A2 Economics Macroeconomics Revision Workbook _ April 2010

A2 Economics

Macroeconomics Revision Workshop

Student Name

Session 1

Globalization: Shifts in Global Trade and Investmen Investmentt 2009 was a difficult year for the global economy Economic growth in a selection of countries World output United States Euro area (16 countries) Germany Japan United Kingdom Africa Russia Developing Asia China India Brazil

2008

2009

2010

3.0 0.4 0.6 1.2 -1.2 0.5 5.2 5.6 7.9 9.6 7.3 5.1

-0.8 -2.5 -3.9 -4.8 -5.3 -4.8 1.9 -9.0 6.5 8 .7 8. 5.6 -0.4

3.9 2.7 1 1.5 1.7 1.3 4.3 3.6 8.4 10 7.7 7. 4.7

Source: International Monetary Fund, Economic Outlook, February February 2010, 2010 data are IMF IM F forecasts

Making connections – five ways in which the world recession has affected the UK economy

2 A2 ECONOMICS Revision Workshop April 2010

Foreign For eign direct investment in the world economy 1 What are the main determinants of foreign investment decisions?

Examples of each to use Access to natural resources

Closeness to growing consumer markets

Access to technology and intellectual property

Efficiency gains from out-sourcing production to lower cost countries

Other factors

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Using AD/AS to illustrate some of the gains from inward investment Price Level

AD2

LRAS

SRAS

National Output

Y2

Possible costs of Fore Foreign ign Direct Investment Worker exploitation issues Doubts over job creation Environmental aspects Remittance of profits overseas Impact on domestic firms Other disadvantages


2 Changing Patterns of FDI Flows Developed countries countries (MEDCs) (ME DCs) still provide the bulk of foreign direct investment investment flows 1 Between developed countries 2 From developed to developing / emerging countries

But there is a clear shift in the pattern of FDI. More FDI from emerging economies to lowest income countries (LICs ). And also rising FDI FD I from emerging economies to developed nations • Much of this shift is the result of trade imbalances – e.g. the strong trade surpluses of countries such as China, India, Brazil and Russia + the other main oil-exporting nations

3 The rise of FDI from emerging market countries Here are some examples of large scale investments made in African countries from the BRI Cs 2009

Liberia

China

Mining

$2.6 billion

FDI

2009

Chad

India

Textile

$25 million

Line of credit

2009

S.Tome/Principle India

Priority projects in agriculture, capacity building, infrastructure

$5 million

Line of credit

2009

S.Tome/P /Prrinciple India

Small and medium enterprises sector

$1 million

Grant

2009

Mozambique

India

Rural electricity projects

$30 million

Line of credit

2009

Nigeria

Russia

Gas

$2.5 billion

Investment

2009

Angola

Russia

Construction

$500 million

Investment

2009

Angola

Russia

Telecommunications

$328 million

Investment

2009

Angola

China

Oil

$1.3 billion

Acquisition

2009/13 Nigeria

Brazil

Oil

$2 billion

FDI

2009/13 Angola

Brazil

Oil

$800 million

FDI

2010

Zimbabwe

China

Development projects

$2.9 million

Grant

2010

Zambia

China

Development projects, Commerce, Trade and industry

$1 billion

Concessional loan

2010

Zambia

China

Stadium in Ndola

$10 million

Grant

2010

Malawi

India

Development projects

$50 million

Line of credit

2010

Malawi

India

Earthquake relief and projects

$5 million

Grants

2010

Zambia

India

Construction of the Itezhi-Tezhi Hydropower project

$50 million

Line of credit

2010

Zambia

India

Social sector

$75 million

Soft loan

2010

Zambia

India

Health and education

$5 million

Grant

2010

Tanzania

China

Infrastructure & ICT sector

$180 million

Concessionary loans

2010

Mozambique

Brazil

Mining

$1.3 billion

Investment

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Evaluating benefits & costs of FDI for lowest income countries Economic advantages

Exports

Capital

Health

Finance

Environment

Costs and risks of FDI F DI for the lowest income countries Trade deficit

Capital flight

Labour migrants

Rogue donors?

Other costs

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De-globalisation – the return of protectionism

Background notes:

The global financial and economic crisis led to a recession in the world economy in 2009. When individual individual countries are are in economic economic trouble the lobbying for protectionist policies nearly always gathers momentum and this has certainly cert ainly happened in the last two years. Global Trade Trade Alert’s latest report identifies no fewer than 192 separate protectionist actions since November 2008, with China as the most common target. Russia has introduced the biggest number of protectionist measures since the crisis started - and of course Russia is not a member of the WTO so it not bound by any commitment to reduce trade barriers.


Import Tariffs Example

Import Quotas Example

Government Subsidies Example

Controls on Mergers and Takeovers Example

Immigration Restrictions Example

Favouring Domestic Businesses Example

Currency Manipulation Example

Extra Bureaucracy Example

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Analysis and evaluation of import tariffs When analysing a tariff try to consider the direct and indirect effects on consumers and producers. And also use economic welfare concepts such as consumer and producer surplus. Price

Domestic Supply

World supply pre-tariff

P1

Domestic Demand

Q1

Q2

Output

Consumers

Domestic producers

Government

Importers

Indirect effects of tariff protection There are many indirect (or second round) effects of decisions to introduce tariff or other forms of import protection and strong evaluation in an exam answer might focus on some of the following areas.

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Economic Efficiency

Retaliation by affected nations

Costs and Inflation

Lower income groups

Analysis and evaluation of import quotas Price

Export supply of steel (no quota)

P1 Import demand for steel

Q1

Output

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Anti-Dumping Duties and Developing Countries 88 of the 104 anti-dumping cases taken to the World Trade Organisation in the second half of 2009 were brought by developing countries against subsidised imports.

What is dumping?

What are the aims behind dumping?

How might dumping affect a developing economy that alleges dumping by another country?


Currency manipulation Some countries have been accused of resorting to competitive devaluations in a bid to increase their competitiveness in international markets.

Advantages of currency devaluation

Risks from deliberate currency devaluation

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Session 2

Poverty, Inequality and Unemployment in the World Economy The World Bank on poverty “Poverty is hunger. Poverty is lack of shelter. Poverty is being sick and not being able to see a doctor. Poverty is not having access to school and not knowing how to read. Poverty is not having a job, is fear for the future, living one day at a time. Poverty is losing a child to illness brought about by unclean water. Poverty is powerlessness, lack of representation and freedom.”

What is the difference between absolute poverty and relative poverty?

Evidence on extreme poverty in the world economy

Less than $1.25 a day

1 99 0

2005

2015

China India Sub-Saharan Africa Latin America

60.2 51.3 57.6

15.9 41.6 50.9

5.1 23.6 38.0

Total

11.3 41.7

8.2 25.2

5.0 15.0

Less than $2.00 a day

1 99 0

2005

2015

China India Sub-Saharan Africa Latin America

84.6 82.6 76.2

36.3 75.6 73.0

16.0 58.3 59.6

19.7 63.2

16.6 47.0

11.1 33.7

Total

What effect has globalization had on the level of poverty?

Poverty is not just about income – which other indicators might be used to measure extreme poverty in the world’s lowest income countries? 1 2 3


Relative poverty • Income or wealth compared to other members of society • Gini-coefficient of inequality is the most commonly used measure of inequality • The coefficient varies between 0, which reflects complete equality and 1, which

indicates complete inequality (one person has all the income or consumption, all others have none).

Per Capita Income Statistics (PPP) measured in US dollars

2007

2010

2014

Median Mean Top Bottom* % Top over bottom

$7,417 $13,074 $85,371 $313 27149%

$7,902 $13,597 $95,597 $347 27327%

$10,007 $16,010 $88,779 $438 20162%

Source: IMF World Economic Report October 2009; News N Economics

Per capita income data is measured in PPP terms – purchasing power parity – and in US dollars. Identify two of the limitations of expressing expressing data in this way 1

2

Estimates of Gini coefficients in different countries

Denmark Japan Sweden Norway Czech Republic Slovakia Germany Ethiopia

24.7 24.9 25.0 25.8 25.8 25.8 28.3 29.8

Brazil South Africa Bolivia Colombia Angola Haiti Botswana Namibia

55.0 57.8 58.2 58.5 58.6 59.5 61.0 74.3

The Gini index lies between 0 and 100. A value of 0 represents absolute absolute equality and 100 absolute inequality. Source: World Bank 2009 Development Report.

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Determinants of relative poverty in developed and developing countries The causes of relative poverty are complex and will vary from country to country at different stages of economic development. Many of these factors can be applied across nations. Factors

Revision Notes

Wage inequalities Weaknesses in human capital Taxation and welfare systems Effects of high unemployment Discrimination in the labour market Debt constraints Impact of food and energy price inflation Impact of climate change

The spike in global food prices in 2007-08 was good news for some countries but created huge problems for millions of poor consumers in economies across the world. The World Bank called high food and energy price inflation the “silent tsunami” causing many millions of people to experience severe poverty. poverty. And then in 2009 came the world recession. In this section we consider some of the effects of the recession on developing countries.


Low Income Countries and the Global Recession Lower income nations did not cause the global crisis but they have been affected in many ways by the fall-out from the credit crunch and the subsequent recession.

Impact of the world recession on

Revision Notes

Foreign direct investment flows Commodity prices and horticulture exports Tourism industries Employment Income from remittances Aid receipts

Anti-Poverty Strategies in Developing Countries Examples of policies

Main aims

Examples

Micro Finance programmes Investment in sustainable energy Social entrepreneurship Investment in human capital Empowering women in developing countries Inward investment to boost infrastructure and productivity Help in adapting to climate change www.tutor2u.net 17

Unemployment and poverty in developed countries Unemployment is a huge policy issue for governments around the world. In this section we focus on the problems facing developed nations. But taking a world view, the International Labour Office estimates that the global unemployment rate for 2009 was estimated at 6.6 per cent. That means that 212 21 2 million people were unemployed.

The main causes of unemployment

Cyclical unemployment

Structural unemployment

Frictional unemployment & other causes


Policies Policie s

Recent examples in the UK

Macroeconomic stimulus policies Employment subsidies Attracting inward investment Investment in human capital Taxation and welfare reforms Support to encourage entrepreneurship

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Session 3

Macroeconomic policies during the global economic crisis

The world recession has prompted a remarkable attempt by many countries to use macroeconomic policies to stabilize confidence, demand, output and jobs. Many nations have been hit badly by external and domestic shocks and some have been taken into “intensive care”! The NICE decade – a long period of non-inflationary continuous expansion – has come to an end and some economists now believe that developed nations will suffer from a DRAG decade – deficit reduction anemic growth! At A2 level you will need to use some of the AD/AS analysis that was covered last year in the AS economics course. But for higher marks you should show a good up to date understanding of what has been happening. And be willing and able to evaluate the possible consequences of the various policies chosen. We will look at stimulus policies in different countries and also consider some of the difficulties facing countries inside the Euro Area.

Main Macroeconomic Policy Options Monetary Policy • • • •

Changes in policy interest rates Quantitative easing (QE) Attempts to change the external value of the currency Changes in the availability of credit (lending rules)

Fiscal Policy • Automatic stabilisers • Discretionary increases in government borrowing


Monetary Policy in the recession

Monetary Policy • Policy interest rates • The exchange rate (depending on the choice of exchange rate system) • The availability of credit in the financial system

To influence in fluence • The level and growth of aggregate demand and output st ability • Meet an inflation target and achieve price stability

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Why have central banks cut interest rates to ultra low levels 1 Response to the credit crunch

2 Risks of price deflation

3 To prevent an economic depression

4 To stabilize confidence and demand

Stabilizing the economy – interest rates and the importance of the output gap


Does monetary policy work anymore? How effective is monetary policy in achieving its aims? The ultra-low interest rates of the last couple of years ought to have had a big effect on economic activity. But there are good reasons for thinking that the impact of monetary policy has diminished. Some economists economists now talk t alk about a liquidity trap effect. The Liquidity Trap

Cheap credit but limited loan availability

Damaging effect of low interest rates on savers

Lengthening time lags for interest rates to have an impact

Paul Krugman on the problems of being in a liquidity trap

“Being in a liquidity trap reverses many of the usual rules of economic policy. Virtue becomes vice: attempts to save more actually make us poorer, in both the short and the long run. Prudence becomes folly: a stern determination to balance budgets and avoid any risk of inflation is the road to disaster. Mercantilism works: countries countries that subsidize exports and restrict imports actually do gain at their trading partners’ expense.” Interpreting this statement

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Quantitative Easing (QE) The Bank of England introduced a policy of quantitative easing in March 2009. The Bank of England has bought up to £200 billion of assets - mainly government bonds financed by the issuance of new central bank reserves.

Bank of England creates new money

Buys bonds drives bond prices higher

This lowers the yield (interest rate) on bonds

Commercial banks now have more deposits

should stimulate more lending

Boosts demand in economy

Revision notes on quantitative easing

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Fiscal policy – aggregate demand and supply effects Our focus here is mainly on how fiscal policy has been used to manage the economy during the financial crisis and recession. But it is important to understand that fiscal policy decisions affect both aggregate demand and aggregate supply. Indeed many of the fiscal stimulus policies of the last few years might also have significant effects on aggregate supply.

Fiscal stimulus policies in the UK during the recession

Taxes

Budget deficit

Subsidies

Govt spending


Economics of the budget deficit Fiscal policy has been used to actively manage demand in the UK U K and in other countries during the recession. A rising budget deficit is an expansionary fiscal policy. But what are the likely consequences of huge state borrowing?

Fiscal deficits – the economic benefits and risks Justifying hi higher go government bo borrowing

Economic ri risks of of a high bu budget de deficit

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Evaluation: The Importance of the Fiscal Multiplier The fiscal multiplier measures the final change in national income that results from a deliberate change in either government spending and/or taxation. Several factors affect the likely size of the fiscal multiplier effect. Factor

Comment

1 Choice of stimulus: Tax cuts or higher

government spending?

2 Taxes: Who are the beneficiaries of tax

reductions?

3 Expectations of taxation in the future 4 Availability of credit for businesses

affected by fiscal stimulus policies

5 Openness of the economy – and the

level of the exchange rate

6 Monetary policy response to a large

rise in government borrowing

7 Amount of spare capacity in the

economy (size of the output gap)

8 General level of consumer & business

confidence / uncertainty


Analysis: Recession and the impact of automatic stabilisers st abilisers When an economy suffers one or more domestic or external shocks, there are some natural automatic stabilisers at work that ought to help moderate or dampen the effects on demand, GDP profits and jobs without any explicit decisions from a government. The world recession recession of 2009 has brought these stabilisers into focus.

Automatic Stabilisers 1 Welfare payments 2 Floating exchange rate 3 Public sector jobs 4 Reduced tax take

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Build the case for a higher inflation target 1

2

3

The risks of allowing inflation to be higher 1

2

3

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Session 4

UK Economy in Focus – Issues facing the UK economy in 2010 and beyond In this special macroeconomics presentation we will consider key recent developments in the UK economy and try to connect as many different parts of the AS macro course together as we can. c an. How strong is the economic recovery likely likely to be? What are the main risks for the UK U K economy in the months and years ahead? Are there good reasons to be cheerful? During this presentation jot down arguments and ideas that you find most relevant – and use this as a great chance to show the examiner that you are right up to date with important developments in the UK and world economy! This will boost your evaluation marks!

Issues Facing the UK Economy


Session 4 Study Notes

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The end of the NICE decade

Dangers of a permanent loss of output and a slower underlying rate of growth


National Output

A deep recession may cause damage to an economy’s potential growth rate Some of the lost output may be unrecoverable and the trend growth rate in a recovery might be slower than in the past

Trend

Time

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Session 5

Aiming for the A* improving your evaluation and analysis skills In this session we will look at two questions – one requiring analysis and one requiring evaluation. We will then look at approaches to the question that provide hints on how to score high marks on analysis and critical evaluation in your A2 papers. After this we concentrate on evaluation skills that can be applied to every question. And we will flag up some handy evaluation phrases that can signpost your attempts at evaluation in the exam .

Practice Questions

The chart above shows the annual rate of consumer price inflation for four countries over the period from 2005 through to 2010. In the exam you will be given some stimulus material in the form of charts, tables and written extracts. It is essential that you make effective use of this material in your answers. We will do this in our discussion of these two questions: 1 Ana naly lysi sis: s: Explain why inflation rates may differ between countries countries 2 Ev Eval alua uati tion on:: Evaluate the view that low inflation should no longer be the number

one priority for macroeconomic policy

Take ten minutes or so to jot down some thoughts to these questions in the space provided on the next page. We will then take you through some suggestions for these questions.


Jot down your answers here

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New A2 Unit 4 Macroeconomic Exam Questions (AQA) Note: 10 mark questions appear in the data response question, 15 mark

questions appear in the main essay paper paper.. 25 mark questions appear in both the data and essay sections. Analysis questions

1 2 3 4 5

Explain the concept of economic growth and analyse two ways in which international trade can increase a country’s economic growth (10 marks) Explain the term ‘recession’ and analyse two possible causes of a recession (10 marks) Explain the concept of the natural rate of unemployment and the factors which might determine it (15 marks) Explain how fiscal policy might be used to bring about supply-side improvements to an economy (15 marks) Explain the factors which help determine the exchange rate of a currency (15 marks)

Evaluation questions

1 2 3 4 5

Using the data and your economic knowledge, assess the possible impact on the UK economy of greater openness to world markets (25 marks) Using the data and your economic knowledge, assess the possible effects on UK U K macroeconomic performance performance of an external economic stimulus, whether arising from other EU members or from other parts of the world (25 marks) Evaluate the consequences consequences for UK U K unemployment of a movement away from spending and importing towards saving and exporting (25 marks) The level of UK public sector spending grew from 37% 37% of GDP GD P in 1997 to over 45% in 2008. To what extent do you regard such an expansion of the public sector as beneficial to the UK economy? (25 marks) In a floating exchange rate system, a currency may be subject to frequent fluctuations in its external value. Discuss the possible economic consequences of such fluctuations for the achievement of a country’s macroeconomic macroeconom ic objectives. (25 marks)

Revision resources from Tutor2u

Ahead of the exams this summer our economics blog will be carrying daily revision updates, news and comment on economic events and useful articles on exam technique. Have a look at our free blogs and other resources by going to

www.tutor2u.net/blog/index.php/economics 38 A2 38 A2 ECONOMICS Revision Workshop April 2010

UK Economy at a Glance

Rece Re cesssi sion on Re Reco cove very ry 2009

2010

Comment

Consumer spending

-3.1

0.4

Government consumption

2.0

1.7

Investment

-14.4

-0.5

Stockbuilding (% GD GDP P)

-1.2

1.0

Domestic demand

-5.1

1.6

Exports

-10.9

4.8

Imports

-12.1

3.0

GDP

-4.9

2.0

Modest rebound in spending - tax rises, high unemployment and continued need to repay debt Squeeze on real government spending likely to be delayed until 2011 when the Politics is settled Deep cut in capital spending last year - less severe in 2010 but weak demand holds back investment Many firms cut back on stocks/ production in 2009, signs of a recovery in inventories in 2010 Overall C+I+G was strongly negative in 2009 (a largely home-made recession?) Weak again in 2010 Exports hit by sharp fall in global output/trade in 2009. More positive in 2010 - weak sterling helping? Imports slumped as UK went into downturn (UK has high income elasticity of demand for imports) Deep recession (-6.2% over course of recession) scraping towards 2% growth in 2010 (the new trend?)

Manufacturing output

-10.4

3.2

Unemployment LFS measure (%) 7.6

7.7

Unemployment CC measure (%) 4.9

6.1

Labour force (million)

31.4

31.2

Average earnings (inc. Bo Bonuses)

-0.1

3.4

R PI Inflation

-0.5

3.8

CPI Inflation

2.2

2.8

Real wages (deflated by CPI)

-1.0

-2.6

Productivity (output per worker)

-3.2

3.0

Unit labour costs (ULCs)

4.3

-3.4

BoP Current Account (% GDP)

-1.1

-0.7

Budget Balance (% G DP)

-11.0

-10.1

Government debt (% of GDP)

68.6

80.3

US Dollar /Sterling

$1.57

$1.61

Sterling / Euro

Euro 1.11

Euro 1.09

Base (policy) interest rate (%)

0.5

0.5

10-year government bond yield (%) 4.1

3.4

Collapse in industrial output in 2009 but more positive signs as industry benefits from weak pound Unemployment to stay lower than in the last recession fewer hours and wage cuts have helped Claimant count also likely to peak below 2 million but long term unemployment is a worry Small shrinkage in size of labour force - partly reverse migration and discouraged worker effect Negative earnings growth for millions in 2009 - pa pay cu cuts and pay freezes (but CEO CE O pay remained strong) Some deflation in 2009 (mainly due to big cuts in mortgage interest rates) - RPI RP I spikes higher in 2010 CPI has remained above target during the recession policy makers happy to ignore this for now Important data - in this recession, real wages have fallen for a significant number (wage flexibility?) Drop in productivity in 2009 explained by weak output but also long term factors limiting efficiency 2010 will see a fall in U K unit labour costs - an improvement in competitiveness which will help UK heading back to balance / equilibrium on the balance of payments, not really a policy issue This is the big macro policy issue - how much borrowing can be sustained? When to squeeze policy? Sharp rise in government debt (although lower than many EU countries) and much debt is long-dated Relative exchange rate stability against the dollar? Hard to forecast - many UK imports priced in Ss Euro set to gradually strengthen against sterling despite woes of the PIGS Policy interest rates set to remain below 1% for at least the rest of the year - MPC M PC in wait and see mode Where next for bond yields? Much depends on election result and credibility of new govt fiscal plans

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A2 MACRO Key Term Glossary The best credit rating that can be given to a corporation's bonds, effectively indicating that that the risk of default default is negligible. negligible. Accelerator effect Where Whe re planned capital investment is linked positively to the past and expected growth of consumer demand. Accommodatory policy A neutral macroeconomic policy stance in the face of an economic shock. For fiscal policy,, generally means keeping tax policy t ax and government expenditure rates unchange unchanged. d. For monetary policy, generally means keeping (real) interest rates unchanged. Aggregate supply shock Either an inflation shock or a shock to potential national output; adverse aggregate supply shocks of both types reduce output and increase inflation. Animal spirits The state of confidence or pessimism held by consumers and businesses. Automatic stabilisers Automatic fiscal changes arising automatically as the economy moves through different stages of the business cycle - for example a fall tax that the government takes out of the circular flow in a recession. Bank run Whenn a substantial number of depositors suspect that a bank may go bankrupt Whe and withdraw their deposits. Bank runs are rare but one happened with the Northern Rock in the autumn of 2007. Beggar my Neighbour This is an economic policy that seeks to promote a country's economy at the expense of another country. An obvious example is the use of tariff barriers. A country may place tariff on imports to help promote local domestic industry. industry. This may help local unemployment, but, be at the expense of the other country's export sector. Behavioural economics Branch of economic research that adds elements of psychology to traditional t raditional models in an attempt to better understand decision-making by investors, consumers and other economic participants. Bond Both companies and governments can issue bonds when they need to borrow money.. The issue of new government debt is done by the central bank and involves money selling debt to capital markets. Brain drain The movement of highly skilled or professional people from their own country to another country where they can earn more money. BRIC economies The BRIC BRI C grouping – Brazil, Russia, India and China – has become short hand for the rise of emerging markets in the global economy. economy. The BRICs BR ICs already have a bigger share of world trade than the USA. Bubble Whenn the prices of securities or other assets rise so sharply Whe s harply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely (at which point the bubble "bursts"). Budget deficit Occurs when government spending is greater than tax revenues. The UK U K budget deficit in 2009-10 is forecast to be more than 12% of GDP. Business confidence Expectations about the future of the economy – vital in business decisions about how much to spend on new capital goods. Capacity The amount that can be produced by a plant, company, or economy (industrial capacity) over a certain period, if current resources (including capital, workers, etc.) are used to their fullest extent. Capacity utilisation Measures how much of the productive potential of the economy is being used. Utilisation falls during a recession. Capital flight The rapid movement of large sums of money out of a country. There There could be several possible reasons - lack of confidence in a country's economy and/or its currency and political turmoil. Capital flows Movements of capital between countries. Outward capital flows are movements of domestically-owned domestically-own ed capital abroad; inward capital flows are movement of foreign owned capital to the domestic economy. economy. Capital stock The value of the total stock of capital inputs in the economy – affected by the rate of net investment spending. Capital-labour substitution Replacing workers with machines machines in a bid to increase productivity and reduce unit costs. This can lead to structural unemployment. Carry trade A strategy in which an investor borrows money at a low interest rate in order to invest in an asset that is likely to provide a higher return. Car scrappage scheme This is a scheme co-funded with the car industry that had the objective of increasing the demand for cars in the UK. AAA credit rating


This occurs when countries countries that start off poor tend to grow more rapidly than countries that start off rich. The result is some convergence in the standard of living as measured by per capita GDP. Claimant Count The number of people claiming unemployment-related benefits. Since October 1996 this has been defined as the number of people claiming Jobseeker's Allowance. Classical LRAS The classical LRAS curve is drawn as vertical because classical economists argue that a country’s productive capacity is determined by factors other than price and demand such as investment and innovation. Classical unemployment Classical unemployment unemployment is the result of real wages being above their market clearing level leading to an excess supply of labour. Clean float A currency exchange rate that varies (or floats) according to market forces, free from government intervention. Comparative advantage Comparative advantage refers to the relative advantage that one country or producer has over another. Countries can benefit from specializing in and exporting the product(s) for which it has the lowest opportunity cost of supply supply.. Competitive devaluation Whe Whenn a country tries to devalue its currency to increase its international competitiveness. However, However, this often encourages other countries to also devalue leading to only temporary increases in the competitiveness of exports. Consumer confidence Expectations about the future including interest rates, incomes and jobs Counter-cyclical Not following the normal pattern of business activity, for example increasing when other activities are decreasing. Countervailing tariffs Tariffs (duties) that are imposed by a country to counteract subsidies provided to a foreign producer. Credit crunch Whenn creditors become reluctant to lend money to businesses or individuals Whe because of the increased risk of default due to adverse economic or political conditions. Creeping inflation Small rises in the general level of prices over a long period of inflation. Creeping protectionism A period of time where import tariff t ariff rates rise and where countries introduce quotas and barriers to the mobility of labour and capital. Currency union A group of countries (or regions) using a common currency – for example the 16 countries that have entered the single European currency currency.. Current account deficit The amount by which money relating to trade, investment etc going out of a country is more than the amount coming in. Cyclically adjusted Adjusting the value value of an economic variable variable e.g. the budget deficit deficit for the effects of the business cycle. Debt burden The amount of debt that a business or country has normally expressed as a share of GDP. Debt deflation High levels of debt leading to falling asset prices. Debt forgiveness The cancelling cancelling by a creditor of a debt to a country or a company. De-industrialization A decline in the share of national income from manufacturing industries. industries. Deflation A persistent fall in the general price level of goods and services. Depression Used to describe a severe recession which may become a prolonged downturn in the economy and where GDP falls by at least 10 per cent. Discouraged workers People often out of work for a long time who give up on job search. Discretionary fiscal Deliberate attempts to affect aggregate demand using changes in government policy spending, direct and indirect taxation and borrowing. Discretionary income Disposable income adjusted for spending on essential bills such as fuel. Disequilibrium Disequilibrium Disequilibri um unemployment comes about when the aggregate demand for unemployment labour is less than the aggregate supply of labour at the current real wage rate and market forces are failing to correct the problem. Double dip recession Whenn an economy goes into recession twice without having undergone a full Whe recovery in between. Dumping Whenn a producer in one country exports a product to another country at a price Whe which is either below the price it charges in its home market or is below its costs of production. Economic nationalism The idea that a country's economy will perform best if its industries are protected from competition, for example by taxes on imported goods. Economic shocks Unpredictable events such as volatile prices for oil, gas and foodstuffs. Economic stability When the main indicators such as growth, prices and unemployment do not change much from one year to another. Catch-up effect

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The financial markets of developing countries. A policy by monetary authorities to expand money supply and boost economic activity,, mainly by keeping interest rates low to encourage borrowing by activity companies, individuals and banks. Expectations How we expect the future to unfold – this can have powerful effects on the spending decisions of households, businesses and the government. Fine-tuning Changes in monetary policy or fiscal policy designed to gradually manage the level of aggregate demand and prices. Fiscal drag The tendency of income from taxation to rise when an economy is growing. This helps to slow consumer spending and corporate activity, and thus acts as a counterbalance to unrestrained growth. Fiscal stimulus Government measures, normally involving increased public spending and lower taxation, aimed at giving a positive jolt to economic activity. activity. Fixed exchange rate An exchange rate that is fixed against other major currencies through action by governments or central banks, usually within small margins of fluctuation around the central rate. Likely to involve periodic intervention in the foreign exchange market by one or more central banks to buy or sell the currency in question if it moves below or above its margins. Foreign direct investment FDI is the acquisition of a controlling interest in productive operations operations abroad by companies resident in the home economy. May involve the creation of new productive capacity such as a new factory. Foreign exchange The reserves of gold or foreign currencies (e.g. U S dollars or Euros) typically held reserves by central banks on behalf of their national government. Free trade When trade between nations is allowed to occur without any form of import restriction. Full capacity output A level of national output where all available factor inputs are fully employed – this is a factor influencing the underlying growth rate. Full employment Whenn there enough job vacancies for all the unemployed to take work. Whe Gini Coefficient The Gini coefficient is a measure of the overall extent to which groups of households, from the bottom of the income distribution upwards, receive less than an equal share of income. Gilts Government bonds paying a fixed amount of money (‘coupon’) as interest annually and redeemable at face value on maturity. Globalisation The deepening of relationships between countries countries of the world reflected in an increasing level of overseas trade and investment. Golden Rule A rule introduced by the Labour government which says that borrowing on state provided goods and services should be zero over the course of one economic cycle. Borrowing is used to finance capital investment. Hard landing A full-scale recession shown by a decline in real national output. Hidden unemployment Unemploymentt which is known to exist but is not included in the official Unemploymen government figures. Hot Money Money that flows freely and quickly around the world economy looking to earn the best available rate of return. It might be invested in any asset whose value is expected to rise (e.g. property or shares) or simply be placed in an account offering the best real rate of interest. Infant industry New industry that requires government protection from overseas competition (for instance through the setting of import tariffs) in order to develop. Inflation target The Government sets the Bank of England a CPI inflation target, which is currently 2 per cent. Infrastructure The transport links, communications networks, sewage systems, energy plants and other facilities essential for the efficient functioning of a country and its economy economy.. Innovation Changes to products or production processes – innovation is important in delivering improvements in dynamic efficiency. Interest elasticity The responsiveness of demand to a change in interest rates. This is relevant in of demand discussing the effects of changes in monetary policy. International The IMF is an organisation of 186 countries, promoting global monetary Monetary Fund (IMF) cooperation, financial stability, international trade, employment and sustainable economic growth. It has provided help for several nations in the wake of the 2007-09 financial crises. Investment income Interest, profits and dividends from assets owned and located overseas. Emerging markets Expansionary monetary policy


J Curve Effect

Job search Keynesian economics Labour shedding Labour shortages Labour supply Lagging indicators Leading indicators Leveraging LIBOR Life-cycle model Liquidity Macroeconomic performance Macro stabilization policies Managed floating currency Marginal propensity to consume Marginal propensity to save Marginal rate of tax Mercantilism

Monetarism

Money illusion

Money supply Moral hazard Multiplier effect NAFTA NAIRU National debt

The effect of currency depreciation on the trade deficit depends on price elasticity of demand for exports and imports. In the short term, demand is often inelastic and the J Curve effect says a trade deficit can actually worsen after depreciation, but get better in the medium term. The process by which workers find appropriate jobs given their tastes and skills. The economics of John Maynard Keynes. The belief that the state can directly stimulate demand in a stagnating economy. For instance, by borrowing money to spend on public works projects like roads, schools and hospitals. Cut backs in employment often seen in a slowdown or a recession. Whenn businesses find it difficult to recruit the Whe t he workers they need. The number of people able, available and willing to work at prevailing wage rates. Indicators which tend to follow economic cycles e.g. unemployment. Indicators which predict future economic trends e.g. consumer confidence. The use of borrowed funds to increase your capacity to spend or invest. London Interbank Offered Rate and - used by banks world-wide to determine the rate at which they lend to each other - whether receiving or giving loans. Libor rates are set daily and released at the same time everyday - 11am London time. A theory that says that savings s avings rates depend on how old someone is. Liquidity refers to the ease with which something can be converted to cash with little or no loss of value. The overall performance of an economy in terms of output, prices, jobs, global trade and living standards. A coordinated set or group of mostly restrictive fiscal and monetary policies aimed at reducing inflation, cutting budget deficits, and improving the t he balance of payments. An exchange rate that is basically floating but subject to intervention from time to time by the monetary authorities, in order to resist fluctuations that they consider to be undesirable. The proportion of any change in income that is spent rather than saved. The change in total saving as a result of a change in income. The rate of tax on the next unit (£) of income earned. The notion that the wealth of a nation was based on how much it could export in excess of its imports, and thereby accumulate precious metals. Applied in the modern context to countries accumulating huge trade surpluses in goods or services and focusing on export-led growth. School of economic thought that considers money supply as the main factor influencing influenci ng the economy, and monetary policy as the key instrument of government decision-making. Controlling money supply should ensure steady economic growth and a healthy healthy price environm environment. ent. Opposed by the Keynesian school, which considers fiscal policy as the key macroeconomic tool. Money illusion occurs when people confuse nominal and real values when making economic decisions. Money illusion is most likely to occur when inflation is unanticipated, so that people’s expectations of inflation turn out to be some distance from the correct level. The entire quantity of a country's commercial bills, coins, loans, credit, and other liquid instruments in the economy. Whenn an insured party decides to take higher risks because they perceive their Whe losses will be covered – often linked to the excessive risk-taking by banks knowing that central banks might rescue them. If there is an initial injection (e.g. a rise in exports) into the economy then the final increase in AD and Real GDP G DP will be greater. North American Free Trade Trade Agreement - a free trade area agreement signed by the US, Canada and Mexico. Non-accelerating Non-accelerati ng inflation rate of unemployment: the number of people without work that some economists say is necessary at a particular time in order to prevent prices rising too fast. The total amount of debt that the government owes the private sector.

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Negative equity occurs when the value of an asset falls below the outstanding debt left to pay on that asset. Term is most commonly used in connection with property prices and describes a situation where the market value of a house is less than the existing mortgage debt. Negative interest rate An interest rate that is below zero. For real interest rates, this can occur when the inflation rate is higher than nominal interest rates. Net investment Gross investment minus an estimate for capital depreciation. Net inward migration Whenn the number of migrants coming into a country is greater than those leaving Whe in a given time period. Neutral interest rate A neutral interest rate is a rate of interest that neither deliberately seeks to stimulate aggregate demand and growth, nor deliberately seeks to weaken growth from its current level. In other ot her words, a neutral rate of interest would be that which is set at a level which encourages a rate of growth of demand close to the estimated trend rate of growth of real GDP. Non-inflationary growth Sustained growth of real national output whilst maintaining price stability Open market operations Central bank intervention in money markets where it buys and sells securities to control the money supply and the level of interest rates. Output gap The difference between actual and potential national output. A negative output gap after a recession implies that an economy has a large margin of spare productive capacity. Overseas assets Assets such as businesses, shares, property which are owned in overseas countries and which might generate a flow of investment income which is a credit item on the current account of the balance of payments. Paradox of thrift The basic concept is that if people save more in a recession, it will reduce consumption and thus aggregate demand demand will fall, impeding impeding economic growth growth and, in fact, lowering the general level of s avings. Phillips Curve A statistical relationship between unemployment and inflation. Policy asymmetry Whenn a given change in interest rates affects different groups or different Whe countries to a lesser or greater degree. Potential output The economy's maximum productive capacity in a physical sense. The largest output that could be produced, given the prevailing state of technology, with all available labour, labour, capital and land fully utilised. Precautionary saving Saving because of fears of a loss of real income or employment. Price stability Price stability occurs when there is low inflation and the price changes that do occur have little impact on day-to-day decisions of people. Productivity A measure of efficiency e.g. measured by output per person employed or output per person-hour. Protectionism The use of tariff and non-tariff restrictions on imports to protect domestic producers from foreign competition. Purchasing Purchasin g power parity Method of currency valuation based on the premise that two identical goods in different countries should eventually cost the same. This is illustrated by the Big Mac index. Rational expectations Where Whe re decisions are based on current information and anticipated future events. Reserve currency A foreign currency that is held in countries' official reserves because of its global importance as a medium of exchang exchangee and its inherent stability. Ricardian equivalence The argument attributed to David Ricardo that government budget deficits have no lasting effects on economic activity. Rational taxpayers are supposed to anticipate that tax cuts today will mean tax increases in future, and so save more when the government saves less. Quantitative easing Central banks flood the economy with money by printing new notes, to increase the supply of money. The idea idea is to add more money into the system to t o avert deflation and encourage banks/people to borrow and spend. Quota A quota imposes a physical limit on the quantity of a good that can be imported into a country in a given period of time. Real disposable income Income after taxes and benefits, adjusted for the effects of inflation. Real interest rat e The nominal rate of interest adjusted for inflation. Real wage The nominal wage adjusted for the effects of inflation. Relative deflation The term “relative deflation” is generally used to describe an economy with an inflation rate, which has not necessarily descended into negative territory, but is markedly lower than comparable economies. Negative equity


Sending of money to people in another country for example migrant workers sending some of their wages to their home country. Retail Price Index (RPI) The RPI is broadly similar to the CPI but includes mortgage repayments repayments and some taxes, and excludes the top 4 per cent of earners. It is used to calculate increases in wages, state benefits and pensions. Risk averse Exhibiting a dislike of uncertainty, often seen in a recession. Saving ratio The percentage of disposable income that is saved rather than spent. Soft landing A slowdown in activity but which does not result in a recession. Sovereign wealth A government or state run fund usually created by profits from natural resources fund (SWF) such as oil, gas or minerals. Highly secretive, their assets grew dramatically when oil prices rose to record levels. Some of the largest SWFs are in the oil-rich Middle East. Spare capacity Whenn a business is not making full use of its available capacity – there are spare Whe factors of production including land, labour and capital. When an economy has plenty of spare capacity, short run aggregate supply tends to be elastic. Special drawing rights A unit of money created by the IM F. Each member country can borrow SDRs at favourable interest rates from the IMF's reserves when they are needed for reasons related to a country's balance of payments. Stability and growth pact EU's fiscal rule intended to maintain discipline in the public finances of Euro Area member-states. The pact sets a limit for government budget deficits of 3 per cent of gross domestic product in normal times. Stagflation A combination of slow economic growth and rising inflation, can lead to stagflation. The most notable recent period of stagflation occurred during the 1970s, 1970s, when world oil prices rose dramatically, dramatically, and UK inflation rose at one point to nearly 30 per cent. Sterling exchange The external value of sterling calculated using a weighted index of a basket of rate index currencies – the weightings are based on the pattern of o f trade between the UK UK and other countries. Sustainable growth Growth which meets the needs of the present without compromising the ability of future generations to meet their own needs. Tariff A tax on imported products which may be ad valorem (%) or a specific tax (a set amount per unit imported). Tight labour market Whenn demand for labour is high and there are shortages of labour. Businesses Whe may have to offer higher wages to attract more workers. Time lags The time it takes for one change e.g. a change in interest rates to affect other variables e.g. consumer confidence and spending. Toxic debt Loans that may not be repaid. Trade-off Choices have to be made between different objectives of policy policy.. Transmission mechanism How a change in interest rates affects sectors of the economy. Trend growth growt h The long run average growth rate – mainly determined by changes in the stock of available factor inputs and also improvements in productivity. Under-employment Whenn people want to work full time but find that they can only get part-time work Whe – the result is a loss of hours that the economy can use. Unemployment trap Whenn the prospect of the loss of unemployment benefits Whe benefits dissuades those without. work from taking a new job – creates a disincentives problem Unorthodox monetary Any policy undertaken, usually by central banks, that operates outside the usual policy parameters for influencing either the price or the quantity of money in an economy. – this includes quantitative easing. Unit wage costs Labour costs per unit of output. Unsecured credit Credit not secured by another asset – i.e. money borrowed on credit cards. Velocity of circulation The average number of times a unit of money changes hands in an economy during a given period - normally measured by dividing the total amount spent (GDP) by the amount of money available (money supply). supply). Wage price spiral A situation where workers bid for higher wages because they have seen their real income eroded by rising prices. This can lead to a further burst of cost-push inflation in an economy. Wealth effect The supposed link between changes in wealth and household spending World Bank Owned by 186 member countries, the World Bank is a source of financial and technicall assistance to developing countries. It normally targets public works and technica other essential capital or social projects. World Trade Organisation The WTO oversees trade agreements, negotiations and disputes between member countries between member countries. Remittances

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No te s

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A2 Economics Macroeconomics Revision Workbook _ April 2010

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