1、Chapter 3The macro-economic environment11 The structure and objectives of the economy Macro-economics is the study of the aggregated effects of the decisions of individual economic units(such as households or businesses).It looks at a complete national economy,or the international economic system as
2、 a whole.2 1.1 Income and expenditure flows There is a circular flow of income in the economy This means expenditure,output and income will all have the same total value A basic closed economy:Firms Households 3 1.2 Withdrawals and injections into the circular flow of income Withdrawals:savings,taxa
3、tion,import expenditure Injections:investment,government spending,export income Financial sector:saving,investment spending Government sector:taxation,government spending Foreign sector:import demand,export demand Changes in behaviour of one of the components of the circular flow can lead to signifi
4、cant changes in economic performance as a whole.42 Factors which affect the economy The economy is rarely in a stable state because of the various changing factors which influence it.These include investment levels,the multiplier effect,inflation,savings,confidence,interest rates and exchange rates.
5、5 2.1 The multiplier in the national economy The multiplier involves the process of circulation of income in the national economy,whereby an injection of a certain size leads to a much larger increase in national income.An initial increase in expenditure will have a snowball effect,leading to furthe
6、r and further expenditures in the economy.6 The increase in national income will be a multiplier of the initial increase in spending,with the size of the multiple depending on factors such as what proportion of any new investment is spent or what proportion is saved.7 2.2 Aggregate supply and demand
7、 2.2.1 Aggregate demand The total demand in the economy for goods and services is called aggregate demand.Include:consumption,investment,government spending and exports minus imports.8 The aggregate demand curve The aggregate demand curve slopes from left to right.A shift may be due to a factor such
8、 as an increase or decrease in consumer confidence.9 2.2.2 Aggregate supply The aggregate supply refers to the ability of the economy to produce goods and services.The aggregate supple curve The aggregate supply curve slopes upwards from left to right and does not shift in the short term10 Where the
9、 aggregate demand curve intersects with the aggregate supply curve,the total demand for goods and services in the economy is equal to the total supply of goods and services in the economy.This is known as the equilibrium level of national income.A change in either the aggregate supply or demand will
10、 have an affect on the price level and the national income.11 2.2.3 A shift in aggregate demand P59 Diagram A drop in consumer confidence:Y0 Y1,P0 P1 A rise in consumer confidence:Y0 Y2,P0 P2123 The determination of national income 3.1 Aggregate demand and supply equilibrium Demand for goods and ser
11、vices is in balance with the available supply13 3.2 Full-employment national income If one aim of a countrys economic policy is full employment,then the ideal equilibrium level of national income will be where AD and AS are in balance at the full employment level of national income,without any infla
12、tionary gap.Where aggregate demand at current price levels is exactly sufficient to encourage firms to produce at an output capacity where the countrys resources are fully employed.14 3.3 Inflationary gaps Occurs when resources are fully employed Any increase in demand only serves to increase prices
13、 3.4 Example15 3.5 Deflationary gap Occurs with unemployment of resources Any change in demand will affect output Prices are fairly constant Actual national income is below full employment national income16 3.6 Stagflation High unemployment combined with high inflation Any long term major increase i
14、n costs(a price shock)is likely to have this effect.17 3.7 Summary An equilibrium national income will be reached where aggregate demand equals aggregate supply.One is at a level of demand which exceeds the productive capabilities of the economy at full employment,and there is insufficient output ca
15、pacity in the economy to meet demand at current prices.There is then an inflationary gap.The other is at a level of employment which is below the full employment level of national income.The difference between actual national income and full employment national income is called a deflationary gap.To
16、 create full employment,the total national income must be increased by the amount of the deflationary gap.184 The business cycle Business cycles or trade cycles are the continual sequence.rapid growth in national income,followed by a slow-down in growth then a fall in national income.after which com
17、es growth again,which peaks followed again by recession19 4.1 Phases in the business cycle P61 Diagram Recession(Point A)Depression(Point B)Recovery(Point C)Boom(Point D)Recession tends to occur quickly,while recovery is typically a slower process.20 4.2 Diagrammatic explanation P61 Diagram Wide flu
18、ctuations in levels of economic activity are damaging to the overall economic,well-being of society.Governments generally seek to stabilise the economic system.21Questions In the business cycle if A represents Recession,B Depression,C Recovery and D Boom,which is the correct sequence?A BADC B DABC C
19、 CBAD D ACDB Answer:B225 Inflation and its consequences 5.1 Inflation Inflation is the name given to an increase in price levels generally.It is also manifest in the decline in the purchasing power of money.Deflation(falling prices)is normally associated with low rates of growth and even recession.A
20、 healthy economy may require some inflation.23 5.2 Why is inflation a problem?(a high rate of price inflation)5.2.1 Redistribution of income and wealth In ways which may be undesirable.In general,in times of inflation those with economic power tend to gain at the expense of the weak,particularly tho
21、se on fixed incomes.24 5.2.2 Balance of payments effects If a country has a higher rate of inflation than its major trading partners,its exports will become relatively expensive and imports relatively cheap.As a result,the balance of trade will suffer,affecting employment in exporting industries and
22、 in industries producing import-substitutes.Eventually,the exchange rate will be affected.25 5.2.3 Uncertainty of the value of money and prices No one has certain knowledge of the true rate of inflation.As a result,no one has certain knowledge of the value of money or of the real meaning of prices.A
23、s prices convey less information,the process of resource allocation is less efficient and rational decision-making is almost impossible.26 5.2.4 Resource costs of changing prices Substantial labour time is spent on planning and implementing price changes.Customers may also have to spend more time ma
24、king price comparison.27 5.2.5 Economic growth and investment Inflation is harmful to a countrys economic growth and level of investment.28 5.3 Consumer price indices A consumer price index is based on a chosen basket of items which consumers purchase.A weighting is decided for each item according t
25、o the average spending on the item by consumers.29 5.3.1 The RPI and the CPI Retail Prices Index(RPI)measures the percentage changes month by month in the average level of prices of the commodities and services,including housing cost,purchased by the great majority of households in the UK.UK HICP(Ha
26、rmonised Index of Consumer Prices)is called the Consumer Prices Index(CPI).The CPI excludes most housing costs.30 5.3.2 The underlying rate of inflation Underlying rate of inflation is usually used to refer to the RPI adjusted to exclude mortgage costs and sometimes other elements as well(such as th
27、e local council tax).RPIX is the underlying rate of inflation measured as the increase in the RPI excluding mortgage interest payment.RPIY goes further and excludes the effects of sales tax(VAT)changes as well.31 5.4 Causes of inflation 5.4.1 Demand pull inflation Inflation resulting from a persiste
28、nt excess of aggregate demand over aggregate supply.5.4.2 Cost push inflation Inflation resulting from an increase in the costs of production of goods and services.5.4.3 Import cost factors When the costs of essential imports arise regardless of whether or not they are in short supply.32 5.4.4 Expec
29、tations and inflation Regardless whether the factors that have caused inflation are still persistent or not,there will arise a generally held view of what inflation is likely to be.Wage-price spiral 5.4.5 Money supply growth Monetarists have argued that inflation is caused by increases in the supply
30、 of money.33Questions The Consumer Prices Index(CPI)is the European equivalent of the Retail Prices Index(RPI).True or false?A True B False Answer:B346 Unemployment 6.1 The rate of unemployment Number of unemployed/total workforce*100%Flows into unemployment Members of the working labour force becom
31、ing unemployed People out of the labour force joining the unemployed Flows out of unemployment Unemployed people find jobs Laid-off workers being re-employed Unemployed people stopping the search for work35 6.2 Consequences of unemployment Loss of output:the economy is not producing as much output a
32、s it could Loss of human capital:the unemployed labour will gradually loss its skills Increasing inequalities in the distribution of income:the poor get poorer Social costs:personal suffering and distress,increases in crime Increased burden of welfare payment36 6.3 Causes of unemployment Real wage u
33、nemployment When the supply of labour exceeds the demand for labour,but real wages do not fall for the labour market to clear.Strong trade unions Minimum wage rate Frictional Friction in the labour market:difficulty in matching quickly workers with jobs Temporary37 Seasonal In certain industries,the
34、 demand for labour fluctuates in seasonal patterns throughout the year Short-term Structural Long-term changes occur in the conditions of an industry High regional unemployment in the location of the industry affected Longer-term38 Technological Structural unemployment,which occurs when new technolo
35、gies are introduced Old skills are no longer required A labour saving aspect Cyclical or demand-deficient Domestic and foreign trade go through cycles of boom,decline,recession,recovery,then boom again,and so on Can be long-term39 6.4 Government employment policies Spending more money directly on jo
36、bs(for example hiring more civil servants)Encouraging growth in the private sector of the economy Encouraging training in job skills Offering grant assistance to employers in key regional areas40 Encouraging labour mobility by offering individuals financial assistance with relocation expense,and imp
37、roving the flow of information on vacancies Reducing wages to market clearing levels Abolishing closed shop agreements Abolishing minimum wage regulations41Questions Which of the following is not a category of unemployment?A Technological B Cyclical C Demographic D Seasonal Answer:C42 How is structu
38、ral unemployment caused?A Long-term changes occur in the conditions of an industry B Strong trade unions resist a fall in their wages C The demand for labour fluctuates throughout the year D There is difficulty in matching workers with jobs Answer:A43 Why does unemployment result in loss of output?A
39、 Unemployed people earn less than employed people B Unemployed labour will gradually lose its skills,and ability to contribute to production levels C Unemployed brings social problems D The economy is not producing as much as it could,because the potential labour force is not fully utilised Answer:D
40、447 The objectives of economic growth 7.1 Economic growth Economic growth may be measured by increases in the real gross national product(GNP)per head of the population.Economic growth may be balanced when all sectors of the economy expand together Unbalanced Actual economic growth is the annual per
41、centage increase in national output,which typically fluctuates in accordance with the trade cycle.Potential economic growth is the rate at which the economy would grow if all resources(eg people and machinery)were utilised.45 7.2 Actual growth Actual growth in the long run is determined by two facto
42、rs The growth in potential output(aggregate supply)The growth in aggregate demand(AD)7.3 Potential growth The causes of growth in potential output are the determinants of the capacity of the economy(the supply side)rather than actual spending(the demand side)There may be increases in the amount of r
43、esources available Land and raw materials Labour(the size of the working population)Capital Increases in the productivity of resources46 7.4 Factors needed for sustained economic growth Sustained economic growth depends heavily on an adequate level of new investment,which will be undertaken if there
44、 are expectations of future growth in demand.7.5 Natural resources Impose a limit on the rate of growth47 7.6 Technological progress The same amounts of the factors of production can produce a higher output New products will be developed,thuse adding to output growth Capital saving/Neutral/Labour sa
45、ving Technological progress may therefore stimulate growth but at the same time conflict with the goal of full employment.48 7.7 External trade influences on economic growth If trading partners have slow growth,the amount of exports a country can sell to them will grow only slowly,and this limits th
46、e countrys own opportunities for investment and growth.49 7.8 Advantages and disadvantages of economic growth Advantages Economic growth should lead to a higher income per head which can in turn lead to higher levels of consumption and a better standard of living.A country with economic growth is mo
47、re easily able to provide welfare services without creating intolerable tax burdens on the community.Disadvantages Faster use of natural resources Pollution People unable to adapt to the demands for new skills and more training,structural unemployment In the short-run,higher growth requires a cut in
48、 consumption50Questions Which of the following is not a disadvantage of economic growth?A Increased pollution B Structural unemployment C Faster use of natural resources D Higher standard of living Answer:D518 Government policies for managing the economy Four main objectives of economic policy To ac
49、hieve economic growth To control price inflation To achieve full employment To achieve a balance between exports and imports 8.1 Government spending Government spend money on such as health,social services,education,transport,defence,grants to industry and so on.52 8.2 Significance of government tax
50、 and spending decisions to companies Expenditure decisions by government affect suppliers to the government A knock-on effect throughout the economy Taxation affects consumers purchasing power Taxes on company profits and tax allowances affect the after-tax return on investment Investment by the pub
