely to experience a loss in income ->The longer they have been out of work, the more difficult it may be to find a new job. This is due to them possibly losing touch with the advances in technology and therefore will lack the training and skills to be employed, as a result they lose confidence and become discouraged workers or even see a decline in their physical or mental health ->However, some may find it beneficial to go through frictional unemployment or even structural unemployment to find a higher paying job

Consequences of Inflation on the Government

->Will have to increase the value of state pensions and transfer payments due to the rising costs of living

Deflation in the LRAS curve (Through shift in AD)

-A decline in Aggregate Demand due to less investment which means firms produce less output, leading to lower profits meaning firms offer less jobs and hence the economy has less income so AD falls -Shifts the economy to point B -As firms adjust to the lower price levels, costs eventually fall which shifts the SRAS curve down and to the right which brings back output to the LRAS curve but at a lower price. -Deflation has occurred

Shifts in Leakages and Injections

-A higher I+G+X will cause and increase in production, raise incomes and spending -A fall in savings is likely to have a similar effect of incomes rising -But a rise in savings leads to some products not being sold so production should fall to prevent a misallocation of resources

A change in taxes on firms (SRAS shift)

-A reduction of corporation tax or indirect taxes will cause a shift to the right and down of the SRAS curve -This can also have an effect in the long-run as profits are higher and more investment can occur leading to a higher productive capacity, PPC, and further out LRAS curve

A change in factor productivity and quality of resources

-A rise in labour productivity and/or capital productivity will cause an increase in aggregate supply both in the Short-run and Long-run -A shift to the right

Change in the price of FOPs (SRAS shift)

-A rise in the cost of FOPs, e.g.: A rise in wages not met by a rise in labour productivity, or raw materials becoming more expensive, will force firms to shift the curve to the left and up -Raises the price of SRAS at all levels of output

Short Run Aggregate Supply (SRAS)

-Aggregate supply that varies with the level of demand for goods and services and that is shifted by changes in the costs of factors of production. -Is the output that will be supplied in a period of time when the prices of FOPs have not yet had time to adjust to changes in aggregate demand and price level

Consequences of Economic Growth

-Allows an economy to have spare capacity -Both graphs show that economic growth results in an increase of the Productive capacity ->However, for the increase in productive capacity to increase maximum output, the new or better resources which made this possible must be put to use ->On the PPC, we see that the productive capacity of the Economy shifts out (larger frontier) and so does Aggregate Demand as output rises from point X to Y -Yet still, at both points the economy is being inefficient and output is inside the PPC whilst a higher combination of both goods could be produced ->On the LRAS curve, we again see that the productive capacity has risen and output has increased from Y to Y1 as a result of Aggregate Demand -Yet the economy is not producing at its maximum at either stage and this would only occur if the AD curve would cut LRAS at its completely inelastic point -However, one could argue that whilst the economy is being inefficient, it has seen an increase in Real GDP without an inflation in the CPI as resources are not experiencing scarcity

Cyclical Unemployment

-Arises as a result of a lack of Aggregate Demand and has affects on the whole economy across a wide range of industries ->Is affected by the economic cycle as in times of downturn or recession, companies may prefer to release workers to cut costs Hence this concerns the demand side of the economy as due to the reduction in AD, firms cannot afford the costs of employing and hence there is no demand for employment -The graph shows that as a result of a fall in AD, firms reduce their output along with their AD for labour, shifting it to ADL1 ->Cyclical unemployment then occurs as people are not willing to take the wage cuts to W1. ->Even if workers are willing to take the waged cuts, cyclical unemployment will prevail as due to the reductions in Income Ad will fall further and so will ADL by firms

Structural Unemployment

-Arises due to changes in the structure of the economy, as overt time, the demand for some services rise and fall hence the need for the skills of these workers may rise or become negligible, causing unemployment Forms of Structural Unemployment ->Regional Unemployment happens as a sector which is primarily based in one area declines and its workers will be unemployed or face geographical immobility ->Technological unemployment occurs when people are out of work due to the usage of labour-saving techniques or their operation of capital is no longer required ->International Unemployment happens when workers lose their jobs because demand switches from domestic industries to foreign ones. However this may create new jobs for those correctly skilled This also concerns the supply side of the economy as there is no supply of workers who are able to fill the needs of the Economy's structure

National income and statistics (general)

-As people earn an income from producing output, this income is spent also on output -> Hence, total output should equal total income and expenditure -Therefore total output can also be used as a measure of its performance, where it can be said that an economy is doing good if it has a constant growth of output

Explaining the Keynesian LRAS curve

-At section (1), the graph shows that output can be raised without an increase in price level. ->When output is low, so is employment which means that firms do not need to raise wages to attract more resources (labour) as the offer of a job may be sufficient enough to attract people --> This due to the fact that even though there is time for the cost of inputs to change (labour, capital, raw materials) the low level of AD does not necessitate this -At section (2), firms begin experiencing shortages of inputs and start to bid wages, and raise the price of capital equipment and raw materials prices in order to attract new resources -At section (3), the economy is producing at its productive capacity and maximum output it can make with existing resources

Shifts in SRAS

-Change in cost of FOPs -Change in tax policy on firms -A change in factor productivity and quality of resources -A change in the quantity of resources

Measurement of Economic Growth

-Economic growth is measured in terms of changes to the Real GDP ->Is the % change if real GDP from one time period to another, usually a year -The GDP is first measured in the prices operating at the time (nominal) which is then adjusted to the effects of changes in price level (inflation/deflation)

Influences on foreign trade X-M (AD)

-Exchange rates will affect foreign trade as if they are to fall, a countries exports become cheaper to others whilst imports for those of that currency become more expensive. If both the imports and exports are elastic, this will increase net exports as exports rise but imports fall -If the GDP of a country increases their demand for imports will rise as per the higher incomes and their exports may be taken off the international market . However if the GDP of a foreign country rises, another country's exports will rise, making their products more price competitive -Relative price competitiveness between countries will effect their ability to export to others

The Forms of Unemployment

-Frictional -Structural -Cyclical

Market and Basic Prices

-GDP and GNI can be measured in both Market and Basic prices -> Market prices are the prices charged to customers and include taxes which may have been imposed and deduct the value of subsidies -> Basic prices are is what would've been charged to consumers without government intervention and equal the income paid to the FOPs for making the product, hence it deducts any indirect taxes and adds on subsidies.

Difference Between GDP and GNI

-GDP and GNI can vary between countries due to MNCs and foreign investment -> Having lots of foreign investment will lead to a higher GDP due to having foreign workers, but a lower GNI as these workers send money out of the country and do not receive any from the outside ->However, if you have many firms abroad, there will be a higher GNI due to the Net Inflow of Property Income from Abroad

Gross Values

-GDP and GNI include "Gross/Total investment" -> This is the total amount spent on purchases of new capital and on replacing depreciated capital

Equilibrium in a 4 sector Economy (Households, Firms, The government and international economy)

-Here, S+T+M = I+G+X -Between the origin and Y, injections exceed leakages, so firms should increase production -From Y to the end Leakages exceed injections o firms should decrease their production until Y as their products are going unsold due to the savings

Injections in Income and in the Circular flow

-I + G + X ->Investment is expenditure on capital goods by businesses which stimulates economic activity and productivity ->Expenditures by the government on goods, services, and infrastructure, creating new jobs and allowing people to join new jobs, hence increasing incomes ->Sales of domestically produced goods and services to foreign countries, injecting income into the economy and supporting economic growth

Equilibrium and Disequilibrium Income

-If income is equal to GDP, so Y = C+I+G+(X-M) -But income is also, Y = C+S+T -> This means that C+S+T = C+I+G+(X-M) ->Once rearranged, this is S+T+M = I+G+X ->Hence, income is when leakages equal injections -Income will move to a lower equilibrium level (Y1) if Leakages rise or if Injections fall; e.g.: A higher tax rate without additional government spending will reduce incomes of households

Link between Injections and Leakages

-In the long run there are links between S+T+M and I+G+X ->An increase in investment will raise the incomes as firms get more money from their capital and may reinvest this as higher wages -->As people get richer they tend to save more --->These extra savings will finance more investment from banks ->Government spending will increase incomes and therefore tax revenue through the hiring of people to build infrastructure -->The said infrastructure creates employment and mobility allowing for lower unemployment and productivity ->A greater value of exports may increase incomes for the same reason of firms becoming richer ->As incomes rise, more will be spent not only domestically but for imports, the money which abroad firms receive for imports may be used for exports

A change in the quantity of resources

-In the short-run, the supply of inputs may be influenced by "supply side shocks". e.g.: natural disasters, technology/innovation, supply chain issues and government tax policy -However these shocks may not have a impact on productive capacity in the long-run

Circular Flow of Income in an Open Economy (book diagram)

-Investment is injected into expenditure but leaks imports and indirect taxes Factor payments are injected with exports and government spending but leak Savings and Direct taxes

Influences on Investment (AD)

-Investment is the spending by private sector firms on capital goods such as factories, offices, machinery and delivery vehicles -Increased consumer demand means firms are more inclined to buy capital goods to increase their productive capacity -If the cost of capital falls, investment rises as firms may now buy new capital and those who have previously borrowed may now find it more attractive to buy -A fall in interest rates is likely to stimulate investment in the form of making borrowing capital cheaper. Opposingly if interest rates grew more would buy instead of borrowing. -Improved technology may make capital more attractive to invest into as its more productive -The government may cut corporate taxes or give out subsidies to encourage investment -Producer confidence and expectations as a rise in investment will occur if firms expect a rise in demand and good economic conditions

Nominal GDP

-Is the GDP measured in terms of prices operating in the year which the output is produced in and is a measure that has not been adjusted for changes in the price level -However this may give a misleading impression of how the economy is doing as the values of nominal GDP could have increased due to inflation and a rise in price level, not the additional production of G&S

Advantage of Frictional Unemployment

-May allow for a greater flexibility of the economy as it will be able to respond to changes in demand quicker by employing this previously unused resource -For example, there may be an increase in the availability of correctly skilled workers leaving a declining industry which could be hired by a growing one

Net Values

-Net Domestic Product (NDP) and Net National Income (NNI) only include net investment -> These values deduct depreciation which is the value of replacement of capital goods which have become obsolete

The "output gap" and changes in SRAS and AD on new classical economist curve

-New classical economists believe that a rise in AD will cause a shift in SRAS outwards as firms aim to make a more intensive use of their current FOPs, (overtime workers, using capital for longer before maintenance check) ->This is known as the output gap, the point between the output at the LRAS curve (Y) and output level at Y1 -->However this raises production costs greatly, so eventually the economy will shift back to its LRAS curve with SRAS1 --->Output will return to normal but will experience inflation and a higher price level at p3 from p1

Negative Economic Growth

-Occurs when the Real GDP of a country falls -A consistent fall in Real GDP over two consecutive quarters or more is called a "recession" -A country's output may decline as a result of loss in AD or LRAS

Price Stability and Why it is a goal for the Central Banks

-Price stability occurs when prices rise by only a small percentage and fluctuation in the price level are avoided ->Price stability makes a currency more attractive for foreign trade which will result in exchange rates changing which will raise imports but lower exports leading to a net loss of exports ->An increase in the money supply may lead to a rise in inflation and hence no price stability. This results in the CB raising interest rates and hence more people will save -The first consequence of this is that Domestic Demand falls leading to a fall in AD as consumer spending decreases, leading to a fall in investment along with a loss of net exports as explained before -The reason why exchange rates change is due to the increase in demand for e.g.: the HUF, this forces people with Euros to sell and hence increasing the supply and making it weaker in comparison to the HUF

Real GDP

-Real GDP is used to get a better picture to find GDP at constant prices of the prices operating in a selected year ->This ensures that the the distortion effect which inflation has on Nominal GDP is removed Real GDP = nominal GDP/(price index/100)

Factors Affecting the Labour Force

-School leaving age (e.g.: 16 or 18) -The number of people who stay in full time education past the school leaving age -Retirement age -Proportion of women in the Work force -Participation rate ->A country with more people of working age is likely to have a larger Labour Force than a country with less people of working age, however, this may be affected by the labour force participation rate

The New classical economist LRAS

-Show the graph as completely inelastic straight line as they believe that in the long run the economy will constantly produce at full capacity as its employing all its resources -Is a vertical line at full employment as in the long-run, wages and other input prices rise and fall to match the changes in the price level ->Hence price level changes do not affect a firms profit and thus there is no incentive for firms to increase their output

The Keynesian LRAS

-Shows the LRAS curve as gradually changing with perfectly elastic supply at low levels of output, then upwards sloping at range (2) with increasing output and ending as perfectly inelastic -The graph emphasizes that an economy does not necessarily operate at full capacity and can operate at any level of output

Circular Flow of Income in a Closed Economy

-The Inner circle represents the real flow of Products (G&S) and Factor Services (FOPs) The Outer Circle shows the Money flow of Spending (expenditure) and Incomes (rewards for FOPs)

Measures of unemployment

-The claimant count measure -The labour force survey measure

Employment Rate

-The employment rate is also often measured, however the employment and unemployment rate do not add up to 100% ->This is due to the fact that employment is the proportion of the working age population and not the proportion of the labour force in work

Why the AS rises as the curve slopes upwards

-The profit effect: Essentially, prices may rise in the short run but the FOPs do not, so as the CPI rises, the gap between output and input prices grows leading to a larger profit margin -The cost effect: It is assumed that the prices of FOPs along the SRAS curve are fixed, however average costs may increase as output does in the short run, like overtime payments so prices are increased to cover the costs -The misinterpretation effect: Producers may confuse changes in the price level with changes in relative price. They may believe that the increase in price they receive for their product means that their product is getting more popular so they produce more

Why the AD curve shows a fall in demand with a higher CPI

-The wealth Effect: A rise in price level/CPI will reduce the amount of G&S that people's wealth can buy and the purchasing power of money which has been saved in bank accounts and assets will fall -The international Effect: A rise in the CPI will reduce the Demand for net exports as they become less price competitive compared to the imports -The interest rate Effect: A rise in CPI will cause higher demand for money to pay the higher prices. This usually leads to higher interest rates and therefore more savings, less consumption and investment

Benefits of Economic Growth

-There is an increase in the G&S which consumers can enjoy which may raise the standard of living -Allows for poverty to be aided especially in LiCs. This is due to more jobs being created, incomes rising as the GDP grows and the government receiving more tax revenue which can be put back in the form of higher transfer payments, better housing, healthcare and education ->However it must be noticed that even though economic growth reduces absolute poverty, income inequality will rise as CEOs, business owners and banks get a proportionally higher gain in income -Economic growth may too create employment due to the increases in Aggregate Demand. This results in higher Aggregate supply which makes the products of a country more internationally competitive and hence creates employment -Economic Growth itself may induce further economic growth as both consumers gain confidence which will encourage investment and boost producer confidence

An improvement in the Quality of resources (Cause of Economic Growth)

-This in general will raise the productivity of the FOPs ->The quality of labour and entrepreneurship may be increased through better education, training and healthcare. This may be induced by government spending ->The quality of land may increase through the use of fertilisers, irrigation and excavation methods which result in purer or easier to refine resources ->The quality of capital goods will improve as technology advances and machines become more efficient

Influences on Government Spending (AD)

-This includes all spending of the government on merit and public goofs like education, healthcare, defence and simple investment into infrastructure -Government policy like a fiscal policy of lowering taxes and raising spending will promote economic activity -Higher government revenue allows the government to spend more without borrowing -Demographic changes as if the population is mainly young the government will spend on education whilst if its old they will spend on healthcare and pensions

The labour force survey measure

-This involves conducting a survey asking people if they are employed, unemployed or economically inactive ->This measure picks up on groups who are not included in the claimant count and uses an internationally accepted concept for Unemployment which makes comparison easier ->However the collection of the data may be more expensive and time consuming along with being susceptible to sampling errors as they are based on a sample survey ->Return rates may also be low

Frictional unemployment

-This is unemployment which arises when workers are between jobs Forms of Frictional Unemployment ->Voluntary unemployment is a form of this and occurs when workers don't accept the current wage rate and work conditions. This will be affected by the conditions of unemployment benefits as if these payments are more generous than working, people will stay unemployed ->Search unemployment arises when one doesn't accept the first job offered to them but is actively seeking for a higher pay job. This form of unemployment may be affected by the provision of information in the labour market as then it is easier to find high paying jobs ->Casual unemployment refers to workers who are only unemployed between periods of work, e.g.: actors, construction workers. This hence will depend on the Demand for these sectors. ->Seasonal Unemployment is based on the fluctuating demand for workers throughout the year. e.g.: tourism sector workers, fruit pickers Frictional Unemployment will concern the Supply Side of the economy as it may increase or decrease the supply of labour

What makes up the Economically Inactive?

-Those who are not of working age -Adults of working age who are not seeking jobs or have retired early -Homemakers (e.g.: stay at home mothers) -Those who are not well enough to work e.g.: Disabled or sick ->All economically active people are also not part of the Labour Force

The stock and Flow of Unemployment

-Unemployment rates and the level of unemployment are only snapshots in a certain time but do not show the movement of people in and out of the state of unemployment itself

The construction of CPI (consumer price index)

1.)Assign the base year you will be adjusting for the change in CPI and give it a CPI of 100 2.)Survey people what percentage of their disposable income they spend on different products and assign a weight according to this - 25% spent on Housing would be represented as 25/100 3.) The government then find the percentage change in price of all the weighted categories 4.)Multiplies the weight of the category with the percentage change in price to get the "weighted price change" 5.)Once this is done for all the "weight" (all items are accounted for and the weight total should be 100), you must also add up all the weighted price change to give you a result such as 1.7 6.)This result will indicate to you the change in CPI, hence in this case, the new CPI is 170

Components of GDP

C = All spending on both foreign and domestic Products I = Gross Private Investment -> Machinery and tools, all construction including homes (homes are included in I not C), Creation of new capital assets, Changes in inventories/stocks If gross investment exceeds depreciation, there will be net investment which means the stock of private capital rises and so does the economy's productive capacity G = Government consumption, expenditures and gross investment. Includes expenditure on G&S used to create public services and expenditure on publicly owned capital goods such as roads and railways and school (X-M) = Net exports minus net imports

The Expenditure Method

Def: A method used to measure the value of aggregate output of an economy, which adds up all spending on final goods and services produced within a country within a given time period. Y = C+I+G+(X-M) -Transfer payments are again not included as they are not spending but transfers of income

The Income method

Def: Adding up all the money earned by people and firms in producing this year's output from their FOPs; wages and salaries+ rent+ profits+ interest - When using this method it is important to only include payments received as a reward for providing FOPs, and not transfer payments since these are just transfers of income from taxpayers to vulnerable groups and subsidies

Circular Flow of Income

Def: Economic model that pictures income as flowing continuously between businesses and consumers -> Shows how spending and output move around in an economy and shows that output generates income which is then spent on output -If leakages exceed injections, more spending will leave the circular flow of income, and income will fall

Inflation

Def: Inflation is the sustained rise in the general price level over time which means the cost of living rises whilst the purchasing power of the money falls -However, this is not an indication of all prices rising by the same extent, same rate or at all, it is simply the average rate at which prices are rising

Labour Force Participation Rate

Def: Is the percentage of the total population of working age who are classified as being part of the workforce ->This may be affected by; Higher participation rate in higher education, More people opting to retire early and the contribution of women which may be constrained by social and cultural factors

Labour Force

Def: Is the total number or workers who are available for work and hence includes those who are employed and unemployed who are willing to works -Refers to all people in the economy who can contribute to the production of G&S

Gross Domestic Product (GDP)

Def: Is the total output by all factors of production within a specified economy, normally for a year -Is used by economists, governments and NGOs to asses what is produced, earned and spent in an economy

Economic Growth

Def: It is the key indicator of economic performance and is the general increase in an economy's output of G&S. Economic growth rates are an annual percentage change of output -For people to enjoy more G&S, the rate of economic growth must be greater than any growth in population. This would also mean an increase in GDP per capita

Gross National Income (GNI)

Def: Measures the final value of G&S flowing into a country's citizens' FOPs whether they are domestic or overseas -Is an economic indicator measuring not only total output produced by a country's residents domestically but also net income earned from overseas assets and investments -> Known as "Net property income from abroad"

Aggregate Supply

Def: The total amount of goods and services in the economy available at all possible price levels Usually differentiated between two types: Short-run Aggregate Supply, Long-run Aggregate Supply

The Output Method

Def: The value of output produced by the economy, but only counting the value added at each stage of production. -Measures the value of output produced by industries such as manufacturing, construction, hotels, catering and agricultural sectors -However with this method double counting may occur (the value of cars sold is added to the value of tires sold) -> To avoid this, output is measured by by totalling together the gross value added (GVA) at each stage of production of a FINAL product

Unemployment

Def: When people are willing and able to work but do not currently have a job, hence are part of the Labour Force and are Economically Active -Those who are unemployed are economic resources which are currently not being used

Problems of GDP

Doesn't include Household Production- Goods and services people produce for themselves Example: If the carpenter makes a bookcase for personal use If the carpenter does not live in the house and makes a bookcase for someone else, it is included in GDP Underground Economy- Individuals and firms conceal what they buy and sell for 3 main reasons: They are dealing in illegal goods and services such as drugs or prostitution, they want to avoid paying taxes on income they've earned, or want to avoid gov't regulations

Economic Growth VS Economic Development

Economic Growth: measured quantitatively by GPD per capita and annual % change in output Economic Development: Broader, includes quality of life measures (life expectancy, literacy rates, per capita energy consumption) and is the improvement in peoples economic wellbeing and quality of life -It is possible for a high proportion if people to improve their living standards and quality of life (economic development) without economic growth taking place. e.g.: A reduction in pollution or a more equal distribution of income

Reasons why one may Enter or Leave the state of Unemployment

Enter: Left school or University, Made redundant by company, Voluntarily left job, Improved health (is now able to work but no job yet), stopped being a home maker, migrated into the country Leave: Entered Higher Education, Found employment, Became ill (becomes economically inactive), became a homemaker, Became a discouraged worker (economically inactive), Emigrated

Causes of Shifts in the LRAS curve

General: Aggregate supply is likely to shift in the long run as overt time, the quantity and quality of economic resources change and so do the way which they are combined -Net immigration will increase the size of the workforce if immigrants are of working age -Education and training raises the skill level of the workforce and hence the levels of productivity -Changes in government policy like the removal of unnecessary business regulations (administration obligations) increases the efficiency of firms and potentially promotes entrepreneurship -Technological advances allow for new products to be made or existing products to be produced with less resources -If net investment occurs, there will be additions to the capital stock as investment exceed depreciation, which raises the productive capacity and PPC boundary greatly -Discovery of new resources can increase a country's productive capacity as resources are cheaper and widely available -An increase in ad-valorem or corporate tax will decrease profits allowing for less investment and net depreciation which shifts the PPC boundary in

Equilibrium income in a 2 Sector economy (Households and Firms)

In this case: Savings are the only Leakages and Investments are the only Injection

Why a rise in Investment will cause a rise in AD and GDP

Increased Employment: Investment often leads to the creation of new job opportunities. As businesses expand their operations or invest in new projects, they may need to hire additional workers to meet the increased demand for labor. This reduction in unemployment rates boosts consumer confidence and spending, further stimulating economic growth. Higher Incomes: With more people employed and wages potentially rising due to increased demand for labor, households experience higher incomes. This, in turn, leads to increased consumer spending on goods and services, driving up aggregate demand further. Multiplier Effect: Investment spending has a multiplier effect on the economy. For example, when a business invests in new machinery, it not only creates jobs directly related to the installation and operation of that machinery but also generates additional demand for raw materials, transportation services, and other goods and services needed in the production process. This creates a chain reaction of increased economic activity throughout various sectors of the economy. Technology and Innovation: Investment in research and development (R&D) or new technologies can lead to innovations and advancements that improve productivity and efficiency across industries. These technological improvements can drive down production costs, increase output, and lead to the development of new products and services, further stimulating economic growth. Confidence and Expectations: Increased investment can boost confidence and expectations among businesses and consumers about the future prospects of the economy. This positive sentiment can lead to additional investment and spending, reinforcing the cycle of economic expansion. Overall, the ripple effects of increased investment contribute to sustained economic growth by generating employment opp

Long Run Aggregate Supply (LRAS)

Is the output that will be supplied in the time period when the prices of FOPs have fully adjusted to changes in aggregate demand and the price level. -> In this time frame there is a limit to the amount of labour that can be hired and capital which can be employed due to their fixed supply - hence it can be said that the LRAS curve is fixed in the long run, no matter the price and output

Level of Unemployment VS Unemployment Rate

Level of Unemployment: Refers to the total number of workers who are unemployed Unemployment Rate: Is the number of unemployed people as a percentage of the labour force ->Unemployment rate = number of people unemployed/number of people in the workforce x 100 -The level and rate of unemployment may move in the same direction but not always. ->If the labour force increases quicker than the level of unemployment, the unemployment rate will fall but the level of unemployment may still rise e.g.: If the initial Working age population is 40 million with 2 million unemployed, the rate is 5%, but if the labour force rises to 44 million and the unemployed to 2.1 million, the rate falls to 4.8%

Macro equilibrium and macro disequilibrium

Occurs where AD and AS are equal

Open VS Closed Economy

Open economy -> Takes part in international trade and hence has (X-M) as a part of it Closed economy -> One which does not export or import goods and services (no such fully closed economy exists but a model can be constructed to show how an economy like that would work)

Aggregate Demand

the sum of all the demand in the economy AD=C+I+G+(X-M) Def: Is used to describe the total spending of customers, firms and the government along with the spending of foreigners on the country's exports minus the spending on imports from the country's economic agents