Built Environment Economics Notes

12 Pages • Topic Notes • Year: Pre-2021

Lecture 4 Economics The business cycle roller coaster • Business cycles are alternating periods of economic growth and contraction, which are measured by changes in o GDP (income and output) o Sales levels o Employment • The model shows short term fluctuations in level of economic activity along a long term • Two phases of economic cycle o Expansion o Recession Expansion • An upturn in cycle where economic activity rises • Peaks occur when economies reach maximum after expansion Recession • When output, sales and employment decline in the economy • Troughs occur when economies reach minimum after recession Economic Growth • Is an expansion in national output measured by the annual % increase in nations GDP • Real GDP is inflation adjusted, so we can see real output changes. • Economic growth = economic goal because measures standard of living Business Cycle indicators • A number of macroeconomic variables provide information as to where the country is on the roller coaster • Often grouped into: o Leading indicators o Coincident indicatos o Lagging indicators Leading indicators • Variables that changes before the economy shits from business phase to another, for example o Average work done o New businesses formed o New building permits Coincident indicators • Variables that change at about the same time that the economy shifts from one cycle phase to another, for example: o Unemployment rates o Household income Lagging indicators • Variables that changer after has a phase change in economy has occurred: o Duration of the unemployment rate o Labour cost per unit of output o Inventories to sale ratio Total spending and the business cycle • The uneven pattern of growth in economy asks what causes a business cycle • GDP = C + I + G+ (X – M) • Changes in any of these variables affects the business cycle GDP Gap • The difference between full employment real GDP and actual real GDP • Full employment does not mean an unemployment rate of 0 • With changing tastes and technology, there will be some level of unemployment • People, having left current employment, find alternatives Economic Growth in the Longer Term • Knowledge of the determinants of economic growth aids governments to develop better policies • Eco growth results from growth in demand and growth in supply Determinants of growth • Output growth is result of increases over time in: o Land, labour, capital • Output per unit of labour can increase once quantity of capital per unit of labour increased Solow Growth Model • Early growth model sought to explain how consumption, saving, capital, labour combine in long term to determine nations economic growth A Trade off • In long term- higher consumption per capita and growth occurs • In short term – consumption is sacrificed to lift the saving rate, to enable investment in capital stock Impact of Technological change • New Capital is likely to embody technological improvements, which means real output per capita can move forward Endogenous Growth Model • It is more likely that technological progress and growth occur alongside one another • It is argued that research and development now will lead to positive externalities in future The Goals of Macroeconomic Policy • To reduce severity of the business cycle: o Reduce the severity of recession limits the rise of unemployment o Not allowing the economy to grow ‘to fast’ reduces chances of inflation Chapter 13 Inflation and the consumer price index (CPI) • Inflation is an increase in price level of goods and services in the economy • CPI is a index that measures change in average price of goods and services CPI formula is: Annual rate of inflation • Is the % change in the CPI from one year to the next. Consequences of inflation • Reduces the purchasing power of money, shrink income • Can affect interest rate for lenders and saver • Affects investment decisions by business Nominal and Real income • Nominal (Money) income does not measure purchasing power • It measures the amount of goods and services bought with nominal income Inflation and the real interest rate Inflation and investment business decisions • a low and stable rate of inflation is conducive to efficient decision making • high inflation may cause over investment in some areas e.g. assets Decisions based on expected inflation • Cause individuals to buy quickly to avoid paying more tomorrow • Affects value of cash-based assets • Reallocate investment into non-productive resources. • Creates a vicious wage price spiral Demand-Pull inflation • is a rise in price level due to excess of total spending over supply • this occurs when economy is operating at capacity Cost-Push inflation • is rise in price level due to increase in the cost of production • this could be caused by cost increases in: o Labour o Raw materials o Equipment o Interest loans Inflation on a rampage • Hyperinflation is rapid rise in genral price level and is conducive to social change: o It encourages immediate spending o Causes a wage-price spiral o It encourages speculation Unemployment • Unemployment rate is percentage of people in the labour force who are without jobs Unemployment rate Types of unemployment 1. seasonal • caused by changes in hiring due to changes in seasonal demand or weather for example o summer resort workers o construction workers in wet season 2. frictional • caused by search time required by workrs with marketable skills who are changing jobs, entering or re entering workforce 3. structural • caused by mismatch of skills of workers out of work and skills required required from existing job opportunities • results from changes in structure of economy (e.g. tastes, preferences, demand) Causes: • inappropriate education or job-related skills • changes in demand over time • changes in production technology • geographic differences. 4. cyclical • caused by lack of jobs during recession • may cause unemployment rates to rise rapidly, but slow to fall again

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