IB Economics - Macroeconomics Definitions - IB 45/45 Student PDF

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Testing myself using the guiding questions in this Macroeconomics definitions document really helped improve my understanding of IB Economics. Within it are not only important definitions but examples to help ensure you are well prepared for any Macroeconomics test! These definitions helped me revis...

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IB Economics - Microeconomics Definitions - IB 45/45

Define or explain the following (try not looking at your books/notes) ● Inflation ○ A general rise in the average price level ● Deflation ○ A general decrease in the average price level that needs to be BELOW ZERO (negative), prices are going BACKWARDS ■ E.g. Japan has experienced this in recent years ○ The inflation has gone below zero, prices are going below zero average ● Disinflation ○ A decrease in the rate of inflation ABOVE ZERO, working at a slower rate of inflation ■ E.g. The base price is inflated by 7% after one year and in the year following the first, the price is inflated by 5%. In this example there is still inflation, however, the rate of inflation decreased in the following year by 2% ○ The decrease in the pace of inflation ● Unemployment ○ When an individual is actively searching for a job and is willing and able, however, they can’t find one ○ Actively searching for work and can’t find job ● Seasonal unemployment ○ When an individual’s career is only required during certain times of the year ○ Only find work in a particular period when demand is greatest ■ E.g. Ski instructors during seasons other than winter or lifeguards in seasons other than summer ■ Fruit Pickers

○ Without a job for a period of time because the demand isn’t sufficient ● Frictional unemployment ○ Natural Rate of Unemployment ○ People who have skills that are marketable are moving between jobs ○ When an individual is searching for a better job (in the process of getting a new job), not satisfied with that they currently have. This may be due to having skill sets that exceed that of the requirements of the job ● Cyclical unemployment ○ Unemployment as a consequence of the business cycle ○ Usually, during downturns (recession or busts) in the business cycle, an increase in the employment rate ● Underemployment ○ When the economy is not operating on the PPF as they’re not employing all their resources. This is due to the skills of individuals being used to undertake jobs that are “below” their capabilities ■ E.g. A nurse working in a fast food restaurant ■ PhD graduate driving a taxi ■ People not working the number of hours they’d like to work ○ People’s skills and abilities are not being fully utilised ● Structural unemployment ○ Unemployment due to a change in the economy, peoples job skills aren’t required or there isn’t work in that area ○ Change in the structure of economy and supply and demand are not able to be met ■ E.g. Technological advances may make jobs obsolete, this may include people who worked in factories to assemble the products being sold or VCR Repairman

■ E.g. Geographic restraints/disconnect, can’t be asked to travel and get a job in another country ● Supply-side economics ○ The market from a producer's perspective (Free Market) ■ Factors that affect AS ■ Goal: Increase the ability for producers to supply, free the market, allow forces of supply and demand forces to do what they do ■ Make it more easy for suppliers to supply and producers to produce ● Deregulation ● Privatization ● Get rid of unions ● Stop sticky wages ● Reduce unemployment benefits ● Demand-side economics ○ The market from a consumers perspective ■ Factors that affect AD ■ Goal: Increase money in people’s pocket, change AD ● Inc gov spending ○ Provide services to people so they don’t have to spend their own money, boost AD ● Dec gov tax ○ People will have to pay less money, therefore they’ll have more in their pocket ○ Reduce taxes will increase AD ● Inc gov tax ○ Decrease in AD ○ Still apart of demand-side economics ● Inc worker welfare ● Demand-pull inflation ○ Too much demand chasing too few goods drives the cost up ○ Demand is greater than supply so the price increases

○ Excess demand pulls price up because people start competing and big against each other ● Cost-push inflation ○ Inflation that occurs when the cost is pushed onto the consumer, this is due to a change in the cost of production (usually as a result of exogenous shocks) ■ E.g. Oil Price Shock ○ This is done to maintain profit margins ■ E.g. New Tax ○ The exogenous shock causes producers to move the cost onto the consumer to maintain profit margins ● Money supply growth-inflation ○ When the government pumps too much money in the economy → Too much activity, not enough productive capacity, drive the price up, value goes down→ inflation ○ When the supply of money within the market is excessive and the value decreases ■ E.g. Countries central bank ○ Money supply grows at too quick a rate ● CPI what is it? what does it measure? How? ○ Consumer Price Index, it takes a weighted “basket” of goods that are regularly consumed by an “average household” and it measures the price of those items in different areas to decipher the inflation ■ E.g. Tobacco has become less important in peoples lives, therefore, it’ll take a lower weighting as it doesn’t have a massive impact on people’s consumption ■ E.g. Healthcare has large weighting ● GDP deflator what is it how does it work ○ Discounts impact of inflation on GDP ○ Impact of things produced only within the country ■ Weakness because it doesn’t take into account imported goods that are consumed

● E.g. In HK, Imported goods constitute for a large of what we consume ● PPI and Core rate of inflation? ○ PPI is the same as CPI but it’s an average basket of goods for producers ■ E.g. Electricity, Water, Petrol, Internet, Gas ○ Core rate of inflation is a measure of inflation that discounts inflation of volatile things ■ E.g. Fuel (Oil) and food ● Things that change on a regular basis Choose any 5 of the issues above and suggest the possible methods to overcome them. Use diagrams and explanations. 1. Unemployment a. Reduce unemployment benefits, more people will feel encouraged to work as they have a greater monetary incentive 2. Seasonal Unemployment a. Relocate workers to areas where their career is demanded 3. Structural Unemployment a. Provide training to give workers marketable skills, training should be shorter and not as in-depth as education, this will make the transition between jobs easier 4. Cyclical Unemployment a. Expansionary fiscal policy i. Decreases taxes or increases government spending (especially government purchases of goods and services). This is largely the approach used during the Great Depression and repeatedly since. b. Expansionary monetary policy i. Increases the amount of money in circulation and reduces interest rates. This is a relatively popular policy approach in more recent decades.

5. CPI a. Create varying “baskets” of goods to cater to different audiences as there isn’t an accurate “average weighted basket” that is applicable to all citizens in a given area 6. Supply-Side Economics a. Deregulate to make it easier for producers to supply i. Get rid of unions ii. Stop sticky wages

CLASS SOLUTIONS: 1. Cyclical Unemployment ○ During downturns, we’re maximizing unemployment ○ Modify ups and downs so they’re not so big (not many large peaks or troughs, we want them gentle). ○ An upward flat line is optimal because it’s economic growth and it’s predictable. Not like this because humans don’t act this way. ○ Goal: Bring peak down ○ Solution: Increase tax, reducing government taxes, take money out of people's pocket ○ Goal: Trough ○ Solution: Give people money: Gov spending (e.g. Buy cars for police in private companies: more vehicles, more spending, more jobs), provide jobs (boondoggle, INFRASTRUCTURE FOR A COUNTRY IS REALLY GOOD) 2. Structural Unemployment ○ Supply and Demand for labour DON’T meet ○ DON’T Lower minimum wage to come back to equilibrium ■ People won’t see the point in working ■ Supply of labour will decrease ■ This can continue

○ Structural rigidity causes structural unemployment, stops forces of S+D to work properly ■ E.g. Geographical constraints ● “My friends and family are here” ■ E.g. Not enough people to do jobs ○ Goal: Make Supply and Demand for labour meet ○ Solution: ■ Fifo workers: Method of employing people in remote areas by flying them temporarily to the worksite instead of relocating employees and their families permanently ● E.g. Mining, common in Canada in Australia 3. Demand Pull Inflation ○ Shortage of a particular g+s ○ Solutions: ■ Produce more (not usually governments job, can be a problem) ■ Decrease demand by increasing interest rates, stop borrowing money and get them to save it ■ Inc. Gov Tax Take money out of people’s pockets, can’t spend it ■ Dec. Gove spending 4. Cost-Push Inflations ○ Cost-Push Inflation exists due to the protection of producer’s profit margins ○ Solution: ■ Manage natural disasters ● E.g. Tsunami, Earthquake, Typhoons ● Japan is very prepared ■ Strategic reserves for oil, as an example, are common in the U.S.

○ Cost-Push Inflation come as a result of exogenous variables, which is beyond the control of the country ○ Can’t tell people what their profit margin should be??...