AS Macro Economics: Economic Cycle and Objectives
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AS Macro Economics: Economic Cycle and Objectives

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In this session we are going to focus on the performance of

In this session we are going to focus on the performance of
the UK economy over recent years and see how economic
growth appears to follow a cyclical pattern

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    AS Macro Economics: Economic Cycle and Objectives AS Macro Economics: Economic Cycle and Objectives Presentation Transcript

    • CYCLES AND GROWTH AS Macro Session 1
    • TASK: What are the main indicators of macro-economic performance? Inflation Unemployment Economic Growth Fiscal objectives You have 30 seconds 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.
    • Tips on interpreting macro data
    • UK Growth, quarter on previous quarter -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. 5 consecutive quarters of negative real GDP growth Double dip…?
    • AGGREGATE DEMAND = C I G X M CONSUMER EXPENDITURE INVESTMENT GOVERNMENT SPENDING EXPORTS IMPORTS
    • 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
    • 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 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 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.
    • 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.
    • AD-AS Analysis
    • UK Car Production Factor 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 • Key concepts: Accelerator; Derived demand
    • UK Car Production Factor 2: Continued investment in research and development improved production techniques. Average Price Level Real National Output AD1 SRAS1 P1 Y1 P2 Y2 SRAS2
    • UK Car Production Suggest 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 1 2 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 3 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.
    • Long Run Aggregate Supply TASK: 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 it
    • 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 Long Run Aggregate Supply TASK: 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 A succinct definition: Difference between actual level of real GDP and potential (trend) level of real GDP
    • The Output Gap A 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)
    • Evaluation In terms of structure to longer answers, one approach is to use the PEEEL method.
    • ASK: Analyse the view that a negative output gap will automatically lead to lower inflation. P E E E L You have 2 minutes
    • 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 consumption Lower 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
    • 10/04/2014 Email: g.riley@etoncollege.org.uk Twitter: @tutor2u_econ