Unit 3.3 - Macroeconomic Objectives

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A flexible employment arrangement with no guaranteed hours for workers.

Zero-contract hours

A scenario where both inflation and unemployment rise, often triggered by supply shocks.

stagflation

A tax system where a higher income results in a higher percentage paid in taxes.

Progressive taxes

Growth that allows for low and stable inflation while increasing aggregate supply.

Sustainable economic growth

Harmful effects on third parties caused by the production of goods or services.

Negative externalities of production

The potential trade-off between low unemployment and low inflation as macroeconomic objectives.

The short run Phillips curve (SRPC)

The situation where a government cannot achieve all its macroeconomic goals simultaneously due to trade-offs.

Conflicting macroeconomic objectives

The situation where only one rate of unemployment is consistent with stable inflation, depicted as vertical.

The long run Phillips curve (LRPC)

Phillips curve

A model illustrating the trade-off between unemployment and inflation, showing that lower unemployment can lead to higher inflation in the short run.

equitable distribution of income and wealth

The fair allocation of income and wealth within an economy, which can be supported by progressive taxation, allowing for both economic growth and equity.

equity in income distribution

The fair allocation of income among individuals in a society, which can conflict with high economic growth as not all segments of the population may benefit equally from economic advancements, leading to disparities.

high economic growth

A period of rapid economic expansion characterized by increased employment and aggregate demand, which can lead to inflationary pressures as more people earn and spend money, potentially conflicting with other macroeconomic objectives like low inflation and environmental sustainability.

long run Phillips curve

A vertical representation of the relationship between unemployment and inflation in the long run, indicating that attempts to reduce unemployment below the natural rate may lead to accelerating inflation without long-term employment gains.

low inflation

A macroeconomic goal characterized by stable and minimal increases in the general price level, which allows for predictable economic planning and helps maintain consumer confidence and spending.

low unemployment

A macroeconomic objective where a high proportion of the labor force is employed, which can lead to increased consumer spending but may also create inflationary pressures if aggregate demand outpaces aggregate supply.

short run Phillips curve

A graphical representation showing the inverse relationship between unemployment and inflation in the short run, indicating that lower unemployment can lead to higher inflation due to increased consumption and demand.

supply shocks

Unexpected events that significantly disrupt supply, such as natural disasters or oil crises, leading to simultaneous inflation and rising unemployment, known as stagflation.

A very large city, typically with a population exceeding 10 million.

Megacity

Challenges that arise from the interplay of economic and social factors impacting communities.

socioeconomic problems

The consumption of natural assets at a rate that exceeds their rate of renewal, leading to sustainability concerns.

resource depletion

The monetary value of goods and services produced in a country annually, without adjusting for inflation.

Nominal gross domestic product (GDP)

The principle of fairness between different generations, especially in terms of resource allocation.

intergenerational equity

The total economic output of a country divided by its population size.

GDP per capita

State the formula: GDP per capita (GDP per capita)

GDP per capita = GDP / population Divides national output by the population to estimate average output or income per person.

State the formula: Real GDP (Real GDP)

Real GDP = (Nominal GDP / GDP deflator) × 100 Adjusts nominal GDP for inflation to measure the real value of output in constant prices.

income distribution

The impact of economic growth on how income is shared among individuals in a society, which often leads to greater disparities, with the rich getting richer and the poor getting poorer. This raises concerns about socioeconomic inequalities despite overall economic growth.

A circular cause of increasing inflation due to higher wages negotiated by trade unions, which raises costs for firms.

A wage-price spiral

A circular process of decreasing prices driven by a weak economy, leading to lower wages and reduced confidence.

Deflationary spiral

A condition characterized by extremely high and uncontrolled inflation rates that lead to significant economic disruption.

hyperinflation

A condition in which the general level of prices stays broadly constant, because inflation is low and steady rather than zero.

price stability

A generally harmless decrease in the price level, allowing the economy to produce more without raising overall prices.

benign deflation

A harmful type of price decrease linked to falling demand for goods and services, leading to negative economic consequences.

malign deflation

A measure that reflects the average cost changes over time for a predetermined basket of everyday goods and services, indicating inflation trends for households.

consumer price index (CPI)

A situation where mortgage debt surpasses the property's value.

Negative equity

A situation where the rate of price increases slows down, even though prices are still rising.

disinflation

A sustained decrease in the overall price level within an economy over a period of time.

deflation

An increase in the general price level caused by rising production costs, which subsequently affects consumer prices.

cost-push inflation

The extra time inflation forces customers to spend hunting for the best deals and making more frequent trips to the bank or sessions of online banking — an opportunity cost of rising prices.

shoe leather costs

The initial period assigned an index number of 100 for calculating price indices.

base year

The ongoing expenses incurred by firms to adjust price lists and tags due to continuous price increases.

menu costs

The reluctance of workers to accept pay cuts, even when it could benefit the overall economy.

Sticky wages

The situation where overall demand for goods and services exceeds supply, causing prices to rise.

demand-pull inflation

The sum of the unemployment rate and inflation rate for a country, indicating economic distress.

Misery index

The total amount of money in circulation within an economy at a specific time, including legal tender, loans, credit, and deposits.

Money supply

State the formula: Inflation rate

Inflation rate = [(Index_t − Index_{t−1}) / Index_{t−1}] × 100 Computes the percentage change in the price index between two periods.

State the formula: Misery index

Misery index = Unemployment rate + Inflation rate A simple indicator of economic discomfort combining joblessness and price changes.

State the formula: New basket cost

New basket cost = Old basket cost × (New CPI / Old CPI) Updates the cost of a basket when the CPI changes from one period to another.

State the formula: Price index

Price index = (Current basket price / Base-year basket price) × 100 Calculates the index number for a given year relative to the base year set at 100.

State the formula: Real interest rate ≈ Nominal interest rate − Inflation rate

Real interest rate ≈ Nominal interest rate − Inflation rate Approximates the real cost of borrowing; when inflation is negative, the real rate rises for a given nominal rate.

State the formula: Updated index

Updated index = Prior index × (1 + inflation rate) Applies a given percentage inflation rate to an existing index to obtain the new index.

State the formula: Weighted CPI

Weighted CPI = Σ (Price index_i × Weight_i) Combines component indices using statistical weights that reflect expenditure shares or quantities.

atypical households

Households that do not fit the standard profile of the average household, often leading to different spending patterns. The Consumer Price Index (CPI) may not accurately reflect their economic reality, affecting its relevance.

bankruptcies

The legal process through which a business or individual declares inability to repay debts. High levels of deflation can lead to increased bankruptcies as firms struggle with reduced revenues and profitability.

current account

A component of a country's balance of payments that records all transactions related to trade in goods and services, income, and current transfers. A deterioration in the current account can occur due to high inflation making exports less competitive.

deferred consumption

The postponement of consumption as consumers wait for prices to fall further, which can lead to decreased economic activity and slow down overall demand in the economy.

economic boom

A period of significant economic growth characterized by rising real GDP, increased employment, and higher consumer spending, which can lead to demand-pull inflation as aggregate demand increases.

inefficient resource allocation

The distortion of resource distribution in the economy due to high inflation, which creates uncertainty and can lead to suboptimal investment and consumption decisions.

policy ineffectiveness

The reduced effectiveness of government policies aimed at achieving macroeconomic goals, particularly during deflation, as traditional monetary policy tools become less viable when interest rates are already low.

purchasing power

The ability of consumers to buy goods and services with their income, which decreases when inflation rises. As prices increase, the same amount of money buys fewer goods, diminishing overall economic well-being.

purchasing power of money

The quantity of goods and services that can be purchased with a unit of currency, which decreases as inflation rises. This means that consumers need to spend more money to maintain their standard of living as prices increase over time.

real value of debt

The increase in the real value of debts during deflation, which redistributes wealth from borrowers to lenders, causing economic uncertainty and reduced consumer confidence.

real wages

The wages of workers adjusted for inflation, representing the actual purchasing power of income. When inflation rises faster than wage increases, real wages can decline, which affects the standard of living for households.

redistributive effects

The consequences of inflation that lead to unequal impacts on different stakeholders, causing a decline in the real purchasing power of certain groups, particularly low-income households, which can exacerbate economic inequality.

regional disparities

Variations in economic conditions, such as unemployment rates, across different geographical areas. These disparities can lead to inefficiencies and limit overall economic productivity, impacting growth and competitiveness.

representative basket

A collection of goods and services representing typical household spending, where items that constitute a larger share of expenses receive greater statistical weight in the Consumer Price Index (CPI). This weighting reflects the importance of these goods and services in calculating inflation and economic well-being.

statistical weights

The values assigned to different items in an index that reflect their relative importance based on household spending patterns. These weights are crucial for accurately measuring inflation through consumer price indices.

uncertainty

The lack of predictability in the economy due to inflation, which diminishes consumer and business confidence, leading to reduced spending and investment as households and firms become unsure about future costs and prices.

A measure that considers those willing to work but unable to find employment, actively seeking jobs, or waiting to start a new position.

ILO measure of unemployment

Exists when wages are set above the market-clearing level due to minimum wage laws.

Real wage unemployment

Individuals who are economically inactive by choice and do not seek full-time work.

Voluntarily unemployed people

Individuals who are unemployed but not counted in official statistics.

hidden unemployment

Individuals who have ceased job hunting due to discouragement.

discouraged workers

Job loss resulting from predictable variations in demand for certain goods or services throughout the year.

seasonal unemployment

Joblessness occurring when individuals are temporarily between jobs, awaiting new employment.

frictional unemployment

Joblessness stemming from a long-term decrease in demand for specific industry skills.

structural unemployment

Officially recorded jobs where workers pay income taxes and contribute to GDP.

Formal sector employment

People of working age who are employed, self-employed, or unemployed but actively seeking work.

labour force

The measure of unemployment modified to account for usual fluctuations in demand for certain goods and services.

Seasonally adjusted

The percentage of the labour force that is without work.

unemployment rate

The proportion of women who are active in the labor market.

The female participation rate

The situation where anyone wanting a job at the market wage can find one.

Full employment

The total number of individuals receiving unemployment benefits as a percentage of the workforce.

claimant count

The underutilization of labor resources in the economy, which limits productivity and efficiency.

underemployment

Unemployment caused by insufficient demand for goods and services.

Cyclical

State the formula: Share of the labour force that is officially unemployed

Unemployment rate = (Total unemployed ÷ Total labour force) × 100 Share of the labour force that is officially unemployed.

Aggregate demand for labour (ADL)

The total quantity of labor that employers are willing to hire at a given wage rate, which is influenced by factors such as economic conditions and the overall demand for goods and services.

Aggregate supply of labour (ASL)

The total number of individuals who are willing and able to work at different wage rates, which can be influenced by factors such as population demographics and economic incentives.

Cyclical (demand-deficient) unemployment

A type of unemployment that arises due to a downturn in the business cycle, characterized by a significant decrease in aggregate demand, leading to job losses across various industries. It is considered the most severe form of unemployment as it can impact virtually every sector of the economy during recessions.

Derived demand for labour

The demand for labor that is contingent on the demand for the goods and services produced by that labor. As firms experience higher demand for their products, they increase production, which in turn raises the need for workers, reducing overall unemployment.

Employment

The utilization of factors of production, specifically labor, in the production process. It refers to the state where individuals who are willing and able to work can find jobs, contributing to the economy's output.

Hidden unemployment (disguised unemployment)

The phenomenon where individuals who are not officially counted in unemployment statistics are still unable to find work, leading to an underestimation of the actual unemployment rate.

International Labour Organization (ILO)

A United Nations agency that sets international labor standards and promotes rights at work, ensuring fair and decent employment conditions globally.

Labour market equilibrium

The point where the quantity of labor demanded equals the quantity of labor supplied in the market, leading to stable employment levels at a prevailing wage rate.

Labour market rigidities

Factors that inhibit the flexibility of the labor market, such as resistance to accepting lower wages or a mismatch between available jobs and worker skills. These rigidities can contribute to structural unemployment and prevent the labor market from reaching equilibrium.

Multiplier effect

A concept that describes how an initial change in spending leads to a more significant overall impact on economic activity. In the context of unemployment, increased government spending can stimulate demand, which further reduces unemployment and fosters economic growth.

Seasonally adjusted unemployment statistics

Unemployment statistics that have been modified to account for predictable seasonal variations in employment. This adjustment aims to provide a more accurate reflection of underlying unemployment trends by excluding typical seasonal employment patterns.

Trade unions

Organizations that represent workers' interests, advocating for better wages and working conditions. While they play a crucial role in protecting workers, their influence can create rigidities in the labor market by pushing for higher wages that may prevent equilibrium.

Voluntarily unemployed

Individuals who choose not to seek employment, often due to personal circumstances or disillusionment with the job market, which contributes to the overall unemployment figures.

Voluntary unemployment

A situation where individuals choose not to seek employment actively, often due to personal choices or circumstances. This can include people who may prioritize other commitments or have become discouraged after unsuccessful job searches, resulting in their non-participation in the labor force.

aggregate demand for labour (AD)

The number of workers all firms in an economy are willing to employ at each real wage rate. It falls as the wage rises, so a minimum wage set above equilibrium cuts employment and creates real wage unemployment.

aggregate supply of labour (AS)

The number of people able and willing to work at each real wage rate. Labour market equilibrium sits where it equals the aggregate demand for labour; a minimum wage imposed above that rate leaves a surplus of workers.

demand deficient unemployment

Unemployment that results from a lack of aggregate demand in the economy, leading to job losses across various industries. It typically occurs during economic downturns and can severely impact the overall labour market.

labour market

Where the supply of labour meets the demand for it, setting employment levels and wages. It reflects how many people are available and willing to work at prevailing pay.

labour mobility

The ability of workers to move between jobs, industries, or geographical locations. High labour mobility can reduce unemployment by enabling workers to find positions that better match their skills and preferences.

loose monetary policy

A monetary policy approach that aims to increase aggregate demand through lower interest rates and increased money supply. This strategy is used to stimulate economic activity and drive employment during periods of economic stagnation.

A metric that expresses a country's national debt as a fraction of its total economic output.HL

debt to GDP ratio

A situation where government expenditures surpass its income during a specific time frame.HL

budget deficit

Actions taken to reduce government spending in order to manage and repay national debt.HL

austerity measures

An evaluation of a borrower's likelihood of fulfilling loan repayment obligations.HL

credit rating

The financial obligations associated with repaying borrowed funds and the interest on those funds.HL

debt servicing costs

The total amount owed by a state due to past budget deficits.HL

government debt

compound interestHL

The interest on a loan that is calculated based on both the initial principal and the accumulated interest from previous periods, leading to exponential growth of debt.

fiscal spendingHL

Government expenditure aimed at influencing economic activity, which can be cut back during austerity measures to manage national debt. This reduction in fiscal spending is often necessary to address budget deficits and ensure future financial stability.

macroeconomyHL

The overall economic performance of a country, viewed through aggregate indicators such as GDP, unemployment and inflation rather than through individual markets.

national debtHL

The total amount of money the government owes due to past budget deficits, representing accumulated borrowing over time. It is essential for assessing a government's financial obligations and its ability to meet those obligations relative to the country's economic output.

tax revenue (T)HL

The income generated from taxes, which is critical for funding government spending and can lead to budget deficits when spending exceeds revenue.

CPIHL

The Consumer Price Index, a measure that examines the weighted average of prices of a basket of consumer goods and services, used to assess inflation and cost of living changes.

Weights (quantities purchased)HL

Quantities used as weights in calculating a weighted price index, which helps measure inflation more accurately based on consumer purchasing behavior.

inflation rateHL

The percentage change in the general price level over time, calculated from a weighted price index that reflects the quantities households actually buy.

weighted price indexHL

An index that measures the average price change of a basket of goods and services, weighted according to their importance or quantity purchased, used to calculate inflation rates and assess changes in purchasing power.