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CYCLES AND GROWTH AS Macro Session 1 3
CYCLES AND GROWTH
AS Macro Session 1
3
TASK: What are the main indicators of macro-economic performance?
Inflation Unemployment
Economic Growth
Fiscal objectives
You have 30 seconds
3
Income inequality… Environmental
objectives… Current account sustainability…
Exam tip: Definitions
Throughout your answers you will need to provide definitions of the key economic concepts. Sometimes a question will explicitly ask for a definition and at other times you will need to define a concept as part of a longer answer on a wider set of topics.
Definitions should be succinct but contain the core information to illustrate the meaning of a concept. At times, a diagram may be the best way to illustrate a definition.
3
Tips on interpreting macro data
UK Growth, quarter on previous quarter
2007 2008 2009 2010 2011 2012 2013
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
%
Key point:The length of the positive and negative growth periods vary.
Since 2007 the changes in growth has seen rapid variation.
4
5 consecutive quarters of negative real GDP
growth
Double dip…?
AGGREGATE DEMAND =
C I G X MCONSUMER
EXPENDITURE INVESTMENT GOVERNMENT SPENDING EXPORTS IMPORTS
5
Task:
Disposable income falls
A decrease in VAT
An increase in income tax
An increase in savings rate
A decrease in interest rates
A decrease in investment by private sector
firms
A decrease in Government spending on the Armed
forces
Exchange rate increases
Trade agreements
with BRIC nations
Increased productive and
allocative efficiency in
MINT nations
Increased spending on
the NHs
A decrease in income tax
An increase in investment by
UK car manufacturers
An increase in Government spending on overseas aid
An increase in unemployment
A decrease in saving rate
An increase in the minimum
wage
A slump in the housing market
Financial crisis in the USA
An increase in VAT
Exchange rate decreases
An increase in interest rates
A reduction in confidence by
consumers
A general increase in
share prices
Continued recession in
Eurozone area
Look at these factors that affect aggregate demand. Which two have the biggest impact on consumer spending and exports of goods and services and why?
You have 3 minutes
5
Task:Look at these factors that affect aggregate demand. Which two have the biggest impact on consumer spending and exports of goods and services and why?
Which have an impact on consumption Why is this most significant?
Disposable income falls
Spending on non-essential items falls immediately
An increase in interest rates
Large number of people who have mortgages see payments rise so spending on non-essential items falls immediately
6
C is c.66% of AD in UK… c.30% in China
In UK more so than in Germany…
Task:Look at these factors that affect aggregate demand. Which two have the biggest impact on consumer spending and exports of goods and services and why?
Which have an impact on exports Why is this most significant?
Exchange rate decreases
All exports become less expensive abroad so sales rise
Continued recession in Eurozone area
Eurozone is the most important trading area for the UK
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Depends how important X is to your GDP e.g.
Singapore and Germany vs U.S and U.K
c.50% of UK X to Eurozone (vs 17% to
USA)
Task:
You have 2 minutes
Exam tip: Data Interpretation• Each key point is put in a separate paragraph
to clearly indicate to the examiner that you are making different points
• Each point should use data from the table or chart
• Use of data must be accurate (don’t estimate) and include correct units
• Only explain the data if asked to do so.• If looking at a time-trend include the trend for
the entire period shown as well as smaller ‘blips’ in the pattern.
Look at the data on UK Aggregate Demand on page 5. Compare 2 significant features of the data provided above for the UK Aggregate Demand Components.
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Significant feature 1
Significant feature 2
All components saw a decrease in the percentage change in 2011 compared to variable changes in other years. For example, G saw a 0.5% per cent fall.
Government consumption had the least amount of change over the time period, with the variance between -0.7% and 1.7% (2.4 percentage points). By contrast, Imports saw a variance of between 0.3% and 7.9% (7.6 percentage points)
Task:Look at the data on UK Aggregate Demand on page 5. Compare 2 significant features of the data provided above for the UK Aggregate Demand Components.
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AD-AS Analysis
UK Car ProductionFactor 1: Recession led to a decrease in aggregate demand and a downturn in production.
Average Price Level
Real National Output
AD1
SRAS1
P1
Y1
AD2
P2
Y2
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• Key concepts: Accelerator; Derived demand
UK Car ProductionFactor 2: Continued investment in research and development improved production techniques.
Average Price Level
Real National Output
AD1
SRAS1
P1
Y1
P2
Y2
SRAS2
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UK Car ProductionSuggest 3 other factors that can shift the short-run aggregate supply curve that could account for the improvement in the output of cars in the UK.
You have 2 minutes
12
Increase in investment on training. To ensure that UK workers are as competitive as foreign workers in car industry.
Use of high capacity factory to improve economies of scale – particularly important to reduce costs in motor industry
83 Reduction in corporation tax leading to overall reduction in costs
Affects RULCs…
Lowers LRAC
Anything that affects costs, effects SRAS
Some analysis
Explaining the cause and effect of a factor is the key to good analysis in exams. If an alteration of one factor (e.g. investment) leads to an increase or decrease in another (e.g. unemployment), explain the full ‘chain’ of analysis (i.e. how one leads to the other) is important.
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Long Run Aggregate SupplyTASK: Analyse the view that inward investment into the UK (such as an increase in inward investment from China) leads to an increase in long run aggregate supply in the UK.
This means that…
This can lead to…
This can cause…
It depends upon…
Inward investment into the UK
There is an increase in
investment in UK
manufacturing
An increase in the productive
efficiency of UK
manufacturing
A reduction in the average
cost of goods manufactured
in the UK
The quality of the
investment and the
nature of it9
Reason why it is very important:
Can improve the long-term productivity of UK without
requiring Government finances
A factor that may be more important:
The skills taught in schools and colleges
10Long Run Aggregate SupplyTASK: Analyse the view that inward investment into the UK (such as an increase in inward investment from China) leads to an increase in long run aggregate supply in the UK.
Inward investment into the UK
The Output Gap
£ trillion at constant prices, data for 2014-15 is a forecast
Actual and Potential GDP for the UK
Potential Output Real GDP
Source: OECD World Economic Outlook
03 04 05 06 07 08 09 10 11 12 13 14 15
£ (
tho
usa
nd b
illio
ns)
1.35
1.40
1.45
1.50
1.55
1.60
1.65
£ (
tho
usa
nd b
illio
ns)
1.35
1.40
1.45
1.50
1.55
1.60
1.65
Actual UK Real GDP
Estimated Potential GDP
A succinct definition: Difference between actual level of real GDP and potential
(trend) level of real GDP
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The Output GapA negative output gap for the UK economy could lead to:
You have 1 minute
1
2
An inefficient use of economic resources leading to higher unemployment
Excess labour leads to downward pressure on wages (wage freezes or cuts)
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Evaluation
In terms of structure to longer answers, one approach is to use the PEEEL method.
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ASK: Analyse the view that a negative output gap will automatically lead to lower inflation.
P
E
E
E
LYou have 2 minutes
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ASK: Analyse the view that a negative output gap will automatically lead to lower inflation.
P
E
E
E
L
Lower AD… leads to higher cyclical unemployment and… lower consumption
Output gap evidence during latest recession (see chart), led to lower consumptionLower consumption forces markets to start to freeze prices or keep price rises small… AD/AS diagram…This may lower Demand Pull inflation but Cost-Push inflation may rise due to external pressures
The negative output gap in the UK has not automatically lead to lower inflation
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