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Economics Door Mind Map: Economics

1. Chapter 1

1.1. Macroeconomics considers the economy as a whole – i.e. the quantity of goods and services produced by all businesses and the government sector.

1.1.1. circular flow of income the connections between different sectors of our macroeconomic system. It revolves around flows of goods and services and factors of production between firms and households. Not all income will flow from households to firms directly. The circular flow shows that some part of household income will be: Withdrawals are increases in savings, taxes or imports so reducing the circular flow of income and leading to a multiplied contraction of output. Injections into the circular flow are additions to investment, government spending or exports so boosting the circular flow of income leading to a multiplied expansion of output.

1.1.2. Whereas microeconomics deals with individual markets such as oil, housing and farming and the behaviour of households and individual businesses, in macroeconomics we look at things ‘in the whole’

1.1.3. Households: receive income from their jobs and from their investments and then buy the output of firms

1.1.4. Firms: Businesses hire land, labour and capital inputs to produce goods and services for which they pay wages and rent etc (income).

1.1.5. International sector The UK buy overseas products known as imports, (M) and overseas businesses and consumers buy UK products – known as exports (X).

1.1.6. Government: collect direct and indirect taxes (T) to fund spending on public services such as education, healthcare and defence. Government spending is given the label (G).

2. Chapter 2

2.1. Economic Growth

2.1.1. What is Economic Growth? Short term economic growth Uses up existing spare capacity / factor resources (i.e. associated with falling unemployment An increase in the rate of factor utilisation Usually determined by the growth of aggregate demand (AD) Economic Growth in the Long Run Long term economic growth requires The rate of increase of real GDP The rate of growth of real national income depends on how fast money national income is growing compared to changes in the general price level (i.e. the rate of inflation) Economics growth is best defined as the long run expansion of an economy’s productive potential The growth rate is also expressed as the percentage annual increase in a country’s real GDP

2.1.2. Real GDP The volume of goods and services produced within the UK (GDP adjusted for changes in the price level)

2.1.3. Gross Domestic Product (GDP) The money value of all goods and services produced within the UK Also known as GDP at current prices

3. Chapter 3

3.1. A Working Definition of Unemployment

3.1.1. People able, available and willing to find work and actively seeking work – but not employed The unemployed are included in the labour force Measuring Unemployment The Claimant Count Measure The Labour Force Survey (LFS)

3.1.2. Types of Unemployment Frictional Lower income tax rates and benefit reforms might be a solution to this – thereby boosting the supply of labour available to work in the economy When workers calculate that because of lost welfare benefits and extra direct taxes they are no better off working than if they remain outside the employed labour force – thus unemployment can result from the problem of disincentives. Includes people experiencing short spells of unemployment Seasonal A worker is described as voluntarily unemployed if, at the given level of wages available, he or she does not yet wish to accept a paid job. Involuntary unemployment exists when someone would be prepared to work at the going wage rate, but for one reason or another, they are unable to find work. Classical Unemployment Unemployment will occur when the supply of labour exceeds the demand for labour. Employers will deliberately pay a market clearing wage for staff. Cyclical unemployment There is a cyclical relationship between demand, output, employment and unemployment Caused by a fall in aggregate demand leading to a loss of real national output and employment Structural Unemployment Arises from the mismatch of skills and job opportunities as the pattern of labour demand in the economy changes Often involves long-term unemployment Real Wage Unemployment Created when real wages are maintained above their market clearing level leading to an excess supply of labour at the prevailing wage rate

4. chapter 4

4.1. Defining Inflation

4.1.1. Inflation is a general and sustained increase in the price level of a currency over time.

4.1.2. A sustained fall in the general price level is called deflation – in this situation, the rate of inflation becomes negative.

4.1.3. The rate of inflation is measured by the annual percentage change in the level of prices as measured by the consumer price index.

4.2. Disinflation

4.2.1. Disinflation is a decrease in the rate of inflation – a slowdown in the rate of increase of the general price level of goods and services in a nation's gross domestic product over timew node

4.3. Measuring Inflation - The Consumer Price Index

4.3.1. The consumer price index is the main measure of inflation for the UK node

4.3.2. The government has set the Bank of England a target for inflation (using the CPI) of 2%

4.3.3. Low stable inflation is also known as price stability

4.4. Key Concepts

4.4.1. The Cost of Living Is the quantity of goods and services that a given amount of money (e.g. £1000 a month) will buy for a typical household.

4.4.2. The Inflation Rate The annual percentage in the consumer price index. This is calculated relative to an arbitrary base year set equal to 100.

4.5. Hyperinflation

4.5.1. With hyperinflation - inflation goes out of control Huge amounts of money has to be printed to meet people’s demand for cash Money effectively becomes worthless The effect is nearly always to lead to a collapse in business and consumer confidence and a recession In most cases a new monetary system may have to be created

4.6. What are the main causes of inflation?

4.6.1. In an open economy such as the UK, there are many potential sources of inflationary pressure.

4.6.2. the pricing strategies of the leading food retailers based on the strength of demand and competitive pressure in their markets.

4.7. Demand-pull inflation

4.7.1. This occurs when there is excess AD – i.e. when there is a positive output gap (actual GDP > Potential GDP)

4.7.2. Businesses respond to high demand by raising prices to increase their profit margins

4.7.3. Demand-pull inflation is associated with the boom phase of the cycle (when SRAS becomes inelastic)

4.7.4. The main causes of demand pull inflation Very fast growth of demand for credit / borrowing High levels of consumer spending

4.8. Cost Push Inflation

4.8.1. Causes: External shocks (commodity price fluctuations) A depreciation in the exchange rate Acceleration in wages

4.8.2. Leads to inward shift in SRAS curve

4.9. Costs and Consequences of Inflation

4.9.1. Inflation can favour borrowers at the expense of savers – because inflation erodes the real value of existing debts

5. chapter 5

5.1. Current accounts

5.1.1. the balance of payments recording a nation's exports and imports of goods and services and transfer payments. New node New node Causes of the current account deficit High propensity to buy imported goods and services Cost levels and UK prices relative to international competitors can measure competitiveness, but non-price factors are also important. Poor price and non-price competitiveness of UK firms Lack of productive capacity of UK firms A strong exchange rate also makes imported goods cheaper inside the UK. Often the root cause of a current account deficit is cyclical. During a boom the demand for imported goods and services rises strongly and if exports cannot keep pace a lack of competitiveness in those sectors of the economy exposed to international trade, then specific policy measures may be required to help correct the deficit. If a country has open capital markets where money can flow into and out of an economy with ease, it should not be a problem to attract the capital inflows needed to finance a balance of payments deficit on the current account. in the long-term if imports are increasingly taking over from domestic producers, this threatens economic growth, employment and living standards in the deficit country.

5.1.2. A current account deficit is the amount by which money relating to trade, investment etc going out of a country is more than the amount coming in.