Macro notes.docx

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McMaster University
Bridget O' Shaughnessy

Absolute advantage Absolute advantage occurs when a country or region can create more of a product with the same factor inputs Accelerator effect Planned capital investment by private sector businesses is linked to the growth of demand for goods and services When consumer or export demand is rising strongly businesses may increase investment to expand their production capacity and meet the extra demand This process is known as the accelerator effect But the accelerator effect can work in the other direction A slowdown in consumer demand can create excess capacity and may lead to a fall in planned investment demand Aggregate demand curve The aggregatedemand curve shows the quantity of goods and services that households firms and the government want to buy at each price level Aggregate supply Aggregate supply AS measures the volume of goods and services produced within the economy at a given price level In simple terms aggregate supply represents the ability of an economy to produce goods and services either in the shortterm or in the longterm It tells us the quantity of real GDP that will be supplied at various price levels The nature of this relationship will differ between the long run and the short run Animal spirits Animal spirits refers to the expectations of businesses entrepreneurs and consumers When business confidence is high we expect to see a rise in planned capital investment at each rate of interest If there is a downturn in business confidence for example during a recession then planned investment may fall and some capital investment projects may be scrapped even when interest rates are fairly low Anticipated inflation Anticipated inflation is expectations about future price rises which householdsfirms use when planning economic decisions Automatic stabilisers Automatic fiscal changes are changes in tax revenues and government spending arising automatically as the economy moves through different stages of the business cyclefor example a fall in the level of tax that the government takes out of the circular flow when the economy suffers a slowdown or a recession Average earnings Earnings are the total factor reward to labour Average earnings comprise basic paywage drift Ie extra income from productivity related pay overtime and other bonuses Average rate of tax The proportion of gross income paid in tax With a progressive income tax system the average rate of tax rises as income rises This is because the marginal rate of tax goes up at certain income levels Balance of payments The balance of payments BOP records all financial transactions between the UK and the Rest of the World The BOP figures tell us about how much is being spent by British consumers and firms on imported goods and services and how successful UK firms have been in exporting to other countries and markets Budget deficit When the government is running a budget deficit it means that in a given year total government expenditure exceeds total tax revenue As a result the government has to borrow through the issue of debt such as Treasury Bills and longterm government Bonds The issue of debt is done by the central bank and involves selling debt to the bond and bill markets Business confidence The state of business confidence can be vital in determining whether to go ahead with an investment project When confidence is strong then planned investment will rise Business cycle The business trade or economic cycle is when actual GDP tends to move up and down in a regular pattern causing booms and slumps depressions with recession and recovery as intermediate stages Capital accumulation The process by which the stock of capital inputs is increased For the capital stock to grow gross investment needs to be higher than that required simply to replace worn out or obsolete machinery and technology Net investment must be positive Capital investment This is investment spending by companies on fixed capital goods such as new plant and equipment and buildings Investment also includes spending on working capital such as stocks of finished goods and work in progress Central banks Central banks occupy pivotal positions in the financial systems of their respective countries In the UK for example the Bank of England controls the supply of cash into the economic system and has the responsibility for setting official short term interest rates Most leading central banks are now independent from government and have control over domestic monetary policy Interest rates inside the Euro Area are now set by the European Central Bank Circular flow The circular flow of income is a diagrammatic representation of economic activity in a given time period It identifies the main sectors in the economy households firms the government and overseas and linkages between sectors eg wages government spendinginterest payments Comparative advantage Comparative advantage exists when a country has lower opportunity cost in the production of a good or service Consumer confidence The willingness of people to make major spending commitments depends on how confident they are about both their own financial circumstances and also the general health of the economy Consumer confidence is quite volatile from month to month Some of the fluctuations are seasonalbut the underlying trend is what really matters Consumer spending Consumers expenditure on goods and services This includes demand for consumer durables eg washing machines audiovisual equipment and motor vehiclesnondurable goods such as food and drinks which are consumed and must be repurchased Corporation tax Corporation tax is paid on profits If the government reduces the rate of corporation tax or increases investment taxallowances there is a greater incentive to invest Britain has relatively low rates of company taxation compared to other countries inside the EU This is a factor that helps to explain why Britain has been a favoured venue for inward investment from overseas during the last decade Cost push inflation Cost push inflation is caused by increases in costs of production eg wage increases increased import price imported inflation or higher indirect taxation Firms put up prices to maintain profit margins Costpush inflation can be illustrated by an inward shift of the short run aggregate supply curve The fall in SRAS causes a contraction of real national output together with a rise in the general level of prices Current account balance The current account balance comprises the balance of trade in goods and services plus net investment incomes from overseas assets This income in the form of interest profits and dividends from external assets located outside the UK is also the difference between GDP and GNP We also add in the net balance of private transfers between countries and government transfers eg UK government payments to help fund the various spending programmes of the European Union Deflation Price deflation is when the rate of inflation becomes negative Ie the general price level is falling and the value of money is increasing Some countries have experienced deflation in recent yearsgood examples include Japan and China In Japan the root cause of deflation was very slow economic growth and a high
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