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Macroeconomics - YEAR 1 - Coggle Diagram
Macroeconomics - YEAR 1
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The Circular Flow Of IncomeThis is a simple model of the economy showing the flow of goods, services and factors of payment around the economy.Expenditure = Output = Income Injections = enter the flow
- Government spending
- Investment
- Exports
Leakage = leaving the flow
Economic Growth
The increase in the real value of goods and services produced as measured by percentage change in GDP.
Ways of measuring Economic growth
- GDP - Gross Domestic Product
The financial value of all goods and services produced in an economy even if a company is based in another country if the good or service is manufactured in that country it is part of that countries GDP. .
- GNP - Gross National Product
This is the financial value of all goods and services produced by a countries firms even if the good or service is manufactured in another country, if the company is based in that country it is counted as part of its GNP.
- Real GDP - GDP taking inflation into account
- GDP per capita - Output of the economy divided by the population
Causes of economic growth Increase in AD
Increase in C+I+G+X and/or a decrease in -M
Only leads to short-run growth (not sustainable) Increase in AS
- Decrease in cost of production
- Increase in productivity
- New technology
- New resources
This will cause a shift right of the AS curve and result in long-run and short-run economic growth. This will also lead to a shift of YFE and the AS curve to shift right.
Increases in productivity (output per unit of inputs employed) of labour and capital often drive economic growth Decrease in corporation tax will increase investment
- In the short run - Ad shifts right, increase in output
- In the long run - new machinery and an increase in efficiency, increase in productivity shift right of AS curve
Impacts of Economic GrowthBenefits
- Increase in life expectancy
- Higher level of education
- Improvements in health
- Improvements in living standards
- Fewer people going hungry
Negatives
- Growth is unsustainable - Increases in pollution, increased pace in using natural resources leading to economic collapse in the future because the productive potential will be increased in the short run but decrease for future generations, however as this increases people will use renewable energy and pollution and climate change may decrease with new technology.
- Increasing inequalities
- Rising incomes does not necessarily improve happiness
Impacts on :
- Firms - Increase sales with customers' rising incomes
- Government - More tax better education, health, infrastructure
- Environment - In HIC's often leads to less pollution with people switching to renewable alternatives, In LIC's there will be increased pollution
- The economy - Larger economy, higher GDP more jobs or fewer as technology improves
Sustainable growth - Growth in productive potential of the economy today which does not lead to a fall in the productive potential of the economy for future generations.
7 Determinants of consumer spendingDefinition - The total amount of spending by all households in an economy
Pneumonic - DICE WII
- Saving is affected in an inverse way by many of the factors of consumer spending, saving is real disposable income minus spending
- Income - The amount of money which is earned by households
Disposable income - income after tax has been deducted
Discretionary income - Income after tax and basic living costs
Increase in YD leads to an increase in consumer spending and an increase in AD increasing demand pull inflation, increase in output less unemployment
Vice versa for a decrease in income, increase in malignant deflation
- Wealth - Total value of all assets you own, an increase in wealth increases consumer spending and AD
- Interest rates - Cost of borrowing and benefit on saving
Increase in interest rates - decrease in consumer spending
Decrease in interest rates - increase in consumer spending
- Expectations - How confident consumers are about the economy, positive expectations during a boom, increase in consumer spending
vice versa for a recession
- Inflation - A sustained rise in the weighted average of all prices.
Creeping inflation - low levels of inflation, consumers think this is bad therefore buy less
Hyper inflation - Above 100% consumers will buy products now in the short run there will be an increase in C
- Availability of credit - How easy loans are to acquire by consumers
Easy to acquire a loan, increase in consumer spending and vice versa for harder loans to acquire
- Demography - Age structure of a population increase in saving for those who are older therefore if there is an ageing population consumer spending would be low and the opposite for a youthful population.
Useful terms :
- Average propensity to consume - the proportion of disposable income that is spent
- Average propensity to save - The proportion of disposable income saved
- Dissave - Spending more than disposable income
- Savings ratio - Saving as a proportion of disposable income
Investment
Definition - Spending on capital goods
Pneumonic - GENICCP
7 Determinants
- Interest rates
Increase in I/R would result in an increase in saving and a decrease in borrowing resulting in a decrease in investment
The theory linking I/R and I is called the marginal efficiency of capital theory, there is an inverse relationship between the two (diagram)
- Government policy - An economic policy introduced by the government aimed at increasing the level of investment. The policy reduces corporation tax. A decrease in corporation tax increases investment and increase AD because of equation C+I+G+X-M.
- Cost of capital goods - The more expensive (machinery and infrastructure) less investment and a decrease in AD.
- Expectations - In a boom, high confidence, increase in investment, increase in AD, opposite for recession
- New technology - E.g computer revolution, efficient and a requirement increases investment and increases AD
- Changes in consumer spending - More consumer spending, more sales, more profits, more investment and an increase in AD
- Past changes in income - In macroeconomics income refers to national income, Level of investment determined by past changes in income- accelerator theory It= a(Yt - Yt-1) It = investment, a =capital to output ratio, (Yt - Yt-1) is GDP in year t - GDP in previous year. Large change in GDP, investment will be high, small change investment will be lower.
The MultiplierAn increase in Investment or any other injection will lead to an even greater increase in income. This is the multiplier process (one persons spending is another's income)E.g - Government injection of 10bn, spent in shops etc, income for some, this in turn will be spent, leading to a larger increase in output and AD to shift from AD1 to AD2 and further to AD3 (AD diagram). Increasing AD more than the initial injection.Calculating the multiplier Multiplier formula = 1 ÷ 1 - MPC
- Marginal propensity to consume - Increase in consumption ÷ increase in income
- Marginal propensity to save - Increase in saving ÷ increase in income
- Marginal propensity to tax - Increase in tax ÷ Increase in income
- Marginal propensity to import - Increase in imports ÷ increase in income
- Marginal propensity to withdraw - (S+T+M) ÷ Increase in income
Relationship between PL and ADReasons why the AD curve is downward sloping
- The wealth effect - Decrease in PL (Average prices fall) more goods and services people can buy with their wealth AD rises- Opposite for increase in PL
- Interest rates - PL decreasing no inflationary pressure, I/R stay low encourages C and I increasing AD - opposite for an increase in PL
- International trade effect - Decrease in PL the country's products are more competitive decrease in imports, increase in exports, increase in AD - opposite for a increase in PL
The four determinants of AS Cost of production (short run)
- Price of labour
- Price of raw materials
- Taxation
Productivity
- Education and training
- Motivation
- Taxation
- Working practises
New resources
New technology
The 5 determinants of ER
- Interest rates
- Increase in the I/R - Foreign money attracted into the UK because their will be a greater benefit for saving in the UK. To do this money must be exchanged into pounds increasing demand for pounds - ER increases - appreciation
- Decrease in I/R - Foreign money not attracted, take money out of UK decreasing demand for pounds - depreciation
- Exports - example
- Germany has a boom - Increase in incomes increased demand for UK exports - increase in demand for £
- Germany has a recession - Decrease in incomes, decreased demand for UK exports - Decrease in demand of £
- Imports - example
- UK has a boom - Increase in income increased demand for imports - foreign producers paid in their currency - demand for pounds decreases shifts left
- UK has a recession - Incomes decrease - demand for imports decrease - demand fore euros decrease and demand for £ increases - appreciates
- Government involvement
- Govt wants to increase ER - buys pounds on FOREX markets, or sells gold/other currencies - increases demand for £ revalues
- Govt wants to decrease ER - Sells £ for foreign exchange/gold decrease in demand for £ - Devalue
- Speculation
- Future increase in ER - If speculators believe the ER will increase they buy that currency increasing demand for it - Appreciation
- Vice versa
The 5 determinants of Exports and Imports
- Exchange rates
- Increase in ER - SPICED - Imports increase and Exports decrease
- Decrease in ER - WPIDEC - Imports decrease and Exports increase
- Other country's economies
- German economy in a boom - more likely to buy imports - Increase in British exports
- German economy in recession - less likely to buy imports - British exports decrease
- The Domestic economy
- UK in boom - Incomes rising more imports
- UK in recession - lower incomes and confidence - less imports
- Relative inflation rate
- If UK average prices are rising faster than German average prices UK is becoming relatively more expensive - this would result in an increase in demand for German exports and a decrease in demand for UK exports
- Trade restrictions also known as 'protectionism'
- With protectionism - High tariffs or strict quota reduces imports
- Without protectionism (free trade) - No tariff or quota - more imports
- Tariffs - Additional tax on imports - encourages buying goods within a country
- Quotas - Numerical limit on the amount of imports allowed into a country
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The Global context
International Trade
Globalisation
Definition - A process where the world's economies are becoming more closely integrated
Causes of an increase in globalisation:1 - Cheaper transport - Economies of scale in shipping (containerisation) competition in air freight transport lowers prices, more efficient use of fuel
2 - Technological improvements - Internet has facilitated communications
3 - Multi-lateral trade agreements - (trade liberalisation) reduction in protectionism that restrict free trade.
4 - Growth of low wage economies - Large populations, low wages, they are competitive countries, leads to increased trade
5 - Multinational companies (TNCs) - Manufacture all over the world Two major characteristics of globalisation :
- Global brands - Same brands across countries with standardised products
- Global sourcing - Global supply chains
Pros :
- Comparative advantage - More output from same input. Allocative efficiency too.
- Economic growth - increased : output, real GDP, AD, productivity, YFE (max potential output)
- Economies of scale - Increased output lowers costs of production - increased productive efficiency
- Competition/choice - Benefits consumers - lower prices and better quality
- Standard of living - Job creation - in developed Long run due to higher wages - In developing countries SR low wage manufacturing
- Export led growth - Increase in X, AD, Real GDP, and economic growth
Cons :
- Wealth inequality - Large increase in wealth in HIC less in LIC, increased inequality
- Environmental issues - TNCs locate to cheaper places with less environmental restrictions
- Creation of multinational monopolies - May have not increased competition, created monopolies, less competition
- Exploitation of low wages - Paid very low wages
- Current account - Current account deficit in UK from importation
- Unemployment - Lost manufacturing industries - UK, USA
- Vulnerability effect - All countries affected if something goes wrong due to interconnection e.g. financial crisis
- Eggs in one basket - Specialisation, issue in that industry = big impact on economy
Trade between nations
- Relative price of exports compared to the price of its imports (think of it as an exchange rate between how many imports you can buy per unit of exports) - Shows a country's benefit from international trade
Index of average price of exports
-------------------------------------------- x 100 = Terms of trade
Index of average price of imports a) A rising price of exports indicates that you need to sell less exports in order to purchase the same amount of imports. This is an improvement in the T of T.
b) Falling price of exports indicates that you need to sell more exports in order to buy the same amount of imports. This is a worsening the the T of T.In developing countries:
- Often dependent on primary good to be exported, the demand for this has been relatively inelastic and price has changed very little, prices of manufactured goods that they import have increased as demand has increased due to the wealth effect. As they can now sell more exports for the same amount of imports their T of T has worsened, they should use profits to diversify the economy.
- China example
- Increased wages
- Increased cost of production
- Increased price of Chinese exports
- Improved terms of trade
- Could be a decrease in demand for their exports - Loss in comparative advantage
Benefits of specialisation
- Countries gain from international trade if they specialise in the production of goods and services if they have the lowest relative opportunity cost.
- Comparative advantage can come from - Climate - Workforce skill - Availability of capital - Population size
- Heckscher-Ohlin model - A country's absolute/comparative advantage/ production costs will be determined by the factors of production. Also explains changes in the terms of trade.
How governments can boost international competitiveness
a) Increase productivity - Works work harder, education, more capital
b) More flexible workforce - Retraining, accept lower wages
c) Incentives to increase investment - Low corp tax, low i/r
d) Improve infrastructure - Road/rail networks
Gains from international trade
- Specialisation leads to a greater efficiency of use of the worlds resources
Absolute Advantage
- A country's ability to produce a good using less resources than another country
- Calculated in man hours to produce 1unit, transport costs ignored
- One country better at producing wheat while the other better at producing wine, mutually beneficial to specialise
Comparative Advantage
- A country's ability to produce a good relatively more efficiently than another country (lower relative opportunity cost)
Example:
- UK - Wheat15 Wine30
- Portugal - Wheat10 Wine15 - Absolute advantage (produces same quantity using less man hours)
- If UK wants to produce one more wine have to give up 2 units of wheat
- If Portugal wanted to produce one more wine it would give up 1.5 wheat
Benefits of International trade and specialisation can be shown in Trading Possibility Curves - A graph showing quantity of one good against the quantity of another good - Same as a PPC
If a country specialises, makes an excessive number to what they ned, they can trade the remaining units for the same number of units of the other good the other country can do the same. This means both countries can achieve a point outside the TPC.
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