Download 2nd ed Chapter 6

Macroeconomic Factors
6.1 What is Macroeconomics?
6.2 Economic Growth
6.3 Unemployment
6.4 Inflation
6.5 The relationship between Inflation,
Unemployment
and Economic growth
6.6 Stagflation
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What is Macroeconomics?
Macroeconomics is concerned with how an overall economic
environment emerges from the choices made by individuals and
organisations.
It studies economy-wide factors such as economic growth,
unemployment and inflation.
Macroeconomic factors are aggregates of microeconomic
factors.
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Economic Growth
Economic growth refers to an increase in the production output
or income of an economy.
When economic
growth is positive the
economy is getting
larger.
When economic
growth is negative the
economy is getting
smaller or contracting.
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Measurement of Economic Growth
Economic growth is measured in terms of Gross Domestic
Product (GDP).
Gross Domestic Product measures the total market value of all
final goods and services produced in the economy in a year.
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Nominal GDP and Real GDP
Economic growth is a comparison of this period’s GDP with last
period’s GDP to provide a growth rate.
Nominal GDP is GDP unadjusted for changes in prices.
Real GDP is GDP adjusted for changes in prices.
Real GDP =
Nominal GDP
________________
Change in price level
• See example pg 202, 203.
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Economic Growth and Living
Standards
Economic growth is used to measure increases in living
standards.
In order to get a true measure of the increase in living standards
we need to adjust real GDP for changes in population.
GDP per capita =
Real GDP
_______________
Population
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The Human Development Index
The Human Development Index (HDI) uses a number of
factors to measure living standards as well as economic
growth.
It provides a broader measure of living standards based on:
Health
Education
Income
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Aggregate Demand
Aggregate demand is the total demand for all final goods and
services.
Can be thought of as the sum of all consumers individual
demand curves for all products.
Major determinant of the level of economic activity.
• Aggregate Demand = C + I + (G – T) + (X – M)
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Consumption (C)
Household purchases of goods and services.
If consumption rises, aggregate demand will rise, causing
economic growth to rise.
Largest component of aggregate demand usually making up
around 60% of the total.
Some level of autonomous consumption, making it less volatile.
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Investment (I)
Investment (I) is when firms invest money into future projects or
capital such as machinery.
Most volatile component of aggregate demand.
Very high when growth is strong and very low when growth is
weak.
• The driver of economic growth.
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Government Spending (G)
Government spending (G) is the spending by the government on
infrastructure such as roads, schools and public transport.
Increases in government spending will increase aggregate
demand and economic growth.
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Taxation (T)
Taxation (T) is revenue the government raises from financial
charges to firms and households.
Governments use taxation revenue to finance government
spending.
An increase in taxation will lower disposable incomes causing
consumption to fall and aggregate demand and economic
growth to fall.
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Exports (X) and Imports (I)
Exports are goods produced domestically, sold overseas.
Imports are goods produced overseas , sold domestically.
If more Australian exports are sold overseas then aggregate
demand and economic growth will rise.
Income spent on imports is leaving the country so a rise in import
expenditure will cause aggregate demand and economic growth to
fall.
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Sources of economic growth
Technological Advances
Microeconomic reform
Education
Expectations
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Benefits of Economic Growth
Increases in the standard of Living
Higher taxation revenue
Lower unemployment
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Costs of Economic Growth
Negative
externalities
(traffic,
pollution)
Wealth
inequality
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Unemployment
Individuals who are above working age and actively looking for
work but unable to find it.
The labour force is the working age population that is either
employed or looking for work.
Total number unemployed
Unemployment rate = ______________________ x 100
Labour force
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Participation rate
The percentage of the working age population who are either
working or looking for work.
Participation Rate =
Labour Force
_____________________ x 100
Working–age Population
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Unemployment and Economic
Growth
As the economy grows firms need to hire more workers to
meet increasing demand with increased production.
As economic growth rises, unemployment falls.
As economic growth falls, firms lay off workers as production
levels have fallen and they can no longer afford to keep the
extra staff as sales and profits are down.
As economic growth falls, unemployment rises
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Types of Unemployment
Structural Unemployment
Hidden Unemployment
Seasonal Unemployment
Long-Term and Hard-Core Unemployment
Underemployment
Frictional Unemployment
Cyclical Unemployment
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Economic Costs of Unemployment
• Loss of taxation revenue
• Waste of productive
resources
Business lays
off workers
Less
consumption
• Fall in living standards
Reduced
business
profit
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Social Costs of Unemployment
Depression and self-esteem issues.
Increase in crime. A black market providing alternative
employment can form:
Drug smuggling
Prostitution
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Groups worst affected by
unemployment
•
•
•
•
•
School leavers
Females
Those with physical and mental disabilities
Aborigines and Torres Strait Islanders
Rural and regional communities
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Why Do Some Workers Get Paid More
than Others?
• The level of education, training and experience a worker has is their
human capital.
• A person with more human capital will usually provide a firm with
more value and revenue than one with less human capital.
• Therefore, those with higher human capital usually get paid more
than those with less.
• Natural attributes can add to a workers unique skill set. People may
get paid more due to these natural assets or abilities.
• Some industries will compensate workers with higher wages for
taking on dangerous or undesirable jobs.
• Industries that are performing well may be able to pay higher
wages than weakly performing industries.
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Unemployment Benefits
Higher unemployment benefits may reduce some of the social
costs of unemployment.
May also raise some of the economic costs of unemployment
such as the strain on taxpayers.
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Minimum Wages and Conditions
Most countries set a minimum wage so that employees cannot
be exploited.
Minimum wage can distort a labour market as some people’s
human capital may be less than minimum wage.
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Inflation
Inflation is a sustained increase in the general price level in the economy.
Inflation is measured by the Consumer Price Index (CPI).
The CPI is a survey of the price of a representative basket of goods and services.
Inflation rate =
Current period CPI – Base Period CPI
______________________________
Base Period CPI
x 100
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Why is inflation bad?
•
Lower real wages (fall in living standards)
•
Uncertainty and the wage-price spiral
•
Income redistribution
•
Reduction in international competitiveness
•
Constraint to economic growth
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Causes of Inflation
•
Cost push inflation
– Inflation that comes from a rise in input prices
•
Demand pull inflation
– Inflation that results from excess demand
•
Expectations
– Inflation that results from inflationary expectations
•
Increases in the money supply
– Inflation that results from ‘printing money’
Children play
with bundles of
worthless
money during
the Great
Depression.
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Deflation
When inflation is negative, or prices are falling.
• One of the worst fates to hit an economy.
• As prices are falling, consumers wait for prices to come down before making
purchases.
• As no-one is consuming today, economic growth falls dramatically.
Zimbabwe has
recently suffered
from extensive
deflation.
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The “good” level of inflation
low, stable and predictable levels of inflation.
The RBA targets a level of inflation between 2–3%.
Some level of inflation is inevitable in a growing economy. Low
levels of inflation ‘greases the wheels’ of the labour market.
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Inflation in Australia
Australia’s inflation levels have become much less volatile since
the early 1990’s.
In 1993 inflation targeting was introduced by the RBA and has
been very effective.
In recent times has Australia’s inflation rate has hovered around
the RBA’s target range of 2–3%.
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The Relationship Between Inflation,
Unemployment and Economic growth
Inflation tends to rise when unemployment levels are very low.
High economic growth can cause inflation (demand pull
inflation)
Inflation is negatively related to both economic growth and
unemployment.
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Stagflation
Occurs when both unemployment and inflation are high at the
same time.
Supply shocks, such as a big increases in oil prices can cause
stagflation.
A rise in oil
prices during the
1970’s caused
the US to enter
into a period of
stagflation
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