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Why does economic activity vary over time and why does this matter?, How…
Why does economic activity vary over time and why does this matter?
Measuring econ activity and illustrating variations
National Y accounting
GDP
income, output and expenditure methods
calculations from national Y data, using expenditure approach
GNI
calculations from data
real vs nominal & calculation using GDP deflator
pc & calculation
ppp
Appropriateness of GDP and GNI
comparison
over time
country comparisons
Alternative Measures:
OECD Better Life Index
Happiness Index
Happy Planet Index
Business cycle
Circular flow of income
leakages & injections
Variations in Econ Activity
AD
components: C,I,G,X,M
determinants:
C: consumer confidence, interest rates, wealth, income taxes, level of household indebtedness, expectations of future price level
I: interest rates, business confidence, tech, business taxes, level of corporate indebtedness
G: political and economic priorities
X-M: income of trading partners, exchange rates, trade policies
SRAS
determinants:
costs of FoP
indirect taxes
Alternative views of AS:
Monetarist/ New Classical vs Keynesian
recessionary gaps
LRAS
Keynesian vs New Classical
determinants:
changes in Q&Q of FoP
improvements in tech
increases in efficiency
institutional changes
SR Equilibrium
New Classical
LR equilibrium at full employment level of output
automatic adjustment
unemployment at LR equilibrium = full employment
Keynesian
persistance of recession
Assumptions of Keynesianism vs New Classical
Economic Objectives
Economic Growth
Short-term growth
actual growth on PPC
role of AD
Long-term growth
shifts of PPC
role of LRAS
Measuring econ growth & calculating from a set of data
Consequences of econ growth including:
living standards
environment
income distribution
Low Unemployment
Measurement of unemployment and the unemployment rate
& calculating from a set of data
Difficulties of measuring unemployment
Causes of unemployment—cyclical (demand deficient), structural, seasonal, frictional
Natural rate of unemployment—sum of the structural, seasonal, frictional unemployment
Costs of unemployment—personal, social & economic costs
Low & Stable inflation
Measuring the inflation rate, using consumer price index (CPI) data & calculation
The limitations of the CPI in measuring inflation
Causes of inflation—demand-pull and cost-push
Costs of a high inflation rate—uncertainty, redistributive effects, effects on saving, damage to export competitiveness, impact on economic growth, inefficient resource allocation
Causes of deflation—changes in AD or SRAS
Disinflation and deflation
Costs of deflation—uncertainty, redistributive effects, deferred consumption, association with high levels of cyclical unemployment and bankruptcies, increase in the real value of debt, inefficient resource allocation, policy ineffectiveness
Calculation of CPI using a weighted price index
Relative costs of inflation vs unemployment
Sustainable level of govt (national) debt
Measurement of national debt as a % of GDP
Relationship between budget deficit and government debt
Costs of high govt debt:
debt servicing costs
credit ratings
impacts on future taxation and govt spending
Trade-off between inflation and unemployment: SR & LR Phillips Curve
Inequality & Poverty
Inequality
Meaning of economic inequality
unequal distribution of income
unequal distribution of wealth
Measuring inequality (Lorenz Curve and Gini coefficient)
Constructing a Lorenz Curve from income quintile data
Relationship between equality & equity
Poverty
Meaning of Poverty
absolute poverty
relative poverty
Measuring Poverty
single indicators including international poverty lines, minimum income standards
composite indicators including the MPI
Difficulties in measuring poverty
Causes of inequality & poverty:
inequality of opportunity
different levels of resource ownership
different levels of human capital
discrimination (gender, race and others)
unequal status and power
govt tax and benefits policies
globalisation and tech change
market-based SS policies
Impact of inequality and poverty on:
econ growth
standards of living
social stability
Policies to reduce poverty, wealth and income inequality
Taxation
progressive, regressive and proportional tax rates
direct taxes (personal, corporate and wealth taxes)
indirect taxes
Calculation of indirect tax paid from a given tax rate and level of expenditure
Calculation of total tax and avg tax rates from set of data
Average and marginal tax rates
Further policies
policies to reduce inequalities of opportunities / investment in human capital
transfer payments
targeted spending on g&s
universal basic income
policies to reduce discrimination
min wages
How do Govts manage their economies and how effective are their policies?
Demand-Side Policies
Fiscal
Sources of revenue:
direct & indirect tax
sale of g&s from state-owned enterprises
sale fo govt assets & expenditure
Goals of FP:
low and stable inflation
low unemployment
promote a stable economic environment for long-term growth
reduce business cycle fluctuations
equitable distribution of income
external balance
Expansionary & contractionary policies
Keynesian Multiplier
Effectiveness of FP
constraints including:political pressure; time lags; sustainable debt; crowding out (HL)
strengths including: targeting specific sectors; govt spending effective in deep recession
automatic stabilisers: preogressive taxes & unemployment benefits
strengths & limitations in promoting growth, low unemployment and low and stable inflation
Expenditures:
current expenditures
capital expenditures
transfer payments
Monetary
Control of money supply and interest rates by the central bank
Goals of monetary policy
low and stable inflation
inflation targeting
low unemployment
reduce business cycle fluctuations
promote a stable economics environment for long-term growth
external balance
The process of money creation by commercial banks
MM Diagram
Tools of monetary policy
open market operations
minimum reserve requirements
changes in teh CB min lending rate (discount rate)
QE
Real vs nominal int rates
calculation of real interest rates from data
Expansionary and contractionary policies
Effectiveness of MP
constraints including: limited scope when close to zero, low consumer & bus confidence
strengths including: incremental, flexible and easily reversible; short time lags
strengths and limitations in promoting growth, low unemployment, and stable inflation
Supply-Side policies
Goals of SS Policies
long-term growth by increasing the economy’s productive capacity
improving competition and efficiency
reducing labour costs and unemployment through labour market flexibility
reducing inflation to improve international competitiveness
increasing firms’ incentives to invest in innovation by reducing costs
MB policies
Encourage competition
deregulation
privatisation
trade liberalisation
anti-monopoly legislation
Labour market policies
reduce power of trade unions
reduce unemployment benefits
abolish min wages (diagram)
incentive related policies
personal income tax cuts
corporate and CGT tax cuts
Interventionist-based policies
education, training
improving, Q, Q and access to healthcare
R&D
provision of infrastructure
industrial policies
Demand-side effects of SS policies
&
SS effects of fiscal policy
Effectiveness of SS policies
Constraints on SS policies:
market based: equity issues, time lags, vested interests, environmental impact
interventionist—costs, time lags
Strengths of SS policies
market based: improved resource allocation, no burden on government budget
interventionist—direct support of sectors important for growth
Strengths and limitations in promoting growth, low unemployment, and low and stable rate of inflation
MACROECONOMICS