Macro Targets
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Transcript of Macro Targets
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Measures of EconomicPerformance
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Measures of Economic Performance
Economic Measures:
Inflation
Unemployment Growth (GDP)
Balance ofPayments
Exchange Rate
Non-EconomicMeasures:
Quality of Life
Environment
Health
Education
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Measures of Economic Performance
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Economic Growth (GDP)
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Economic Growth (GDP)
Gross Domestic Product:
The value of output of goods and services
produced in the UK during one year Primary, secondary and tertiary sectors
Real versus nominal output
Can be viewed as being national income,
national output or aggregate demand (AD) GDP per capita GDP divided by the
population (GDP per head)
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Economic Growth (GDP) Potential Growth the overall capacity of the
economy (i.e. what the economy could produceif it used all its resources)
Actual Growth the annual percentage increasein output
Nominal Growth the growth in output notincluding any adjustment for price changes expressedas current prices (the price reigning at the time ofthe measurement)
Real Growth growth in GDP adjusted to takeaccount of changes in the price level expressedas constant prices
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The Business Cycle
Growth (NY)
Time
Potential Growth
Actual Growth
Recession/Slump
Growth/Upturn
Boom/Overheating
Decline/slowdown
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Inflation
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Inflation
A persistent rise in prices in aneconomy over a period of time
Now measured by the HICP (CPI) Inflation does not fall it slows down orspeeds up! (If inflation in 2003 was 3%and in 2004 is 2% it still means prices
have risen by an average of 2% overthe last year!)
A fall in the price level is termeddeflation
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Inflation
Anticipated and Unanticipatedinflation:
affects the outcome of economicdecision making if anticipated,changes in prices can beaccommodated, if unanticipated cancause shocks and problems to arise
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Inflation
Causes of Inflation:
Demand-Pull where aggregate
demand (AD) rises at a faster ratethan aggregate supply (AS)
Cost-Push increases in costs
(labour, raw materials, importedcosts, etc.) that cause a leftwardshift in AS
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Inflation The effects of inflation:
Seriousness of the effect depends on the extentto which the inflation is anticipated
Menu costs the cost of having to change prices vending machines, labels, etc.
Wealth costs inflation affects those on fixed incomesand redirects wealth to those in strong bargainingpositions or with physical assets
Planning costs businesses uncertain about future pricechanges may be reluctant to invest hits economic growth
Competitiveness inflation at a higher rate in the UK
than elsewhere hits domestic competitiveness and affectsthe balance of payments
Social stability - At very high rates, confidence in thecurrency is eroded and production and exchange can bestifled can lead to food riots, looting and violence
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Unemployment
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Unemployment
Various definitions:The number of people of working age
who are without a jobThe Claimant Count those actively
seeking work and claiming benefit
ILO (International Labour
Organisation) measure the numberof people available for work andactively seeking employment
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Unemployment
UK Unemployment and the claimant count, 1992-2002Source: Office for National Statistics (http://www.statistics.gov.uk/cci/nugget.asp?id=165 ) (Crowncopyright material is reproduced with the permission of the Controller of HMSO and the Queen's Printerfor Scotland.)
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Unemployment Causes of unemployment:
Frictional Unemployment where people becomeunemployed between jobs
Demand Deficient Unemployment where AD is less
than AS Technological Unemployment caused where peopleare put out of work by changes in technology
Seasonal Unemployment caused by the seasonalnature of some types of employment e.g. holiday resorts
Real Wage or Classical Unemployment caused by
wage rates being held above market clearing levels Structural Unemployment caused by changes to the
structure of industry in the economy e.g. the decline ofthe coal, iron and steel industries
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Unemployment
Costs of unemployment to theeconomy:
Lower tax revenuesHigher benefit payments
Social costs: crime, vandalism, familybreakdowns and social welfare
support, regional decayOpportunity cost of lost potential
output
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Unemployment
Costs of unemployment to theindividual:
De-skilling Loss of self-esteem
Lower income reduced purchasingpower and lower standard of living
Effects on the family unit
Increase in likelihood of stress relatedillnesses and mental breakdown
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Balance of Payments
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Balance of Payments
Measures economic transactionsbetween UK residents and the rest
of the world:Trade in goods
Trade in services
Income flows from investments
Financial flows shares, loans
Foreign aid
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Balance of Payments
Current Account: The trade in goods
The trade in services
Income flows
Current transfers
Capital Account:
Sale and purchase of capital assets andnon-produced or non-financial assets
Financial Account: Trade in financial assets
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Exchange Rates
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Exchange Rates
The price of one currency in termsof another the amount of onecurrency that has to be given up topurchase another currency
Exchange rates determined by thedemand and supply of a currencyon foreign exchange markets
Demand determined by the purchaseof exports, supply by the purchaseof imports
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Exchange Rates
Floating Exchange Rates:
Where the rate is determined by the
interaction of supply and demand of thecurrency with no intervention bygovernment or other agencies in the market
Dirty or Managed Floating:
Where the exchange rate is allowed to floatfreely but intervention by governments orother agencies is carried out to manipulatethe rate within some desired band
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Exchange Rates
Fixed Exchange Rates:
Where the rate is fixed or pegged
to another currency or asset (suchas gold the Gold Standard) intervention may be necessary tomaintain the rate or economic policies
to influence the strength of economicgrowth
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Exchange Rates
Adjustable Peg System
A managed exchange rate rate
fixed in the short term but hasthe possibility of devaluationor revaluation if necessary
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Non Economic Measures
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Social Investment Infrastructure roads, communication
networks, bridges, railways, airports, ports
Education schools, colleges and universities
Hospitals/Health primary and secondarycare, health education, disease and accidentprevention, number of doctors per head,access to health care
Water/Sewerage Housing affordable and accessible housingto meet the needs of those in search of homesand employment
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Environment
Pollution land, air, sea and noise
Waste waste disposal and waste
management Nature areas of outstanding beauty,
national parks, wildlife, ecology, sitesof special scientific interest
Land Use planning regulations,building regulations
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Taxation
Tax Burden the amount of taxpaid by the population directand indirect taxation
Incentives aimed atencouraging enterprise, businessdevelopment and creativity
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Quality of Life Material Wealth telephones, fridges,
computers, cars, etc.
Mental State Stress caused by employment,
unemployment, travel, etc.
Crime crime prevention, crimereduction, monitoring of crimeand perceptions of crime