2021 Baccalaureate Economics Notes

A sustained increase in the general price level. Usually measured by the (Harmonised) Consumer Price Index (CPI/HICP), which is a weighted average of retail prices.

The (Harmonised) Consumer Price Index (CPI/HICP) is calculated by assigning different weights to goods and services based on the percentage of income households spend on them. These weights are determined from household surveys. To determine the inflation rate, compare the prices of a representative basket of goods now with prices in a base year. For the annual rate, compare present-day prices with prices one year previously.

Inflationary costs can include: Inflation is generally a problem when above the desired target of 2-3%. It erodes purchasing power for those on fixed incomes. There are psychological and political costs. It makes planning for investment difficult. It can lead to 'shoe leather costs' (increased time and effort spent searching for lower prices). It makes exports less competitive. It can cause problems with the current account.

Deflationary problems include: Lack of confidence in the economy. Consumer reluctance to spend money. Decreases in Aggregate Demand. Lower investment. Recession (cause or effect). A fall in GDP.

The primary objective of the ECB's monetary policy is to maintain price stability. This is considered the best contribution monetary policy can make to economic growth and job creation. The fundamental aim of the ECB is to use monetary instruments to maintain an inflationary target. This target is to maintain inflation rates below, but close to, 2% over the medium term. This encourages growth, as once the inflation rate falls below this level, there is a fear of slipping into deflation.

The main instruments of monetary policy available to control inflation include: interest rates, open market operations (OMO), reserve requirements (RR), and quantitative easing (QE).

Lowering interest rates can stimulate borrowing, leading to increased consumption and investment, ultimately aiming to raise Aggregate Demand and increase growth, which in turn could lead to higher inflation. However, with very low interest rates, their effectiveness may become questionable. Additionally, low interest rates have allowed governments to raise their borrowing significantly in response to the pandemic.

Net buying in open market operations involves the central bank purchasing more maturing bonds than it issues new bonds. This adds cash to the banking system, making it more liquid and able to expand lending for consumption and investment. Net buying also reduces the supply of bonds on the market, raising their price and pushing yields on existing bonds down, ultimately lowering interest rates. This positive liquidity effect should stimulate the economy, but its effectiveness depends on banks' confidence in borrowers' creditworthiness and the elasticity of borrowing in relation to falling interest rates.

Lowering reserve requirements allows banks to reduce their minimum liquidity ratios and support more lending for consumption and investment. However, its effectiveness depends on banks' confidence in the ability of borrowers to repay and consumers' confidence in borrowing.

Quantitative Easing (QE) involves a central bank buying back bonds before maturity, making commercial banks cash-rich by turning illiquid assets (bonds) into liquid assets (cash) and enabling them to lend more. However, low confidence and uncertainty can reduce its effectiveness in stimulating the economy.

Unemployment can be defined as a situation where individuals of working age are without a job, have been actively seeking work in the past four weeks, and are available to start work in the next two weeks. The main measurement methods are the claimant count, which measures the number of people registered as unemployed and claiming benefits, and Labour Force surveys, which measure the number of people unemployed based on the ILO's definition.

Employment rates can differ between countries due to factors such as: Variations in labour market flexibility. Rigid labour markets can discourage employers from hiring due to the difficulty of shedding excess labour. High wage levels and associated costs can make labour costs too high. The relative cost of capital and labour and its impact on productivity can also influence employment rates.

Unemployment has several social and economic consequences, including: Costs to the unemployed, leading to a loss of income, potential rise in personal debt, and lower living standards. Costs of wasted resources, as unemployed labour reduces output. Costs to GDP and output, as economic growth stagnates and may trigger a negative multiplier effect, leading to further unemployment and potentially deflation. Costs to the government, as lower tax revenue can result in larger budget deficits, reduced growth, and increased borrowing. Costs to society, as high unemployment can lead to depression, suicide, higher crime rates, social deprivation, divorce, and political unrest.

Supply-side policies target the causes of economic growth and aim to increase the quantity and quality of factors of production. Examples include: Promoting investment by improving the investment climate and profit expectations. Promoting education and research tailored to the needs of the economy. Encouraging innovation by promoting competition. Improving labour productivity through continuing education and retraining. Providing infrastructure and other public goods to support efficient use of factors of production.

Demand-side policies focus on increasing aggregate demand to stimulate short-term economic growth. While they can have an impact on long-term growth, they are typically associated with addressing cyclical downturns. Examples include borrowing to improve transport infrastructure or monetary policy that creates stable, low inflation and promotes confidence.

Economic growth is usually measured by the annual percentage change in real Gross Domestic Product (GDP). However, this is only a proxy measure, as potential output or productive capacity cannot be measured directly.

The causes of economic growth are associated with the availability and use of factors of production, including: Land, labour, and capital. Improvements in these factors, such as investments in human capital (training), research and development, and technological advancements, can lead to increased productivity and future growth.

The Harrod-Domar model emphasizes the importance of saving and investment in achieving economic growth. It highlights that a high saving ratio and stocks of productive capital are key drivers of growth. During periods of lower income and uncertainty, investment spending may decrease even if saving is rising.

Economic growth can be viewed from a quantitative or a qualitative perspective. Quantitative growth measures numeric expansion in total economic production, such as the increase in GDP. Qualitative growth considers not just the increase in total output but also improvements in living standards, sustainability, environmental protection, and income distribution.

Economic growth can bring about an improvement in the standard of living by: Leading to higher national income, which can result in better material welfare, health, education, and opportunities. Reducing poverty by providing extra tax revenue for social security and welfare schemes.

Economic growth can have negative effects, including: Inequality of income and wealth, as higher income may be concentrated among a few, leading to greater disparities. Exploitation and poor living standards for some groups, as growth may not benefit everyone equally. Unsustainability, as pollution and resource exhaustion may impact future generations' ability to benefit from similar growth. Fluctuations in growth rates, where a steady rate of growth may be more beneficial than erratic growth.

Governments can use a range of measures to support long-term economic growth, including: Promoting investment by creating a favorable investment climate and boosting profit expectations. Encouraging education and research aligned with the needs of the economy. Promoting competition to stimulate innovation. Improving labour productivity through education and retraining programs. Providing infrastructure and public goods to support efficient use of resources.

Market-based policies focus on improving conditions for businesses and allowing markets to operate freely. Examples include: Reducing regulatory red tape, deregulation, creating more flexible labor markets, lowering the tax burden.

Interventionist policies are government interventions to correct market failures and introduce regulations where free markets may not produce optimal outcomes. Examples include: Investing in infrastructure, promoting education and research, regulating environmental protection.

The European Central Bank (ECB) has several key objectives: Maintaining price stability to contribute to economic growth and job creation. Using monetary instruments to maintain an inflation target, typically below but close to 2%, to encourage growth and avoid deflation.

The ECB has several instruments of monetary policy: Interest rates, open market operations (OMO), reserve requirements, and quantitative easing (QE).

The primary objective of the ECB's monetary policy is to maintain price stability. This is considered the best contribution monetary policy can make to economic growth and job creation. The ECB aims to use monetary instruments to maintain an inflation target of below but close to 2% over the medium term. This encourages growth, as once the inflation rate falls below this level, there is a fear of slipping into deflation.

Unemployment can be defined as a situation where individuals of working age are without a job, have been actively seeking work in the past four weeks, and are available to start work in the next two weeks. The main measurement methods are the claimant count, which measures the number of people registered as unemployed and claiming benefits, and Labour Force surveys, which measure the number of people unemployed based on the ILO's definition.

Economic growth can be defined as a long-run increase in an economy's productive capacity/potential output. It is usually measured by the annual percentage change in real Gross Domestic Product (GDP). However, this is only a proxy measure, as potential output or productive capacity cannot be measured directly.