Macro Essay Plans

Costs and benefits of economic growth

For:
- Higher Living standards
- Increased employment
- Investment accelerator
- Budget position
- Confidence
Against
- Inflation/exports
- Environmental Impact
- Wealth inequality

Depends Upon
- Whether the growth is steady and paired with an increase in productive capacity(LRAS)
- If its achieved through renewable resources and gov policy
- Whether at full capacity

Effect of de-valuing currency on international competitiveness

For:
- UK goods cheaper relative to other countries, exports increase as more price
competitive
Against:
- UK firms who input raw materials will experience increase in cost, worsening
international competitiveness
- Unit labor costs and productivity also impact the level of international competitiveness
- Devalued currency may not address the quality of the goods relative to other countries

Depends Upon:
- Price/Quality of other countries
- Marshall Lerner condition
- Cause for in competitiveness (price or quality?)

Monetary Policy:
For:
- Increased money supply – Lower interest rates – reduce borrowing costs – increases RDI
– increases consumption
Against:
- Liquidity trap, when confidence low interest rate decrease doesn’t lead to spending
- High interest rates appreciates currency, leading to BOP worsening

- Doesn’t deal with cost push inflation

Depends Upon:
- Depends on level of consumer confidence
- Depends on spare capacity

Fiscal Policy:
For:
- Lower taxes, more RDI, more consumption, AD shift

Against:
- Time lags
- Cost to gov (gov spending)
- Crowding out – high gov spending financed by borrowing will leave less investment for
private firms, shifting AD left

Depends upon:
- Size of the multiplier
- Consumer confidence
- Gov level of info
- Whether economy at full capacity (if not then spending won’t cause crowding out)
- Depends on other factors in the economy (subsequent interest rates rising?)

Exchange Rates
For:
- High interests lead to hot money flows, currency appreciation
- Inflation affects currency

Against:
- Appreciation leads to uncompetitive exports, inflation, lower AD, worse BOP
- Depreciation leads to competitive exports, increase AD but also inflation

Depends Upon:
- PED of exports and imports (Marshall Lerner)
- Time lag
 - Reasons for the currency appreciating/depreciating (is it because of speculation or high
competitiveness

Supply side policies:

For:
- Can help reduce the natural rate of unemployment (education + more flexible labour
markets)
- Increased productive capacity of economy
- Lower inflation
- Increased competitiveness increases exports and thus BOP
- Long term
Against:
- Time lag
- Cost
- Not guaranteed to work

Depends upon
- Causes
- Whether at full capacity
- Is it done with sustainable resources?

Reducing Unemployment:
Disadvantages of unemployment:
- Loss of human capital (inefficient use of resources)
- Less tax revenue + more gov spending on benefits
- Social alienation + crime
- Less income for unemployed (less consumption)

Advantages:
- Lower unemployment causes inflation
- Firms can lower wages, reducing costs

Depends Upon:
- Whether economy at full capacity
- Type of unemployment

Policies for Inequality:

- Economic growth (AD shifting, increased total income in society)
- Reducing unemployment (increases incomes of the poor)
- Increased progressive taxation (poorer have more RDI)
 - Increased benefits to the poor (money targeted to those in need)

Problems:
- Growth not guaranteed to trickle down to the poor, may benefit high skilled workers
- Unemployment may be geographical therefore needs to be targeted
- Higher taxes could disincentivize people to work, higher corp tax less investment
- Increased benefits may increase stigma against poor, also may disincentivize getting a
higher payed job

Costs and Benefits of Inequality

Benefits:
- Incentive effect, encourages people to work productively and gain skills to get a higher
wage
- Entrepreneurs require rewards to incentive innovation
- May be trickle down effect from high income earners
Costs
- Could lead to social costs (alienation etc.)
- Unemployment (inefficient allocation of resources)

How to reduce budget deficit

- Cut spending
- Increase taxes

Depends upon;
- Where spending is cut
- Taxes may reduce incentive to work, lower RDI, consumption, unemployment
- Taxes depend on whether economy is at full capacity
- Economic growth may not solve underlying structural deficit (inefficiencies in public
sector causing high costs)

Policies to reduce inflation;

- Tight monetary policy – high interest rates
- Tight fiscal policy – high tax
- Supply side policies ( SRAS shift right)

- If confidence high M + F may not be effective

- Supply side policies have time lag + no guarantee
 - Depends on type of inflation (Cost push or demand pull?)
-

Evaluate the costs and benefits of pursuing the macroeconomic objective of price stabilit y

Benefits
- Increased confidence/reduced uncertainty – increased investment – AD shift
- More competitive exports – lower price level, improving BOP

Costs
- Reduced economic growth – from contractionary demand side policy, lower livings
standards etc.
- Increased unemployment – contractionary policy reduces demand.
- If reduced to much could lead to deflationary spiral – consumer withhold spending etc.

DU
- Level of spare capacity
- How price stability is achieved (Demand or supply side policy)

Evaluate the costs and benefits of pursuing the macroeconomic objective of full employment

Benefits
- Economic growth – Increased wages, RDI, consumption etc.
- Better Gov budget – less spending on benefits + more tax revenue
- Possible LRAS shift if inactive workers join the labour pool – increased productive
capacity

Costs
- Inflation – Increased consumption/wages results in increased price level
- BOP worsening – inflation reduces international competitiveness
- Labour shortages – firms may be more inflexible in responding to demand, reduce
international competitiveness?
DU:
- Whether full employment is permanently or temporarily achieved
- How it is achieved (sustainable policy?)
Evaluate the costs and benefits of pursuing the macroeconomic objective of maintaining a
balance of payments

Benefits
 - Increased productivity/output – if competitiveness targeted may lead to shift in LRAS
- Economic growth – If current account surplus is pursued, increased exports and reduced
imports will shift AD right

Costs
- Inflationary – increasing exports increases AD, price level rise
- FDI decrease – reducing surplus may mean productive capacity reduces

DU
- How it is achieved (demand/supply side?)
- State of the economy (are other objectives more urgent?)

To what extent to is there a trade – off between unemployment and inflation?

Conflict:
- Low unemployment means higher RDI – increased consumption, AD – inflation
- Short run Philips curve shows trade off/inverse relationship
No Conflict:
- Employment increasing through supply side – LRAS shift – no inflation increase
- Below full cap the increase in consumption causes no inflation
- Low MPC/confidence – RDI not get spent – no inflation

DU:
- How employment is increased (supply vs demand side)
- Spare capacity – if full then increased spending increases inflation

To what extent is there a conflict between growth and inflation?

Conflict
- Increased growth – Increased RDI – consumption, AD shift, PL rise
- More income chasing same number of goods – prices rise

No conflict
- Increase in LRAS (through supply side investments) – shift LRAS and achieve growth but
with a reduction in inflation

DU:
- Spare capacity
- Type of growth (actual vs potential)
To what extent is there a trade-off between inflation and balance of payment?

Conflict
- If inflation reduced through contractionary fiscal policy (reduced spending) – spending
on competitive industries reduced – lower competitiveness abroad – lower quality – less
exports

No Conflict:
- Low inflation level – price of goods relative to other countries cheaper – price
competitive – export increase – current account surplus
- Low inflation make country more attractive to FDI – increase financial account

DU:
- How inflation is reduced. (Contractionary fiscal vs supply side to increase
competitiveness)
- State of BOP – current account deficit (too much imports) could benefit from lower
inflation

To what extent is there a trade off between growth and balance of payments:

Conflict:
- High growth (demand side policies) – higher RDI – increased consumption on imports –
current account deficit
- Growth – inflation – reduced price competitiveness – reduce exports

No conflict:
- Increase in l/r growth through investment (education, skilled labour) – supply side more
competitive on quality – increased exports, BOP achieved
- Growth attracts foreign investors – inflow of investment – improve financial account –
balance out current account deficit

DU:
- Type of growth (LRAS vs AD)
- Spare capacity

To what extent is there a trade-off between economic growth and wealth inequality?

Conflict:
 - Economic growth disproportionally grows high skilled sectors – employment benefits
mainly felt by high skilled workers – increase income in top range – increased inequality
- Economic growth increases value of investment assets (stocks, real estate) which are
mostly held by wealthy

No Conflict:
- Growth improves confidence – increased investment – could benefit poorer through
things like jobs/education
- Low value sectors also improve with growth – increased employment
- Growth improves gov budget – more funds to invest into poorer households

DU:
- How benefits of growth are distributed (progressive taxation, redistribution etc)
- Type of growth (supply side may benefit poorer more)

Evaluate, with the use of appropriate diagram(s), whether economic growth will reduce
poverty. (25) 

Will reduce poverty:

- Increase growth – increased output – increased demand for labour – reduce
unemployment – increase living standards, access to essentials, increased income
increased imports giving access to more resources– reduce absolute poverty
- Better government budget – more taxation less benefit spending – investment into
supply side policies (education) – increased human capital – further employment and
economic growth cycle gains – reducing poverty

Wont reduce poverty

- Inflation – reduced spending power – regressive – less access to necessities – increased
absolute poverty (Venezuala) – reduced investor confidence – less FDI – less
opportunities for employment
- Benefits not distributed evenly – inequality (Lorenz shift right) – may benefit rich
disproportionally or a certain sector – do nothing to improve poverty and may increase
relative poverty

DU:
- Type of economic growth (supply vs demand will dictate sustainability/inflation)
- Whether benefits from growth reinvested

Policies to reduce income and wealth inequality

Taxation:
 - Increase progressive tax (income)
- Reduce regressive tax (VAT etc.)

- May lead to migration of high skilled workers (Laffer curve)

- Reduced gov rev available for investment – lower benefits for lower incomes

Increase government benefits

- Increase incomes (unemployment benefits)

- May encourage people not to get a job

- High cost to the government

Legislation
Things like hiring/firing laws, minimum wage etc.

- Protect poorer people

- Cost of enforcement
- High costs to the business (may reduce employment)
- Government failure (causing businesses to shut down etc)

DU:
- Government resources (funding)
-