Unit 3 Macroeconomics(Macroeconomic objectives)
macroeconomic objectives
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stable economic growth
low rate of unemployment
low and stable rate of inflation
economic growth
When a country produces more goods and services in one period than in a previous one. It is usually measured by changes in the real GDP.
sticky wages
Sticky wages refer to minimum wages, labour unions, and contracted or salaried work agreements that prevent wages from dropping to an equilibrium level. This causes a surplus of labour supplied during demand-deficient periods.
possibilities of an economy
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land
labour
capital
Formula
Rate of economic growth=(Real GDP year 2-Real GDP year 1)/Real GDP year 1*100
unemployed
The status of people who are in the workforce, actively seeking employment, but unable to find it.
unemployment rate
The number of unemployed people in relation to size of the labour force.
Unemployment rate=(Number of unemployed)/(Total labour force)*100
disequilibrium unemployment
Occurs when there is a fall in demand for labour in the economy, but sticky wages prevent the market from reaching equilibrium.
natural rate of unemployment
The percentage of people who are unemployed for structural, seasonal and frictional reasons. This is irrespective of the level of GDP of the economy or its position in the business cycle.
cyclical unemployment
Cyclical unemployment, also known as demand-deficient unemployment, occurs when a lack of or reduced aggregate demand in the economy forces firms to make workers redundant.
stagflation
stagflation
Stagflation refers to a state of the economy when it experiences both high unemployment and high inflation. This is caused by a fall in short-run aggregate supply.
real-wage unemployment
This refers to a gap between the number of jobs available and the number of people willing and able to work at the prevailing wage rate.
natural rate of unemployment
The percentage of people who are unemployed for structural, seasonal and frictional reasons. This is irrespective of the level of GDP of the economy or its position in the business cycle.
frictional, seasonal and structural unemployment.
Frictional unemployment
Those who are between jobs or between schooling and a job and are therefore unemployed.
Seasonal unemployment
Those who are unemployed as their skills are only needed during certain times of the year.
Structural unemployment
A mismatch between the supply and demand for labour caused by labour market rigidity and changes to industries.
Economic costs
Loss of GDP
Loss of tax revenue
Increased cost of unemployment benefits
Loss of income for individuals
Greater disparities in the distribution of income
Personal costs of unemployment
Increased indebtedness, homelessness and family breakdown
Increased stress levels
Social costs of unemployment
Increased crime rates
Increased risks to health
Policy
Fiscal
monetary
Fiscal policy is where the government adjusts government expenditure and/or taxation to stimulate the economy.
Where the central bank uses the money supply and interest rates to manage the economy.
circular flow of income
A model that illustrates the interactions between economic agents in an economy. It shows how factors of production, goods and income flow between households, firms, government, the financial sector and the foreign sector.
hyperinflation
Price level rises that are more than 50% a month can be considered hyperinflation.
consumer price index
A weighted basket of typical goods and services that are bought in the economy by the typical family, used to measure changes in inflation.
Unit 3 Macroeconomics(Macroeconomic objectives)
The limitations of the CPI in measuring inflation
selection of goods
differences in income distribution
changes in consumption patterns
changes in quality over time
Producer Price Index
A measurement of the average change over time in the selling prices received by domestic producers for their output.
Formula for CPI=cost of the basket in year/cost of basket in base year*100
costs of a high inflation rate
greater uncertainty
redistributive effects
effects on saving
damage to export competitiveness
impact on economic growth
inefficient resource allocation
Deflation
A sustained decrease in the general price level over a period of time.
oligopolistic market
A market with a few firms holding more than 50 percent of the market or industry, e.g. the market for laptops is dominated by a few firms such as Apple, Microsoft, Dell and can be defined as oligopolistic.
costs of demand-deficient deflation
business uncertainty
redistributive effects
deffered consumption
high levels of cyclical unemployment
bankruptcies
increase in the real value of debt
inefficient resource allocation
policy ineffectiveness
balance of payments
Environmental Kuznets curve
A curve that shows the hypothesised relationship between environmental degradation and income per capita. It is named after Kuznets, who hypothesised that environmental degradation initially increases as income inequality rises, and decreases when income inequality falls with economic development.
budget deficit(HL)
A budget deficit arises when government expenditure is greater than tax revenue.
bonds(HL)
The central bank may issue bonds to raise funds to finance a range of projects from infrastructure to war. After a predetermined period of time, the government would repay the loan, including interest.
national debt (HL)
The accrued yearly deficits of a nation.
rely on a trade surplus