Macroeconomic Performance AS Economics Unit 2

Aims and Objectives Aim: To understand measures of unemployment and inflation as measures of macroeconomic performance. Objectives: Recap on the business cycle Define and describe unemployment trends Define and describe inflation trends Analyse the relationship between inflation and interest rates Evaluate the effects of inflation

Output Gaps and Economic Cycle Draw out the economic cycle on your whiteboards. Write out the following statements and suggest with each letter where each statement occurs on the economic cycle. E.g. Actual Growth Trend Growth GDP Time A B

A Unemployment begins to rise B Unemployment begins to fall C AD begins to rise D AD begins to fall E Consumer confidence is high and firms benefit from high profits from high demand. F Firms are suffering from a contraction in AD and making redundancies. G Government intervenes to stimulate AD. H Household incomes are increasing.

I Aggregate demand is exceeding aggregate supply, resulting in higher prices and inflationary pressure. J Consumer confidence is low, and instead of spending, consumers are saving, resulting in a contraction of AD. K Workers demand higher wage levels to keep up with inflation. L Interest rates are low in an attempt to boost consumer spending M The number of people claiming welfare benefits rises.

Employment and Unemployment Both vary over the course of the business cycle. Unemployment tends to occur when there is a negative output gap. Unemployment causes negative externalities. As economy grows, employment is created. However increases in technology may result in unemployment.

Unemployment Task: Two significant points of comparison.

Unemployment The Office for National Statistics (ONS) said the unemployment rate also rose to 8.4% from 8.3%, the highest since January What would you do as a policy maker to address this problem?

Inflation AS Economics

Inflation Task 1: Break the Code Task 2: Using the code, answer the four questions. £

Answers Task 1, Break the Code: First think about a planet where you have a basket of goods. Now think that the only basket of goods you can buy are: milk, bread and petrol. They all cost one pound. What is Inflation?

Prices month 1 (£) Prices month 2 (£) 1)Milk £1.00£1.05 2) Bread £1.00 £1.02 3) Petrol £1.00 £1.03 Average Price ££1.00 £1.033 Percentage Change % 3.33%

Persistent tendency for prices to rise, resulting in a fall in the real value of money Inflation Definition: £

Retail price index (RPI): Monthly record of inflation. Measured from a base period = 100. Calculated by recording price movements in hundreds of consumer goods/services. Shows the change in the prices of an average person’s ‘shopping basket’. It includes housing costs such as mortgage interest and council tax. How is Inflation Measured?

Consumer Price Index (CPI): Measure based on RPI. Difference: CPI excludes housing costs. Used by the government and B of E as inflation target. 2.0% Usually lower than RPI More accurate and provides a better comparison internationally How is Inflation Measured?

Inflation has fallen, so have prices fallen? Inflation and interest rates have previously seen a strong link in years gone by. Higher inflation rate, the higher the interest rate. Interest rate used as a mechanism to control inflation. 4.2% CPI UK Inflation (Dec 2011). 4.8% RPI UK Inflation (Dec 2011). 0.5% UK interest base rate (Dec 2011). Task: Discussion. Why do we currently have high inflation, but a low interest base rate? Inflation & Interest Rates

When Inflation falls.... Fall in inflation rate Reduced prices Slowing down in the rate of increase Fall in inflation rate

Effects of High Inflation Encourages borrowing Businesses increase prices. Consumer price sensitivity increases. Increased likelihood of industrial action for pay rises. If UK inflation rate higher then the rest of the world then less competitive internationally. Interest rates may rise (monetary policy) High Inflation

Effects of Low Inflation Interest rates tend to be low. More competitive in international market Greater level of certainty Inefficient firms disappear Low Inflation

The Government & Inflation Target for inflation of 2% Bank of England’s responsibility Too high a level of AD during a boom will result in inflation, the Bank seeks to reduce AD by increasing the base interest rate. During a negative output, inflation is likely to be low, and the Bank seeks to increase AD by reducing the interest rate, creating an incentive to spend as apposed to borrow. Policy is aimed at price stability. Inflation important measure of performance as indicates whether or not the UK is price competitive internationally.

Plenary Is inflation a good or a bad thing?