Chapter 10 Macroeconomic Factors
Part 1 Defining Macroeconomic Policy
-the study of how society allocates scarce resources, which have alternative uses between competing ends
-The study of wealth creation
Microeconomics
-Study of economic behaviour of inidividual consumers,firms and industries
Macroeconomics
-Aggregrate behaviour and study of sum of individual economic decisions
-The study of wealth creation
Microeconomics
-Study of economic behaviour of inidividual consumers,firms and industries
Macroeconomics
-Aggregrate behaviour and study of sum of individual economic decisions
1.1 Environmental Analysis
1.2 Defining Macroeconomics
1.3 Macroeconomic Policy
Four macroeconomic policy objectives
-Economic growth
-Inflation
-Unemployment
-Balance of payments
-Economic growth
-Inflation
-Unemployment
-Balance of payments
Part 2 The Level of Business Activity in the Economy
2.1 Introduction
While the level of activity within a particular industry will depend on specific PEST issues, the overall level of activity in an economy can be anticipated and explained by reference to generic (mainly economic) factors.
2.2 Factors that Influence the Level of Business Activity
Factors that influence the overall level of business activity include the following:
Confidence
-Greater consumer confidence - Higher Demand
-Higher business confidence - Higher levels of investment, new firms being set up by entrepreneurs
-Confidence can be reduced by a wide range of factors - Political instability, disasters, likelihood of unemployment and high inflation.
Aggregate Demand
-The total demand for a country's output and consists of Consumer Spending (C) + Investment by firms (I) + Government Spending (G) + Demand from exports (X) - Imports (M)
-Higher demand - Firms increases output (to meet demand)
-Higher demand - Inflationary pressure
Capital
-Greater availability of finance - Higher levels of investments
-Lower interest rates - Capital cheaper
-Government policy on cheap loans
Use of Resources
-New tech and more efficient working - improve productivity and lower costs
-Advances in levels of education - More productive workforce
Government Policy
-Governments can increase or decrease the level of aggregate demand through fiscal policy
-Investment in the infrastructure of the economy can attract investment
Exchange Rate Movements
-A strengthening currency will make a country's exports more expensive and will thus dampen demand for those exports. Imports, on the other hand will get cheaper
2.3 Trade Cycle
Many economies exhibit fluctuations in economic activity over time with an underlying trend of output growth
Part 3 The Impact of Economic Issues
3.1 Stagnation and Economic Growth
Growth Should result in:
-More goods being demanded and produced
-People earn more and can afford more goods
-More people should have jobs
Growth and it's problems:
-Is economic growth fast enough to keep up with population growth?
-Growth rates have to exceed inflation rates for benefits to arise.
-Growth amy be in 'demerit' goods, such as illegal drugs.
-Growth may be at the expense of the environment or through exploitation of the poor.
-The gap between rich and poor may grow, as the benefits from growth are not evenly distributed.
-Measurement of growth is difficult given the black market and goods that are excluded from national income calculations.
-Rapid growth = rising incomes, and this often 'sucks in' imports, worsening the balance of trade, rahter than benefiting domestic producers.
3.2 Inflation
Most governments want stable prices and low inflation. The main reasons:
-Inflation causes uncertainty and stifles business investment.
-Not all incomes rise in line with inflation
-In extreme cases of inflation, the function of money may break down, resulting in civil unrest and even war.
-Inflation distorts the working of the price mechanism and is thus a market imperfection.
Note that high inflation can affect savings in diff ways
-People who save to spend later (a "transactions motive") will save less to avoid the purchasing power of their money being eroded.
-People who save in case something bad happens (a 'precautionary motive') will save more due to the uncertainty inflation creates.
3.3 Unemployment
Mass Unemployment is a problem because:
-The government has to pay out benefits to the unemployed at a time when its tax receipts are low.
-Unemployment has been linked to a rise in crime, poor health and a breakdown in family relationships.
-Unemployment is a waste of human resources and can restrict economic growth.
3.4 Balance of Payments
To run a persistent surplus or deficit can have negative macroeconomic effects
-A long-term trade deficit has to be financed. The financing costs act as a major drain on the productive capacity of the economy.
-A long-term trade surplus can cause significant inflationary pressures, leading ultimately to a loss in international confidence in the economy and a lack of international competitiveness.
Part 5 Achieving Policy Objectives
5.1 Growth
- cutting interest rates - part of Keynesian demand management or monetarism
- running a budget deficit - Keynesian response to a recession. Monetarism argues that the way the government finances the increase will have a negative effect elsewhere, thus reducing its effectiveness
- supply side policies - increasing the availibility of skilled labour
- other - regional developement grants and tax incentives to boost investment. protectionist measures to reduce imports. creating a stable economy to boost confidence
5.2 Unemployment
- cyclical unemployment - aggregate demand in the economy is too small to create employment opportunities for all those willing and able to work
- frictional unemployment - people who are short-term unemplyoed as they move from one job to another
- structural and technological unemployment - boosting aggregate demand is likely to have little impact on structural unemployment
- seasonal unemployment - demand for some goods and services are highly seasonal which creates highly seasonal demand for workers
- real wage unemployment - occur in industries that are highly unionised. by keeping wages artificially high by threat, the number of people employed is reduced
5.3 Inflation
- demand-pull inflation - if demand for goods and services is growing faster than the ability of the economy to suppy these goods and sevices, prices will increase
- cost-push inflation - underlying cost of factors of production increases, output prices increases
- imported inflation - weakening of the national currency will increase the cost of imports
- monetary inflation - over expansion o money supply. money supply increases, purchasing power increases, demand for goods and services increases
- expectations effect - if anticipated levels of inflation are built into wage negotiations and pricing decisions then it is likely that the expected rate of inflation will arise
5.4 Balance of Payments
- balance of payment deficits - net outflow of funds from the country.
strategies to reduce balance of payments deficits:
- expenditure-reducing strategies - reducing overall demand in the domestic economy a government will be able to reduce demand for imports
- increasing interest rates - will reduce demand for exports by domestic consumers and firms
- expenditure-switching strategies - the government seeks to change expenditure pattern of consumers by encouraging expenditure on domestically-produced rather than imported goods
- lower the exchange rate - making imports more expensive and exports cheaper to an overseas buyer
- cutting interest rates - part of Keynesian demand management or monetarism
- running a budget deficit - Keynesian response to a recession. Monetarism argues that the way the government finances the increase will have a negative effect elsewhere, thus reducing its effectiveness
- supply side policies - increasing the availibility of skilled labour
- other - regional developement grants and tax incentives to boost investment. protectionist measures to reduce imports. creating a stable economy to boost confidence
5.2 Unemployment
- cyclical unemployment - aggregate demand in the economy is too small to create employment opportunities for all those willing and able to work
- frictional unemployment - people who are short-term unemplyoed as they move from one job to another
- structural and technological unemployment - boosting aggregate demand is likely to have little impact on structural unemployment
- seasonal unemployment - demand for some goods and services are highly seasonal which creates highly seasonal demand for workers
- real wage unemployment - occur in industries that are highly unionised. by keeping wages artificially high by threat, the number of people employed is reduced
5.3 Inflation
- demand-pull inflation - if demand for goods and services is growing faster than the ability of the economy to suppy these goods and sevices, prices will increase
- cost-push inflation - underlying cost of factors of production increases, output prices increases
- imported inflation - weakening of the national currency will increase the cost of imports
- monetary inflation - over expansion o money supply. money supply increases, purchasing power increases, demand for goods and services increases
- expectations effect - if anticipated levels of inflation are built into wage negotiations and pricing decisions then it is likely that the expected rate of inflation will arise
5.4 Balance of Payments
- balance of payment deficits - net outflow of funds from the country.
strategies to reduce balance of payments deficits:
- expenditure-reducing strategies - reducing overall demand in the domestic economy a government will be able to reduce demand for imports
- increasing interest rates - will reduce demand for exports by domestic consumers and firms
- expenditure-switching strategies - the government seeks to change expenditure pattern of consumers by encouraging expenditure on domestically-produced rather than imported goods
- lower the exchange rate - making imports more expensive and exports cheaper to an overseas buyer
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