MACROECONOMICS



ECONOMIC GROWTH, UNEMPLOYMENT & INFLATION

Name:___________________

[pic] [pic] [pic] [pic] [pic]

Economic Growth

A. Definition of Economic Growth

B. Measurement of Economic Growth

C. Causes of Growth

D. Effects of Economic Growth

E. Recent Performance (evaluation)

[pic] [pic] [pic] [pic] [pic]

Full Employment = Low Unemployment

A. Definitions

B. Measurement of Unemployment

C. Causes of Unemployment

D. The Concept of Full Employment

E. The Effects of Unemployment

F. Recent Performance (evaluation)

[pic] [pic] [pic] [pic] [pic]

Price Stability = controlled Inflation

A. The Concept of Price Stability

B. Measurement of Inflation

C. Causes of Inflation

D. Effects of Inflation

E. Recent Performance

MACROECONOMICS

Introduction

Macroeconomics is the study of the performance of the economy as a whole.

It is concerned with the aggregates and economic objectives.

It also looks at policies to achieve economic objectives

[pic][pic][pic][pic] [pic]

INTERNAL STABILITY

The government aims to keep the economy stable or to avoid sudden changes in the economy.

Why is this objective important?

If economic conditions change too much it creates uncertainty which leads to:

(i) a reduction in business and consumer confidence

(ii) difficulty for a business to make production decisions i.e. investment

Internal Stability objective for the government

Targets for Australia and other western countries

* Steady or stable economic growth (continuous) __% Real GDP

* Price stability or low inflation __ % (CPI)

* Full employment or low unemployment __ % Unemployment

Targets for Indonesia and other developing countries

* Steady or stable economic growth (continuous) __% Real GDP

* Price stability or low inflation __ % (CPI)

* Full employment or low unemployment __ % Unemployment

4.1 ECONOMIC GROWTH – ECONOMIC OBJECTIVE 1

A. Definition of Economic Growth

[pic][pic][pic][pic]

Economic growth is _____________________________________________

__________________________________________________________________________________________________________________________

Real GDP is money GDP with the effect of inflation removed.

E.g. No of goods ↓ Price Δ↓ GDP

Year 1 cars $ each » $

Year 2 cars $ each » $

B. Measurement of Economic Growth

It is measured by_______________________________________________

Rate of Growth =

Gross Domestic Product (GDP)____________________________________

_____________________________________________________________

Final good is __________________________________________________________

Methods of Measurement of Economic Growth

Real GDP – the value of all final goods and services produced during a given time (year) based on the prices existing in a selected base year.

_______________________________________________________

Money GDP/Nominal GDP – the value of all final goods and services produced during a given time (year) ____________________________________________

Money GDP/Real GDP

Example (i) Output Price Money GDP Real GDP

Year 1 100 cars $ 1 each $ $

Year 2 100 cars $2 each $ $

Example (ii) Money GDP CPI (inflation) Real GDP

Year 1 $100B - $

Year 2 $110 $

Real GDP per capita – __________________________________________

_____________________________________________________________

________________________

Considered to be the best measure of GDP

E.g. $100,000,000,000 = $_____ =$_________ per person

20,000,000

• Real GDP is ______________________________________________

_________________________________________________________

Calculations of Economic Growth

|YEAR |REAL GDP |ECONOMIC GROWTH % |

|2004 |$800B | |

|2005 |$900B | |

|2006 |$950B | |

The rate of economic growth from 2004-2005 is _________ than the rate from 2005-2006. This does not mean its __________. ________________

_____________________________________________________________

Limitations of Real GDP as a measure of Economic Growth

• __________________________________, it excludes a/ second hand transactions e.g. used cars, non-productive financial transactions.

• ________________________________________________________

___________________________________________________

i.e. goods sold for cash-tax free or illegal goods and services

• ________________________________________________________

__________________________________________________.

• ______________________________________________________

e.g. China 1.3 Billion and Australia 22 million and Indonesia ______.

• ____________________________________________________________________________________. (should distinguish between different economies and one economy?)

[pic][pic][pic] [pic] [pic]

C. Causes of Economic Growth (source)

Increase in Production Possibilities Adjust the Diagram and explain

How economic growth increases

[pic]

(i)Aggregate Demand (AD)

This represents the __________________ by all participants in the economy.

The participants are:-

Consumers , Government, Producers, Exporters, Importers

[pic][pic][pic] [pic][pic]

An increase in the total of AD causes a shift (or increase) in AD

Price

Levels

AS

AD

Production Output

(Level of Economic Activity)

(Draw an increase in AD Line and Label Diagram)

| |

| |

| |

| |

Factors that shift the AD Curve

i) Increase in _____________________________________________

ii) Increase in _____________________________________________

iii) Increase in ____________ (borrowing)________________________

______________________________________________________

iv) ____________________________________________________________________________________________________________

These factors _______________ AD

Factors that _____________ AD below

____________________ – people have less money to spend

Global Economic Crisis 2008/9 _______________________________________

_____________________________________________________________

Austerity Cutbucks in the Eurozone 2011 onwards ______________________________________________________________________________________________________________________________________

Price of Petrol Increasing in Indonesia in 2014 lead to _________________________________________________________________________________________________________________________________________________________________________________________________________

Fall in the Price of Oil worldwide in 2015 will mean ______________________________________________________________________________________________________________________________________

(ii)Aggregate Supply (AS) _______________________________________

_____________________________________________________________

AS is determined by _____________________________________________

A supply side contribution to growth can occur by (_____________________)

a/ employing _______________________e.g. unemployed people

b/ by increasing the amount of resources e.g. _______________________________

[pic][pic][pic][pic][pic]

Therefore, economic growth needs a contribution from both ______________

A relatively equal contribution is the best outcomes.

The level of AD must be high enough to generate growth (AS) but not too high as to cause inflation.

Aggregate Demand and Aggregate Supply: Diagram

Price

AS

AD

Production Output

(Level of Economic Activity)

(Draw an increase in AD and AS Line and Label Diagram)

Describe an increase in AD

| |

| |

Describe an increase in AS

| |

| |

If only AD is increased, it eventually results in no economic growth and very high level of inflation.

Increasing both AD and AS produces better results

If the economy is in a recession or many resources are unemployed, only an increase in AD will increase economic growth.

But not when all resources are fully employed

[pic][pic]

(Label Diagrams with increase AD at full employment and show full employment on PPC)

E. Effects of Economic Growth

Benefits

i) ______________________________________________________

ii) ______________________________________________________

iii) ______________________________________________________

[pic][pic][pic][pic]

Costs

i) ______________________________________________________

e.g. oil and coal and gold etc

ii) ______________________________________________________

e.g. air and water pollution and global warming

iii) ______________________________________________________e.g. too much demand for goods and services

[pic][pic][pic][pic]

E. Evaluation of Economic Growth or Recent Performance

How well are we performing for this country?

Aim: to achieve sustainable and stable economic growth

Target: To achieve about ___ % economic growth

Why 4%

Economic growth > _ % reduces unemployment

< _% increases unemployment

> _ % increases inflation

USA 10 year average is ____%GDP (2004-2014)

Indonesia’s 10 year average is ____%GDP (2004-2014)

China’s 10 year average is ____%GDP (2004-2014)

The Trade Cycle (Business Cycle)

The Business Cycle is when there are alternating periods of economic growth and contraction, which can be dated by changes in output, income, sales and employment measures.

Trade Cycle:

Trade

7 Years Time

Draw the Business Cycle and Label

i) Expansion: ____________________________________________

ii) Boom/Peak: ____________________________________________

iii) Contraction: ___________________________________________

iv) Trough/Recession: ______________________________________

______________________________________________________

Q1 Why is it important for a country to achieve close to its target for economic growth

| |

| |

| |

| |

4.2 FULL EMPLOYMENT – ECONOMIC OBJECTIVE 2

A. Definition of full employment

[pic][pic][pic][pic]

Full employment is______________________________________________.

______________

Full employment occurs when there is ____cyclical unemployment. It allows for some natural unemployment such as _____________________________

unemployment.

Cyclical unemployment is considered to be _________________________.

The target for Australia is about _____% unemployment.

The current unemployment rate is __________________________________

N.A.I.R.U. (Target)

N.A.I.R.U. stands from the _______________________________________________

This means we aim to get unemployment as low as possible without causing a sharp rise in inflation.

Classification of People

Four options

i) _________________ – children at home or school

ii) __________________– retired people, students studying, disabled people etc.

iii) ________ – people in workforce working (working more than 1.1hrs per week)

iv) ___________ – are those without work but looking for work (working less than

1hr per week.)

B. Measurement or Calculation of Unemployment

______________ = Unemployed__(iv)_______ * 100

Employed + unemployed (iii)+(iv)

______________ = Labour Force_(iii)+(iv)_________ * 100

Population above 15 years (ii)+(iii)+(iv)

|0-14 years |

|Not wishing to work |

| |

|Unemployed |

| |

|Employed |

Employed: _____________________________________________________________

_____________________________________________________________

[pic][pic][pic][pic]

Unemployed: __________________________________________________

_____________________________________________________________

Q/ Why do we need to know the value of the unemployment rate and participation rate?

A/ _____________________________________________________________

_____________________________________________________________

C. Causes or Types of Unemployment

(i)Cyclical Unemployment (avoidable)

This is caused by _______________________________________________

_____________________________________________________________

Aggregate Demand and Aggregate Supply: Diagram

Price

AS

AD

Production Output

Trade Cycle (Level of Economic Activity

[pic]

Draw a decrease in AD A Recession on Trade Cycle.

| |

| |

| |

When the economy recovers, _____________________________________________

(Unavoidable – natural unemployment) Expected

(ii) Seasonal Unemployment

[pic][pic][pic][pic]

__________________________________________________________________________________________________________________________

e.g. Snow ski instructor in summer and a fruit picker in winter

(Natural Event!)

(iii)Frictional Unemployment

__________________________________________________________________________________________________________________________

e.g. Ms Accounts leaves Accounting Firm to look for a job at a University.

[pic][pic][pic][pic]

(iv)Structural Unemployment

_____________________________________________________________________

e.g. When a bank teller is replaced by an automatic teller.

Clothing and textile workers in Australia lose their jobs as production moves to China.

{The concept of sunrise industries i.e. Mobile phones – expanding industry equals new employment

and sunset industries i.e. cars and clothes – contracting industry equals increase unemployment}

Solution to structural unemployment

Retrain workers/new skills required. Education funding from government needed.

[pic][pic][pic][pic]

Hard core unemployment _____________________________________________________________

_____________________________________________________________

Calculation Question

Taylia (Country)

Workforce = 50 Workforce – Employed = _________________

Employed = 45

Not wishing to work = 20

Unemployment Rate = Unemployed__________ * 100

Employed + unemployed (workforce)

Participation Rate = Labour Force__________ * 100

Population above 15 years

D. The Concept of Full Employment

Full employment occurs when there is zero cyclical unemployment.

E. Benefits of achieving full employment

(i)More income tax is collected and less social welfare payment are paid.

This improves the federal government budget.

This means more funds for education, health and public transport (opportunity cost)

(ii)Social Factors: there should be less crime, vandalism and lower divorce rate.

Less money is spent on Police and Social Workers etc

(iii)Improved productive efficiency in theory as we approached the PPC

(iv)More goods and services and improved living standards

E. Cost of High Unemployment Opposite of above

| |

| |

| |

| |

| |

| |

| |

| |

Costs of Full Employment (Eco Growth)

i) ____________________________

ii) ____________________________

iii) ____________________________

F. Evaluation of Australian performance

(i)Current unemployment rate compared to the past? _________________________

This is __________________compared to the last ten years of unemployment figures

(ii)Australia compared to other countries? ___________________________

_____________________________________________________________

__________________________________________________________________________________________________________________________

How accurate are the unemployment figure measurements?

(i)Many people have moved away from unemployment benefits onto DSP (Disability support pension) [cheating?] From 1996 to 2006 370,000 more people on DSP

(ii)Hidden Unemployment: many people are giving up looking for work but still want a job. These people are recorded as not wishing to work. This lowers the unemployment rate (but ↑not wishing to work rate) e.g. mothers who can’t find a job and husband is working

So in a time of a boom, when consumer and business confidence is high, more people join the workforce, pushing the participation rate up. Conversely, during a recession when confidence is low and pessimism prevails, some people withdraw from the workforce. This is called “discouraged worker hypothesis”

[pic][pic][pic]

(iii)Under-employment or disguised unemployment. This occurs when part-time workers are seeking full-time work. They are counted as full employed.

e.g. if a teacher works 2 classes at Taylors they are only getting 50% of wage but are considered fully employed and not counted as unemployed.

[pic][pic][pic]

4.3 PRICE STABILITY

[pic][pic][pic][pic]

A. Definition: Price Stability

______________________________________________

____________________________________________________________________Price rises on average should not be faster than your trading partners. E.g. Australia trades with China, Japan and USA

Inflation: _____________________________________________________________

Aim is to maintain a rate of ___% per year, Indonesia’s current rate is ______________

Deflation: _____________________________________________________________

_____________________________________________________________

Disinflation: _____________________________________________________________

_____________________________________________________________

Where does inflation become a problem?

Where there is a sustained and substantial increase in the average price levels.

(inflation rate _________ 2-3% is high inflation)

Measurement:

(i)Headline Inflation:

This is measured by the CPI or the Consumer Price Index. It is a quarterly measure

(3 months) of average changes in consumer prices in a ‘basket’ (regime/list) of goods and services normally purchased by typical city households.

(ii)Underlying Inflation:

Calculated by removing the more volatile, seasonal and policy factors in the CPI.

e.g. ____________________________________________________

This is also know as core inflation or trimmed mean.

Calculation of CPI

Formula

Rate of Inflation = Current CPI – Previous CPI * 100

Previous CPI

Base year CPI always 100

Year Price Index Year 3 Inflation

1 100

2 109

3 119

Problems with the Accuracy of Consumer Price Index

[pic][pic][pic][pic]

The CPI is only an _______: (Due to costs of checking all goods +services in Australia)

(i)_________________________________________ –only goods in basket (selection)

(ii)_______________________________________, Sydney, Brisbane and not country

(iii)__________________________________________________________________

Factor market is not included only consumer goods and services (product market)

(iv)_______________________________________________ (exhibit 13.1 Text Book)

C. Causes or Types of Inflation

Demand Pull Inflation = Increase in AD

Demand Pull inflation is __________________________________________

_______________________________________________________________________________________________.

This is caused by

E.g. A large increase in government spending or large tax cuts

Increase in wages that leads to a higher level of consumption spending

Lower interest rates leading to increase in Investment spending

Demand Pull Inflation Diagram

Price

AS

AD AD=___________________

Production Output

(Level of Economic Activity)

Draw an increase in AD and describe it’s effect on Price levels and Output.

| |

| |

| |

Shortages of goods and services occur and prices rise

AD>AS = High inflation

Solution: (i)Reduce AD or cut spending –increasing interest rates means people save more and people pay more in interest and therefore spend less reducing AD and therefore inflation decreases

(ii)Increase AS (difficult in Short Term)

Cost Push Inflation

Cost Push inflation is ____________________________________________

_____________________________________________________________

This occurs when increases in the cost of production of most products leads to reduced profit margins and a _____________________.

e.g. __________________________________________________________

Unemployment is often associated with cost push inflation as workers can price themselves out of the labour market when seeking higher wages.

The producer may try to pass on the price increase to consumers when profit margins for businesses, there are 2 choices

A/ Reduce profit or B/ pass on the costs in higher prices for consumers

This depends on the types of market structure dominating the economy

Cost Push inflation Diagram

Price

AS

AD AD=C+I+G+(X-M)

Production Output

(Level of Economic Activity)

Draw an decrease in AS and describe it’s effect on Price levels and Output.

| |

| |

| |

Reasons for the decrease in AS are increases in costs of production e.g. pay rises, raw materials i.e. increase in fuel costs and so businesses will supply less

Not easy to solve

Must increase AS

D. Effects of High Inflation

High inflation is like a disease that effects the whole economy. It is the priority objective [FIFS – Fight Inflation First Strategy]

Achieving low inflation makes it easier to achieve all other objectives _____________________________________________________________

(i)___________________________________________________________________(these investments do not increase output of goods and services)

e.g. gold, art work, land etc.

(ii)___________________________________________________________

_________________________________________________. E.g. less factories built

The costs to businesses may increase. They may cutback on production.

(iii) Income redistribution effect occurs because there are winners and losers as a result of inflation. The winners include borrowers of funds, strong trade unions, powerful firms and the owners of real assets. Losers include those on fixed incomes, lenders, poorly organised groups such as weak trade unions and firms facing strong competition perhaps from cheap imports, holders of money assets and exporters

(iv) __________________________________________________________

___________________________________ (↓ exports, ↑ imports). If the prices of AUSTRALIA goods increase too much then people and businesses may start to import more goods from abroad because they are cheaper. .

(v)__________________________________________________________________ in the long-term. And therefore Lower economic growth leads to higher unemployment

|WINNERS High Inflation |LOSERS of High Inflation |

| | |

| | |

| | |

| | |

| | |

| | |

| | |

| | |

| | |

| | |

| | |

| | |

| | |

[pic] [pic][pic][pic][pic]

E. Evaluate Indonesia's Recent Performance with Inflation

____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Phillips Curve

[pic]

In economics, the Phillips curve is a historical inverse relationship between rates of unemployment and corresponding rates of inflation that result in an economy. Stated simply, decreased unemployment, (i.e., increased levels of employment) in an economy will correlate with higher rates of inflation.

Stagflation

Definition of Stagflation.

Stagflation is a period of rising _________ and falling __________. With falling output, unemployment will tend to be _____________.

Diagram Stagflation

[pic] 

 

Stagflation is often caused by a ______________________. For example, rising commodity prices, such as _____ prices, will cause a rise in business costs and Aggregate Supply will shift to the left. This causes a higher __________ rate and lower _______.

People may talk about stagflation if there is a rise in inflation and a fall in the growth rate. This is less damaging than higher inflation and negative _________. But, it still represents a deterioration in the trade off between unemployment and inflation.

Stagflation and Phillips Curve

The traditional phillips curve suggests there is a __________ between inflation and unemployment. A period of stagflation will shift the Phillips curve to the right, giving a worse trade off.

Stagflation in the 1970s

[pic] 

In 1974, we have an inflation spike of 25%, at the same time, we see negative GDP growth. This was caused by the oil price boom and also end of the Barber Boom.

Stagflation in 2011

In 2011, the UK experienced a rise in inflation to 5%, at the same time, we experienced economic stagnation, with a very low growth rate.

This was caused by:

• Higher ___________ prices

• Higher __________ prices

• Impact of devaluation increasing ____________ prices

• Impact of higher _______, which increased inflation but reduced _____ standards.

• see also: _______________________

Solutions to Stagflation

There are no easy solutions to stagflation, though supply side policies to increase productivity may help.

e.g. _____________________________________________________________

___________________________________________________________________

REVISION QUESTIONS

ECONOMIC GROWTH

1/ Define economic growth.

2/ What is the formula for calculating economic growth?

3/ a. What are the costs and benefits of economic growth?

b. What are 2 limitations of Real GDP as a measure of Economic Growth

4/ What are the 2 main causes/sources of economic growth?

5/ Using a PPC explain how economic growth is achieved.

6/ Using an AD and LRAS diagram. Explain how economic growth can be achieved with increased LRAS and what increases LRAS.

7/ Is increased investment essential to achieve economic growth? Evaluate

8/ Is improved productivity essential to achieve economic growth? Evaluate

9/ Evaluate the consequences of good economic growth.

LOW EMPLOYMENT

1/ Define unemployment.

2/ Distinguish between employed and unemployed person.

3/ Show the formula for calculating the unemployment rate and the participation rate.

4/ What is the difference between hidden and disguised unemployment?

5/ Is Cyclical unemployment avoidable? Why? Use a AS/AD diagram

6/ Explain each of the 4 types of unemployment and give examples of each.

7/ Using a diagram explain how structural unemployment is caused by changes in demand and the reasons why.

9/ Explain the Social and economic effects of a high unemployment rate on the economy.

10/ Ms Jo’s Island

No of People-:

Workforce 1000

Unemployed 200

Not Wishing to work 300

a/ What is the unemployment rate?

b/ what is the participation rate?

11/ Evaluate government policies to deal with different types of unemployment

PRICE STABILITY – Low and stable rate of inflation

1/ Define the term “Inflation”, “disinflation” and “deflation”

2/ Explain the difference between

a/ Demand Pull

b/ Cost Push Inflation

using AD and AS diagrams.

3/ How can high inflation effect resource allocation?

4/ What are the benefits of low inflation for an economy?

5/ Who are the winners and losers of HIGH inflation country? Effects of changes in oil and food prices for example

6/ What are the consequences of

a/ Inflation

b/ Deflation?

7/ Why is the achievement of price stability a high priority Indonesia.

8/ Explain the relationship between interest rates and the level of inflation?

High inflation. The solution is to interest rates

This will saving and interest payments and

People will spend and AD will be _____________.

9/ Evaluate Policies used to deal with different types of inflation

10/ Using the Philips curve explain how there is a trade off between the unemployment and inflation rate in the short run

11/ Using the Philips curve explain how “stagflation” may occur.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download