Chapter 5. revision.

Government economic policy objectives and indicators of national economic performance.

Definitions:

Economic growth: in the short run, an increase in real GDP, and in the long run an increase in productive capacity, that is the maximum output that the economy can produce.
Unemployment: a situation where people are out of work but are willing and able to work.
Labour force: the people who are employed and unemployed ,that is ,those who are economically active.
Economically inactive: people of working age who are neither employed nor unemployed.Elastic: responsive to a change in market conditions.

Inflation rate: the percentage increase in the price level over a period of time.
Objectives of government economic policy.
Governments have always had general policy objectives for the macroeconomy but in recent years many have set more specific targets.
Economic growth.
Governments want to achieve economic growth because of the benefits it brings, including increasing material living standarts.
Definitions:
Sustainable economic growth: economic growth that can continue over tome and does not endanger future generations’ ability to expand productive capacity.
Trend growth: the expected increase in potential output over time. It is a measure of how fast the economy can grow without generating inflation.
Employment and unemployment.
Another government policy objective is high employment and low unemployment. Some governments state that their objective is full employment.
Definition:
Full employment: a situation where those wanting and able to work can find employment at the going wage rate.
Inflation.
A third macroeconomic policy objective is low and stable inflation.
Balance of payments.
In the past,governments placed considerable emphasis on achieving a satisfactory balance of payments position, particularly with respect to trade in goods and services.
Definition:
Current account deficit: when more money is leaving the country than entering it, as result of sales of its exports, income and current transfers from abroad being less than imports and income current transfers going abroad.
Economic stability.
While a satisfactory balance of payments position has been somewhat downgraded as an objective, economic stability has become more significant as an objective.The benefits of economic growth.
Although there can be costs of economic growth, most governments believe thet the benefits of economic growth outweigh the costs. This is why economic growth is a key macroeconomic objective.
The sustainability of economic growth.
One of the crucial factors that has to be taken into account in deciding whether economic growth is beneficial or not is whether it is sustainable.
Determination of exchange rates.
An exchange rate is the price of one currency in terms of another currencies. the bank of England Monetary Policy Committee’s main indicator of the pound’s value is the Bank’s trade-weighted index.
A number of factors influence the demand for and supply of a currency and so its exchange rate.
1) Demand for pounds is likely to be high and supply is likely to be low if UK products are internationally competitive.
2) Changes in income abroad influence the exchange rate.
3) Rising incomes at home may put downward pressure on the value of the pound.
4) A rise in UK interest rates, relative to other countries’ interest rates, will be likely to increase demand for pounds.
5) Pounds are also bought and sold by those wishing to undertake foreign direct investment(FDI).
6) Speculation is now an important influence on the exchange rate.
Definitions:
International monetary fund(IMF): an international organization that helps co-ordinate the international monetary system.
World trade organization(WTO): an international organization that promotes free international trade and rules on international trade disputes.
Exchange rate: the price of one currency in terms of another currencies.
Monetary policy committee(MPC): a committee of the Bank of England with responsibility for setting the interest rate in order to meet the government’s inflation target.
The relationship between the exchange rate and the interest rate.
Changes in the exchange rate and interest rate are closely linked. If for instance, the UK’s exchange rate rises, exports prices expressed in terms of foreign currencies will rise.
The effect of a change in exchange rate on export and import prices.
A fall in the exchange rate, called a depreciation if caused by market forces, will reduce the price of exports in terms of foreign currencies.
Changes in the exchange rate and the macroeconomy.
A reduction in the exchange rate is likely to improve the current account position of the balance of payments. A fall in the price of exports will result in a rise in export revenue if demand is elastic. A rise in import prices will reduce the expenditure on imports, again if demand is elastic.The causes of unemployment.
Cyclical unemployment: unemployment arising from a lack of demand.
Structural unemployment: unemployment caused by the decline of certain industries and occupations due to changes in demand and supply.
Frictional unemployment: short term unemployment occurring when workers are in-between jobs.
The causes of inflation:
Cost push: increases in the price level caused by increases in the costs of production.
Demand pull: increases in the price level caused by increases in aggregate demand.

Chapter 4. revision.

Chapter 4. revision.

Aggregate Demand and Aggregate supply.

Aggregate demand: The total demand for a country's goods and services at a given price level and in a given time period

Rule for AD= C+I+G+(x-m)

Definitions:

Consumer expenditure: spending by households on consumer products.

Investment: spending on capital goods.

Government spending: spending by the central government and local government on goods and services.

Exports: products sold abroad.

Imports: products bought from abroad.

Net-exports - the value of exports minus the value of imports.

Trade surplus: the value of exports exceeding the value of imports.

Trade deficit: the value of imports exceeding the value of exports.

Definitions:

Inflation: a sustained rise in the price level

Average propensity to consume:the proportion of disposable income spent. in is consumption divided by disposable income.

net savers:people who save more than they borrow.

Wealth: a stock of assets.(property,shares,money held in savings account)

SAVINGS.
Influences on savings include:

1)real disposable income:average propensity to save rises.

2)the rate of interest:rise in it increases the reward for saving and so usually encourages people to save more.

3)confidence and expectations:people and firms are usually tend to save more,if they are not confident about their future.

4)saving schemes:when people agree to save a certain amount on a regular basis in insurance and pension schemes.

5)Government policies:a decision by the government to introduce tax-free saving schemes will encourage people to save more.

6)the age of a people: young people tend to spend more and the middle-age group of people usually save more than they spend.

Definitions:
dissave: spending more than disposable income
Savings ratio: savings as a proportion of disposable income


INVESTMENT

influences on investment include:
1)changes in real disposable income:if real disposable income increases,it is mean that demand for goods and services will also rise.

2)expectations:firms more likely to invest,if they are confident about their economic future.

3)capacity utilisation:firms are also tend to invest more if they are operating near to full capacity.

4)current profit levels:high profit levels can encourage investment in two ways:they provide finance to invest and they are likely to contribute to firms' optimism about the future.

5)corporation tax: if there is a cut in tax,firms will have more money,therefore more investment.

6)the rate of interest:a rise in interst rate likely will decrease the investment.lower demand for shares will reduce their price level and so decrease the funds that firms can raise for investment.

7)advanced technology:firms can invest money in machinery,in purpose to incsease the profit or quality of the products.

8)price of capital equipment:a reduction in capital equipment may also rise investment.

Government spending.

Definition: Spending by the central bank and local government on goods and service.

Government spending decision are influenced by a number of factors.

1)the government's view on the extent of market failure and its ability to correct it.

2)the level of economic activity in the economy can influence government spending.

3)a desire to please the electorate. voters can put pressure on the government to spend money improving education, health care and transport infrastructure.

4)war, terrorist attacks and rising crime or their threat can also increase government spending.Definitions:

GDP definitions

Real GDP: GDP after inflation

Gross domestic product(GDP): the total output of goods and services prodused in a country.

exchange rate:the price of one currency in terms of another currency.

Government bond: a financial asset issued by the central or local government as a means of borroing money.

Aggregate supply.

Aggregate supply the total amount that producers in an economy are willing and able to supply at a given price level in a given time period.

Definitions:
Productivity: output,or production, of a good or service per worker per unit of a factor of production in a given time period.

Macroeconomic equlibrium: a situation where aggregate demand equals aggregate supply and real GDP is not changing.

Privatisation: transfer of assets from the publuc sector to the private sector.

Macroeconomic equlibrium.
if AD would be more than AS, there would be a shortage of goods and services.
The excess AD would encourage them to expand their output. The surplus AD may also push up the price level, depending on the leve of capacity.
AS exceeding AD would also lead to pressures that would move the economy back to eqilibrium.

Circular flow of income:the movement of spending and income throughout the economy.

Factor services:the services provided by the factors of production.

Leakages:withdrawals of possible spending from the circular flow of income.

Injections:additions of extra spending into the circcular flow of income.

Multiplier effect: when adding injections into the economy results in the greater rise in national income.