Various Macro-Economic Questions and answers

by joshmartin15 (student)

27th Jan (ARG)

Explain the difference between micro and macroeconomics?

Microeconomics is looking at individual segments of the economy, looking at the effects of certain company’s actions such as social costs and benefits, macroeconomics is looking at the economy as a whole. Macroeconomics covers the objectives of the government such as growth, inflation, balance of payments and employment. These are all causes of the actions of the economy as a whole, such as growth is the increase in production over the whole economy, inflation is a general rise in the price level across the whole UK market and employment is an effect and cause of aggregate demand.

What is ‘economic activity’?

The actions of the economy as a whole, it is the input, production and output of all of the individual firms in the economy. It covers all sectors, primary, secondary, tertiary, private and public and can be defined as:

“the process of producing a good/service and for it to then be exchanged in a market place”

Economic activity comprises all activities involved in producing goods and services for sale in the marketplace.

Explain in detail the main economic objectives of a government. Why are they desirable?

To maintain full employment or aim to achieve as higher employment as possible.

High employment/ low unemployment is key to a healthy economy because high employment means national income rises, stimulating demand and therefore welfare of firms across the country. This in turn further increases employment, as more factors of production are needed to meet demand.

High employment means high income tax for the government and increases sales for UK businesses, which may also lead to more equality in the balance of payment deficit.

High unemployment causes social problems such as crime and more specific problems such as heightened cases of alcohol consumption leading to greater stain on the NHS, who would have little funding anyway due to the lowered government income.

To keep inflation low but not necessarily zero as inflation is a signal of economic growth. High inflation can be dangerous as it could cause hyper inflation, which leads to the complete failure of an economy as a whole. In less extreme cases it causes firms minor costs like reprinting catalogues as the price increases so much constantly.

High inflation is causes by a surge in demand not being met by supply, thus leading prices to shoot up, inflation can be largely down to events such as shortages in supply/ surges in demand in the commodity markets as a high percentage of incomes are spent on these.

Inflation is also a signal and necessary part of economic growth so 0% inflation is not necessarily the best amount of inflation to have. 2% is the target amount for the UK economy set by the Bank of England.

To maintain the balance of payments, aim to have more exports than imports.

A deficit in the balance of payments is detrimental to an economy because it means that the country as a whole is losing money, as if country A and B have £1m each then country A exports more to B than B to A, then A will benefit and B will be losing money.

The UK has a deficit in our balance of payments as our primary and secondary sectors have gone into decline in recent decades due to coal and north sea oil running ...

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To maintain the balance of payments, aim to have more exports than imports.

The UK has a deficit in our balance of payments as our primary and secondary sectors have gone into decline in recent decades due to coal and north sea oil running low and with the rise of the BRIC’s with their ability to produce goods cheaper than the UK.

To achieve low steady growth.

Growth (rise in GDP) is the main aim for an economy, growth shows that an economy is producing more year on year, and therefore the country can be said to be more prosperous, but this may not be the case as there may be other factors to consider such as inequality of incomes and corruption.

By 10th Feb (ARG)

What is economic growth?

Economic growth is the measure of the output of the economy. It is calculated by either GDP or GNP. It is the value of all goods and services produced within an economy within a year. It can be calculated via GDP per capita, which is just an easier way to compare between economies as population of the economies is taken into account.

If GDP rises, it is called economic growth, a negative change in GDP means there has been a shrink in the size of the economy, and if this occurs for two consecutive quarters, it is called a recession.

How is it usually measured?

It is usually measured by GDP or GNP. GDP is the value of all goods and services produced within an economy. GNP is the value of all goods and services produced by British businesses, which may include British businesses operating abroad.

Economic growth can also be calculated by finding the national income. This should be roughly equal to the GDP of the economy.

Are there any problems with the use of GDP as a measure of growth?

GDP only measures output; it doesn’t measure any investment made by firms or other counties. Plus it only measures the output by British firms, and as most of the companies in our economy are foreign it doesn’t say much. Also it doesn’t count the output from firms outside the UK.

Explain in detail the determinants of growth

Consumer Spending (C) – The amount of income that the consumer spends on goods in an economy, the more spending, the more business have to increase productive capacity.

Investment (I) – with more investment, the more a firm/economy can produce so the productivity capacity increases, increasing GDP, which is a measure of economic growth.

Government spending (G) – the money that comes from tax revenue and exports is used on spending by the government, this can be from increasing firms potential to produce, or in public services for the economy.

Exports (X) - the more we export, the more money we get from abroad which expands our economy

Imports (M) – The more imports, the less money consumers spend in our economy, which can be a leakage, but the more tax the government gets to spend on the economy.

Explain the term ‘Economic Cycle’

Economic cycles are the typical changes in an economy over time. Periods of rapid increase in growth (Boobs) are averaged out by periods of slower increase in growth (Busts). The time between one boom and another is typically 5 years. But in the long run we can see that the economy is steadily growing.

Explain with a diagram the term ‘output gap’

The output gap is the difference between potential GDP and actual GDP. If this number is positive, it’s called an inflationary gap as aggregate demand is outweighing aggregate supply, possibly creating inflation. If the number is negative, it is called a recessionary gap-possible signifying deflating.

This is the output gap.

By 2nd Mar (ARG)

Other than a rise in GDP, what factors determine economic welfare? Explain them.

Economic welfare is measured in different ways. Factors used to measure the economic welfare of a population include GDP, , access to health care, and assessments of quality.

Explain in detail the problems associated with economic growth

Stress and polution are the main problems, as economic growth

Explain in detail the components of aggregate demand?

Aggregate demand is composed of several components:

Government spending, which is an injection into aggregte demand and thus if government spending rises, so does demand.

Investment, which is also an injection. Investment normally falls dramatically during a recession as prospects for the future of the economy are bleak, which is a common cause of a slump as a lack of investment leads to a lack of efficiency.

Exports-Imports, if exports are larger than importants, then overall the effect is an injection into the economy as money comes into the UK from abroad. On the other hand, if imports exceed exports then it will technically be a leakage from the economy and thus be detrimental to aggregate demand.

What will cause a shift in the aggregate demand curve?

A change in factors affecting any one or more components of aggregate demand, consumption (C), firms (I), the government (G) or exports and imports (X) changes planned aggregate demand and results in a shift in the AD curve.

What does ‘the multiplier effect’ mean? How does this process work?

The multiplier can either be in inflation due to incomes or in a recession due to lack of investment.

In the case of inflation, as the average price level rises, workers demand more pay in line with inflation, but then to maintain the wage gap, people on higher incomes also demand a pay rise. With the ‘extra’ cash these workers all have, aggregate demand is increased very quickly and thus extra inflation comes in due to supply not being able to keep up in the short run.

In a recession, as soon as GDP growth falls to a small/ negative quantity, investment stops as projections for the future are negative. A recession is a self forfilling prophicy, as soon as people think the economy is going to decline, investment stops and for that reason the economy does actually decline as without new machinery, companies become uncompetitive and demand for capital equipment falls.

By 16th Mar (ARG)

What is meant by aggregate supply?

Aggregate supply is the total amount of supply in the economy, throughout the country by all economically active people in the population.

What is ‘the short run’ when discussing aggregate supply? What does a short run aggregate supply curve look like?

What does a long run aggregate supply curve look like? Why?

Explain the factors that will cause a shift in the aggregate supply curve.

Shifts in the SRAS curve can be caused by the following factors

Changes in unit labour costs: Unit labour costs are defined as wage costs adjusted for the level of productivity. For example a rise in unit labour costs might be brought about by firms agreeing to pay higher wages or a fall in the level of worker productivity. If unit wage costs rise, this will eventually feed through into higher prices (this is known as an example of “cost-push inflation”)

Commodity prices: Changes to raw material costs and other components e.g. the world price of oil, copper, aluminium and other inputs in many production processes will affect a firm’s costs. These costs might be affected by a change in the exchange rate which causes fluctuations in the prices of imported products. A fall (depreciation) in the exchange rate increases the costs of importing raw materials and component supplies from overseas

Government taxation and subsidy: Changes to producer taxes and subsidies levied by the government as part of their fiscal policy have effects on the costs of nearly every producer – for example an increase in taxes designed to meet the government’s environmental objectives will cause higher costs and an inward shift in the short run aggregate supply curve. A rise in VAT on raw materials will have the same effect.

Explain what is meant by “equilibrium in the economy”?

Where supply equals demand so neither the suppliers or the consumers need to change anything as all demand is being supplied and all supply is being consumed so everyone is happy, this is only a constuct though and cannot exist in the real world.

How is ‘short run equilibrium,’ different to ‘long run equilibrium’?

A market can exist is short run equilibrium for a short time but long run equilibrium is much harder to achieve and can only really be achieved through a thoroughly planned economy.

What is ‘consumption’?

Explain how is consumption related to income

Explain the main determinants of consumption

Explain the main determinants of saving

By 30th Mar (ARG)

Investment

What is ‘investment’? How is it different to ‘saving’?

Explain the Marginal Efficiency of Capital theory

Explain the factors that affect the level of investment

What is ‘the accelerator’? How is it supposed to work?

Supply side policies

What is meant by ‘a supply side policy’?