2.1.

1 economic growth
There are 4 main macroeconomic indicators

1) Rate of economic growth

2) Rate of inflation
3) Level of unemployment
4) State of balance of payments

GDP is a measure of economic growth, economic growth can be measured with the change in
national output of a period of time, national output is all the goods and services produced by a
country

Output can be measured in

1) Volume - adding up the quantity of goods and services produced in one year
2) Value - calculating the pound value of all the goods and services produced in one year

GDP can also be calculated with the national expenditure or aggregate demand

Economic growth is measured as a percentage, the rate of economic growth is the speed at
which national output grows over a period of time.

GDP per capita is total GDP divided by the population

GNI and GNP are also used,

GNI is the gross national income and this is the GDP plus net income from abroad, this may be
any UK firms making profit from a foreign investment minus any foreigner investment
domestically.

GNP is gross national product, this is the total output of the citizens of the country, whether they
are a resident or not

Purchasing power parity

When using GDP per capita to compare living standards, exchange rates mean there won't
always be a direct comparison, purchasing power parity is the real value in terms of what you
can actually buy with it. This is done by an annual basket of weighted goods.

Limitations of GDP
While GDP and GDP per capita are easy to compare between countries and have many
benefits, there are some downsides to comparing countries with GDP

The extent of the hidden economy / Public spending / Income inequality / Hours worked / free
time / working conditions / environmental damage / different spending needs
Inflation

There are two ways to define inflation

Inflation is an increase in the average price of goods and services

Inflation is a fall in the value of the money

Increasing prices = inflation

Falling prices = deflation
Rate is slowing down but still positive (6% to 4%) disinflation

CPI
The consumer price index is the method of inflation measure used in the UK
A base year for prices is selected and a family expenditure survey is handed out, a basket of
over 600 goods is used and each item is weighted in relevance to percentage of total
expenditure. Weights are then multiplied by changes in price and the total is the inflation rate.

The limitations are that CPI does not measure mortgage interest payments or council tax
The information given by households can be inaccurate
The basket of goods only changes once a year
Inaccurate for a non typical household
Changing quality of goods and services
New products
Does Not account for differences in regional spending

Employers and trade unions use inflation as a starting point in wage negotiations
The government uses them to increase state pensions and other welfare benefits
Some benefits are index linked and they rise to the same percentage as their according year.

Causes of inflation
Rising costs of production, increased minimum wage or raw materials increase in price
Increase in the global price of energy
Movements in the exchange rate (if the value of the currency decreases the cost of raw
materials increases)

Cost push inflation occurs when the cost of production for businesses increase, this can be
things like increase in minimum wage, increase in the cost of raw materials, when there is cost
push inflation output and employment falls causing slow growth and rising inflation

Demand pull inflation is when the total demand for goods and services exceeds the total supply,
as the economy reaches full capacity labor and raw material shortages occur more frequently,
making it harder to expand business and increase output however demand pull inflation is
related to a increase in real GDP (economic growth) and an increase in employment levels.
Effects of inflation

Inflation impacts everyone differently, some people benefit and some people don't.

Pros

● workers with strong bargaining power (or unions) can ask for pay rises
● Debtors real interest rates will decrease
● Producers which increase their prices faster than costs

Cons
● People on fixed incomes suffer
● Lenders will suffer
● Savers loose if they kept their money in an account
● Firms that are dependent on exports may lose sales and profits

Risks of high and volatile inflation

1) Inequality will increase
2) Falling real incomes
3) Negative real interest rates (disincentivises saving)
4) Wage inflation
5) Cost of borrowing will increase
6) Business competitiveness will decrease
7) High business uncertainty

For evaluation, the impacts of inflation are dependent on

1) Is it temporary or long term
2) Are other countries experiencing inflation right now
3) How much is the central bank willing to tolerate inflation before rising interest rates
4) Bargaining power of employees
5) Whether uncertainty decreases or does not decrease investor confidence
2.1.3 employment and unemployment
How is unemployment measured, The UK uses a labor force survey where 60000 people are
surveyed and they are wither employed, unemployed or economically inactive

If they are unemployed they must be jobless and looking to work for the past 4 weeks and
willing to work in 2 weeks
Or they might be out of work, found a job and are waiting to transfer within the next 2 weeks.

An alternative measure is the claimant account, this counts the number of people claiming
benefits and it is added to those who must be looking for work to claim universal credit

Labor force method advantages

1) Easily comparable against other countries
2) Criteria for unemployment has had little to no change so can be easily compared to past
3) Provides a rich data set on may aspects of the labor market

Labor force method disadvantages

1) Sampling errors as only 60000 people
2) Costly and time consuming
3) Only done quarterly so wont pick up quick changes in the short term

Advantages of the claimant count measure

1) Accurate as you can calculate the exact number of people who claim employment
benefits
2) Easy to classify if someone is seeking work or not
3) Easy to see regional / local differences in unemployment patterns
4) Data is produced once a month

Disadvantages of the claimant account

1) A lot of unemployed people don't meet the criteria for benefits
2) People may be too proud to claim

Under employment
Underemployment occurs when people are looking to work more hours at their job, looking for
additional work or their skills are not being fully utilized.
Causes of unemployment
Cyclical (demand deficient) unemployment
This occurs when there is a decrease in the AD of a country and therefore firms are forced to
fire employees due to decreased revenues.

Frictional unemployment.
This is caused by people who are seeking a better job or have gotten a new job and are waiting
to transfer there will always be frictional unemployment regardless of the economic cycle

Structural unemployment
This occurs when there is a lack of suitable skills for the jobs available (miners being sacked
and having no office skills)
Or when there is geographical immobility meaning people are willing to work better jobs but
cannot transport to them or house prices in that area are too high

Seasonal unemployment
This is when a business is only profitable at a certain time of the year, i.e christmas tree sellers
Often times these workers may have a second job to help them throughout the year yet still
remain unemployed for periods of time

Unemployment trap
This is when there is little incentive for someone who is unemployed to start working again as
the loss of welfare benefits and the need to pay an income tax may lead to them being worse off
overall child care costs may also contribute to a barrier of finding work

Migration increases the labor supply of the country

1) Migrant workers are young skilled and flexible and have a positive effect on the economy
2) They will earn and spend money which increases the aggregate demand and grows the
economy
3) They can fill specific skills gaps and missing labor forces
4) Free movement allows for workers to move to where their skills are best utilized
5) In the UK there has been a net inward migration

When immigration occurs in an economy there will be a rightward shift in the supply, this causes
the wage rate to decrease and the quantity supplied and consumed of labor to increase

Governments may try to reduce immigration

1) High level of immigration of low skilled workers is not beneficial to any country
2) The UK made some changes to decrease immigration by only allowing “skilled workers”
to entry
3) The effectiveness of government policies has been limited by the EU and the
Economic and social costs of unemployment

1) Slower long run rate of economic growth

2) Risk of a period of price deflation as AD falls
3) Risk of income inequality
4) The longer people are unemployed the more their skills deteriorate
5) Fiscal cost to the government as tax revenues decrease and spending increases
6) Externalities from social problems such as crime

● Loss of work experience

Gaps in CV look bad
There is a depreciation of skills
Decline in the quality of human capital

● Loss of current and future income

Unemployed are vulnerable to consumer debt at high interest rates
Decline in physical health and increase in stress means people are less likely to work

● Changing pattern of jobs in the economy

New jobs in the recovery stage are often different from lost ones
Structural unemployment makes it harder for people to get into new jobs

Economic effects of a fall in unemployment

1) Increased employment helps boost GDP (living standards increase)

2) More people in work makes more money for the government to lower budget deficit or
increase spending
3) Social costs of unemployment have decreased.

Negatives of an increase in employment

1) Extra spending may worsen the current account if more exports are purchased
2) Risk of acceleration in demand pull and cost push inflation
3) Less spare labor means labor shortages
2.1.4 Balance of payments

The balance of payments records all financial transactions of a country with other countries.
The balance of payments is made up of the current account, capital account and financial
account for theme 2 we only focus on the current account

1) Trade in goods
2) Trade in services
3) Investment and employment income (salaries paid to workers abroad, dividends from
stocks in a foreign country etc
4) Transfers (payments between countries which aren't for a good or service (sending
money back to home country for family)

The balance of payments can be used to tell a lot about a country

If there is a visible deficit this means there are more goods leaving the country than entering
If there is a invisible surplus it means that we are exporting more services than we are
importing
If there is a investment income surplus this means we receive more dividends from
investments than we receive
Deficit on transfers means we are making more payments like foreign aid than we are
receiving

What causes a surplus or deficit ?

Economic growth leads to more imports, or a high income elasticity of demand for imports
Countries that are struggling to compete will see a reduction in exports and an increase in
imports or external shocks such as a change in raw materials or the imposition of trade barriers.
BOP deficit BOP surplus

Deficit means that a country is not Surplus means a country is competitive

competitive

Deficit isn't bad and it may mean people in A surplus for a prolonged period of time leads
the country are wealthy enough to afford lots to stagnation where low domestic demand
of imports and allows them to have a higher lead to a decrease in economic growth
standard of living but unsustainable in the
long run

A deficit leads to a fall in currency leading to A large surplus may be due to a over reliance
higher import prices in the short run and may on imports
also lead to inflation

Balance of payment deficit can lead to A surplus is created nu am undervalued

domestic job losses currency, this often leads to inflationary
pressures the rise of components will
increase and therefore a rise of production
and therefore price level
2.2.1 aggregate demand

Aggregate demand is the total level of expenditure of goods and services produced in a given
time span, this can be calculated with

AD = C + I + G + ( X - M )
The curve can be shown on a graph as shown below,

There are several reasons to its downward sloping shape

As the price level decreases people consume more goods leading to a increase in real GDP
If price inflation is low then there will be a reduction to interest rates, this creates an incentive to
spend and to not save. The curve shifts when one of the components are changed in value
2.2.2 consumption

Consumption is also known as consumer spending and is the spending from consumer /
households on goods and services

The marginal propensity to consume is the change in spending relative to a change in income it
has a formula C/Y where change in consumption is divided by change in income

Factors that influence consumer spending are

1) Real disposable income after taxes
2) Employment and job security
3) Existing household wealth
4) Xpectations and sentiment
5) Market interest rates
Low interest rates promote spending
High interest rates promote saving

Saving is important as it helps people when they have no source of income, provides a fail safe
for firms when profit is low, furthermore saving is needed to fund investment and it acts as a
buffer of financial resources for consumers, when there are tough economic ties people use
savings to spend and to get out of debt.

2.2.3 investment

1) Investment is the money spent by firms on assets which they will use to prudence goods
a) Gross investment is all investment spending
b) Net investment only includes investment that increases productive capacity
If a firm has 3 old trucks, and they buy 5 more, the gross is 5 trucks but the net is
2 trucks.

1) Firms invest with the intention of making profit in the future

2) Investment makes up 15% of AD in the UK
3) There are several factors that affect investment

Risk
The level of risk will affect the amount of investment by firms, if there is economic instability it is
likely the firm will not invest

Government incentives and regulation

Subsidies or reductions in the level of taxes will influence the level of investment, lower
regulation may reduce costs and make it more worthwhile to invest
Technical advances
Firms need to invest in new technologies to stay competitive, investment will rise when
significant technological advancements are made

Business confidence and animal spirits

The more confident a business is that they will generate a profit, the more likely they are to
invest. Firms may see that demand is high and choose to invest however this may only be
temporary and they may be only guessing.

2.2.3. Government spending

Government spending is the money spent by the government on public goods and services
such as education, healthcare and defense
Only money that directly contributes to the output of the economy is considered, this means we
do not account for transfer payments this means that benefits and pensions are not included.

Government spending is not always directly linked to revenue, if the government spending is
greater than revenue there will be a budget deficit but if government spending is less than
revenue there will be a budget surplus

Governments use fiscal policy to alter their spending and taxation so that they can influence
aggregate demand

If aggregate demand is low and growth is slow, they may overspend creating a budget deficit to
increase AD and boost economic growth

If AD is high and the economy is experiencing a boom then it is likely the government would
increase taxes and spend less to reduce AD and slow down economic growth

An imbalance will influence the circular flow of income, a budget surplus acts as a withdrawal
form the circular flow but a deficit will be an injection into the economy.
Imbalances are fine in the short run however are unsustainable in the long run and harm
economic growth.
2.2.4 imports and exports

A change in the value of a currency will affect net exports in different way sin the long and short
run

Currency appreciates in value (long run)

Imports become relatively cheaper and exports become more expensive for foreigners, when
the currency increases in value (X-M) will decrease

Currency appreciates in value (short run)

When the currency appreciates in the short run, demand for exports and imports are inelastic
and it takes time for countries to change their purchasing habits

Changes in the world state economy will also be influenced if other countries are suffering
economically there will be a decrease in the level of exports and increases in imports, when
other countries are in a boom there will be an increase in exports and a decrease in imports.

The degree of protectionism from tariffs and quotas influence imports, if the country you are in
has a high degree of protectionism then it is likely you will not benefit from importing
2.3.1 aggregate supply
There are two different aggregate supply curves
There is a short run aggregate supply (SRAS) and there is a long run aggregate supply
curve LRAS.

The first type is the short run aggregate supply curve

It runs from left to right and it shows with an increase in the
price level there is an increase in the amount of output firms
are willing to provide. This is seen on the diagram to the right.

In the long run it is assumed that an economy will move to

an equilibrium where all resources are being used to their
full capacity, this is shown by the long run aggregate supply
curve, the LRAS curve is vertical as an increase in the price
level will not lead to an increase in economic output as we
cannot create any more output. This can be shown on the
diagram to the left.

Changes in the costs of production lead to a shift in the SRAS, a reduction in the cost of
production leads to a shift, this as as for the same price level more output can be produced so
the curve shifts to the right

Changes in the factors of production also cause the LRAS to shift, an improvement increases
the total capacity meaning the curve will also shift rightward.

Shifts are often caused by changes such as level of education, demographic changes, better
healthcare, cheaper raw materials etc.

The keynesian LRAS is L shaped, at low levels of output AS

is completely elastic, this means there is spare capacity so
the economy can grow without an increase in the price level
when the curve begins to slope upwards this shows that the
economy is experiencing problems with supply and we are
approaching full capacity, here AS is completely inelastic all
resources are being fully used and output cannot increase
any more
2.4.1 National income

The multiplier effect comes about because injections of new demand for goods and
services into the circular flow of income, stimulate another round of spending - because
one person's spending is another person's income this leads to an overall bigger effect on
society than the initial injection

The circular flow of income demonstrates the flow of income between firms and households.

Firms produce goods and services, which are then traded for labor that households produce,
the households then spend the money on more goods and services, this is called the circular
flow of income.

There are injections and withdrawals into this system, when there is an increase in investment
or there is increased government spending we consider that an injection, when there is money
leaving out through taxation, or exports, we consider that a withdrawal.

Injections have a multiplier effect on the circular flow meaning the actual change is much
greater than the value of the injection.
The size of the multiplier depends on the rate at which money leaks from the circular flow if
there is a lot of money being spent on exports, there will be a smaller injection, the formula for
the injection is 1/(1-MPC)

The multiplier is dependent on the MPC and this is what will make the biggest change to the
AD, it is dependent on several factors

1) Marginal propensity to consume, or the change in consumption / change in income

2) Marginal propensity to save, or the change in total savings / change in income
3) Marginal propensity to tax, the proportion of additional income that is paid to the
government as tax
4) Marginal propensity to import, the proportion of additional income which is spent on
imports
5) Marginal propensity to withdraw, MPM + MPS + MPT, or the proportion of additional
income which leaves the circular flow.

Wealth and income

Wealth is the total value of the assets owned by individuals or firms in an economy, this can be
money in savings, stocks or physical items
Unlike income, a flow of money, wealth is a stock concept
2.5.1 causes of economic growth.

Short run economic growth can be defined as change in the position of the PPC or an increase
in demand.

Long run economic growth can be considered as an entire shift of the PPC or the aggregate
supply, where the total potential output has increased.
EXPORT LED GROWTH

Export led growth is one of the biggest expansions of real GDP and therefore economic growth
as more and more resources enter your country.

Advantages
1) Acts as an injection into the economy
2) Export sales provide revenue and profits for businesses
3) Industries help facilitate trade such as trade insurance logistics and port facilities,
countries with fast growing export sectors are likely to see increased foreign investment
4) International trade increases domestic producers' competition, this increases the overall
innovation and lower prices for consumers.
Disadvantages

1) Focusing on only exports leads to over dependence on the economic cycles of other
countries
2) Running persistent surpluses may cause other countries to enforce more trade policies
3) Production capacity may overcome domestic needs and wants lowering the life quality of
domestic people
4) Rapid export led growth leads to demand pull inflation and domestic residents suffer the
most
5) Export-led growth is unsustainable if a country only has enough resources for domestic
use.
2.5.2 output gaps.

The output gap is the difference between the actual level of the GDP and its estimated potential
level, this is expressed as a percentage of potential output.
A positive output gap is where actual GDP is more than predicted GDP (sign of excess AD in
an economy)
A negative output gap occurs when an economy is performing under its predicted GDP
In reality it is not easy to measure the true value of a GDP as it is based on productivity, exact
value of labor force, business output and underemployment.

Negative output gap

Here on the top the potential output is more than the
current output.

Positive output gap

Here we can see the economy is producing at a output
greater than the predicted level

The trade cycle

The actual growth of an economy fluctuates over time, these fluctuations are known as the
economic cycle.

Booms occur when the economy is growing quickly, AD will be rising

Recessions occur when there is negative economic growth for at least two consecutive
quarters.

During a recovery the economy begins to grow again from negative economic growth
 boom Recession

Rising income Falling income

High business confidence Low business confidence

Rising employment Rising unemployment

Rising wages Stagnant wages

Rising inflationary pressure Decreasing inflationary pressures

Decreased government borrowing Increased government borrowing

Rising investment Decreased investment

2.5.4 impact of economic growth

Benefits of economic growth

1) Higher living standards

2) Employment increases, lower inequality, poverty, and increased living standards
3) Government has more resources to spend on public and merit goods
4) Accelerator effect, the more economic growth there is the more investment there is
5) More business profit stimulates RnD and investment into technologies
6) Additional income can be used for rainy day

Costs of economic growth

1) Risks of higher inflation and interest rates

- Leads to demand pull and cost push inflation
- Central bank may raise interest rates to control inflation
- Consumer spending might lead to a trade deficit

2) Environmental effects
- Negative externalities such as pollution and waste
- Risk of unsustainable use of finite resources

3) Inequalities of income and wealth

- Rapid growth can sometimes increase social divisions
- Growth may be because of overworked employees
2.6.1 macroeconomic objectives

1) Economic growth
2) Low unemployment
3) Low and stable inflation
4) Balance of payments equilibrium
5) Balanced government budget
6) Protection of the environment
7) Income inequality

2.6.2 demand side policies

Fiscal policy
Fiscal policy involved government spending and taxation, it can be used to influence an
economy as a whole or individual firms and people

1) Fiscal policy can be used to stimulate aggregate demand

- Expansionary fiscal policy

Boosting AD by increasing government spending and lowering taxes

- Deflationary fiscal policy

Reducing AD by decreasing government spending and increasing tax rates

2) An expansionary fiscal policy is likely to be used during a recession or when there is a

negative output gap, it will increase economic growth and decrease unemployment,
however it will also increase inflation and worse the balance of payments
3) A contractionary fiscal policy is used during a boom or a positive output gap, it will
reduce the level of economic growth and increase unemployment. It will lead to a
decrease in price levels and will help the current account of the balance of payments, as
incomes fall imports decrease

Taxation
Direct taxes these are applied on income, wealth and profit, these are things such as income
tax, inheritance tax and corporation tax, this burden cannot be passed onto someone else

Indirect taxes
Indirect taxes are taxes on spending such as duties on fuel, cigarettes and alcohol. Especially
VAT sold on almost all goods and services, producers can pass on an indirect tax onto
consumers based on the price elasticity of demand

Tax revenues are the main source of income for the UK government
Taxes and aggregate demand
Changes in the income tax alter the level of consumption, changes in corporation tax alter the
incentive to invest / enter a market, changes in import taxes can change flows of international
trade
Fiscal budget surpluses and deficit

If total government spending is less than total tax revenues there is a budget surplus
If total government spending is more than total tax revenues there is a budget deficit

Government borrowing is the amount the government must borrow every year to finance the
difference, usually this borrowing is done through the sale of government bonds or also known
as government debt

Causes of a budget deficit

● Recession Leading to unemployment and lower tax rates
● Decrease in consumer spending and profits leading to less tax revenue
● Increase in inactivity due to welfare benefit spending
● Increase in interest rates on debt leading to an increase in debt costs
● Rising state pensions

Austerity policies are policies used by the government to reduce the size of the budget deficit,
here there are increases to the government revenue made and decreases to the spending to
help decrease the built up costs.

These are cuts in government spending, higher taxes, and supply side policies to help increase
the level of growth

Monetary policy.
Monetary policy refers to the changes in interest rates, the supply of money, and exchange
rates.

Taxes cannot be increased infinitely, if taxes

become too high people lose the incentive to
work, go to other countries or decide to avoid
taxes, after a certain point there is a decrease
in total tax revenue relative to increase in tax
rates. This can be shown by the laffer curve
where after a certain point tax revenue
decreases
Monetary policy
Monetary policy in the UK involves changes in the interest rate and the supply of money. The
exchange rate is determined by demand and supply. When the MPC sets the bank rate,
commercial banks can change that rate for their customers.

Expansionary monetary policy

1) Fall in nominal and real level of interest rates

2) Measures to expand the supply of credit from the commercial banking system
3) Depreciation of the external value of the exchange rate
4) Leads to an increase in AD
5) Increase in LRAS if lower interest rates stimulate investment.

Deflationary monetary policy

1) Higher interest rates on loans and savings

2) Tightening of credit supply (loans become harder to get)
3) Appreciation of the exchange rate
4) Decrease in AD

Nominal interest rates are interest rates accounted for inflation, if there is a 10% interest rate but
a 5% inflation rate, there is a 5% nominal interest rate.

When interest rates fall

1) Cost of borrowing decreases and consumption goes up

2) Consumer confidence should increase allowing for more consumption
3) Disposable income increase as lower mortgage costs
4) Increased business investment
5) More demand for property and higher property prices
6) Exchange rate falls and exports increase

The Bank of England is assigned with the task of ensuring the free floating currency, hitting the
2% inflation rate, quantitative easing and capital / liquidity requirements for banks.

Quantitative easing

1. Purchasing Assets: The central bank creates new bank reserves (digital money)
and uses these funds to buy assets, primarily government bonds, from banks and
other financial institutions.
 2. Increasing Money Supply: By purchasing these securities, the central bank injects
liquidity directly into the financial system, increasing the money supply.
3. Lowering Interest Rates: QE aims to lower interest rates on bonds, which can
lead to a decrease in the overall yield curve across various types of debt. Lower
interest rates make borrowing cheaper for businesses and individuals, which can
stimulate investment and spending.
4. Wealth Effect: By buying assets, QE can also lead to higher asset prices (like
stocks and real estate), creating a wealth effect. People and institutions with
assets that increase in value may feel wealthier and more willing to spend,
further stimulating economic activity.
5. Encouraging Lending: With more reserves, banks can increase lending to
businesses and consumers. This can lead to economic expansion as companies
invest and hire more, and consumers increase spending.
6. Influence on Currency: QE can affect the value of a country's currency. Increasing
the money supply typically devalues the currency, which can make exports more
competitive and potentially improve the trade balance

(not my words but most efficient notes i could find)

SPICEE Strong Pound Imports Cheaper Exports Expensive

Currency depreciation

Inflation
- A fall in currency makes imports more expensive
- Causing an increase in cost push inflationary pressure
- Makes domestic energy and food bills higher

Export demand and trade balance

- Weaker currency makes exports cheaper overseas
- Riing export sales will increase ad
- Real GDP and jobs will increase

Rise in exports and fall in imports makes AD increase

- Export profits are a stimulus to the labor market
- Weaker pound has the same effect as a fall in interest rates
2.6.3 supply side policies
Supply side policies are meant to improve the productive potential of an economy, this can be
shown by a rightward shift in LRAS, there are different approaches to supply side actions

Market led policies to make markets work better and give the private sector more freedom

Government intervention in markets to overcome market failures.

They act to

1) Improve incentives to look for work and invest in people's skills

2) Increase labor and capital productivity
3) Increase occupational and geographical mobility to reduce unemployment
4) Increase investment and research and development spending
5) Promote more competition and increase competitiveness
6) Strong sustained non inflationary growth
7) Encourage new businesses to enter markets especially with export potential
8) Improve the trend growth of real GDP

This can be shown by the following diagram, as you can see after expansionary fiscal policy
supply / or the total potential of a country increases, this means that inflation will decrease as
maximum capacity is now further while real GDP increases.

The benefits are that if they are successful we can reach a better trade off between inflation and
unemployment (phillips curve)
We are more flexible to changes in external supply meaning we won't be as dependent on other
countries
Livings standards increase from long term economic growth
Reduced unemployment
Improved competitiveness

Interventionist supply side policies

 1) State investment in infrastructure and public services
2) Commitment to a minimum wage to incentivise work
3) Higher taxes on the wealthy
4) Policies to inject extra demand
5) Import controls allowing domestic firms to grow faster
6) Management of the exchange rate to improve competitiveness
7) Nationalization of key industries

Human capital can be increased by

Increased educational spending, increased investment in training opportunities, higher real
income to allow people to consume more knowledge and an inflow of skilled migrants to bring in
new labor.

Market based supply side policies

● Cutting government spending

● Lower business taxes to stimulate investment
● Lower income tax rates to improve work incentives
● Decreasing regulation
● Easier employment laws
● Privatization of state assets
● Opening up the economy to overseas trade and investment
● Opening up more inward skilled labor migration
2.6.4 conflicts and trade offs between
objectives and policies
It is often hard for a government to reach several maco objectives at once, trade offs or choices
still have to be made

1) Unemployment and inflation, the phillips curve tells us that as employment increases,
inflation will also increase.
2) Economic growth and inflation, excess growth from AD puts inflationary pressures on the
economy
3) Economic growth and the balance of payments a consumer boom may cause the trade
deficit to rise as spending on imports increase
4) Economic growth and inequality, when there is rapid economic growth some areas are
exploited for the benefits of others leading to inequality
5) Environmental degradation, almost all economic growth leads to environmental
degradation
6) Income inequality vs economic growth, does high inequality cause slower long term
growth

To counteract this there are several policies

Supply side policies

Reforms to improve labor productivity
Incentives to promote r&d and innovation
These are done to help increase export competitiveness

Exchange rate movements

A devaluation of a currency makes exports more price competitive and imports more expensive,
however this is dependent on the price elasticity of demand for these goods

Macroeconomic policies
Monetary policy to keep inflation low relative to the inflation of comparative countries
Infrastructure to help increase export competitiveness

Short run phillips curve

Elastic phillips curve, when there is a large amount of spare

capacity employers don't need to bargain for labor and get it at a
cheap price

Inelastic phillips curve, when there is little labor, firms must raise
wages to attract labor leading to an increase in price