P 2: Assignment - First take

DEFINITION of 'Macroeconomics' The field of economics that studies the behavior of the aggregate economy. Macroeconomics examines economy-wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels.

13. The three primary macroeconomic policy goals are ...


Mar 17, 2008 - The three primary macroeconomic policy goals are economic growth, low unemployment and low inflation. 13. The three primary macroeconomic policy goals are economic growth, low unemployment, and low inflation. Economic growth is an increase in a country's standard of living.

Gross Domestic Product (GDP) is the broadest quantitative measure of a nation's total economic activity. More specifically, GDP represents the monetary value of all goods and services produced within a nation's geographic borders over a specified period of time.

DEFINITION of 'Nominal GDP' A gross domestic product (GDP) figure that has not been adjusted for inflation. Also known as "current dollar GDP" or "chained dollar GDP."

The unemployment rate is a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force. During periods of recession, an economy usually experiences a relatively high unemployment rate.

A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance.

DEFINITION of 'Inflation' The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.

In economics, the marginal propensity to consume (MPC) is a metric that quantifies induced consumption, the concept that the increase in personal consumer spending (consumption) occurs with an increase in disposable income (income after taxes and transfers).

The marginal propensity to consume (MPC) is equal to ΔC / ΔY, where ΔC is change in consumption, and ΔY is change in income. If consumption increases by 80 cents for each additional dollar of income, then MPC is equal to 0.8 / 1 = 0.8.

The coincidence of wants problem (often "double coincidence of wants") is an important category of transaction costs that impose severe limitations on economies lacking money and thus dominated by barter or other in-kind transactions.


persistent high inflation combined with high unemployment and stagnant demand in a country's economy.

DEFINITION of 'Demand-Pull Inflation' A term used in Keynesian economics to describe the scenario that occurs when price levels rise because of an imbalance in the aggregate supply and demand. When the aggregate demand in an economy strongly outweighs the aggregate supply, prices increase.

There are three main types of unemployment: cyclical, frictional and structural. Cyclical unemployment occurs because of the ups and downs of the economy over time. When the economy enters a recession, many of the jobs lost are considered cyclical unemployment.

Money serves four basic functions: it is a unit of account, it's a store of value, it is a medium of exchange and finally, it is a standard of deferred payment.

The Bank's most important objectives are to maintain the external stability of the xxx and to promote the efficient functioning of the financial system in the xxx

An open market operation (OMO) is an activity by a central bank to buy or sell government bonds on the open market. A central bank uses them as the primary means of implementing monetary policy. The usual aim of open market operations is to manipulate the short-term interest rate and the supply of base money in an economy, and thus indirectly control the total money supply, in effect expanding money or contracting the money supply. This involves meeting the demand of base money at the target interest rate by buying and selling government securities, or other financial instruments. Monetary targets, such as inflation, interest rates, or exchange rates, are used to guide this implementation.An open market operation (OMO) is an activity by a central bank to buy or sell government bonds on the open market.

DEFINITION of 'Accommodative Monetary Policy' When a central bank (such as the Federal Reserve) attempts to expand the overall money supply to boost the economy when growth is slowing (as measured by GDP).

Economic Growth is a narrower concept than economic development. It is an increase in a country's real level of national output which can be caused by an increase in the quality of resources (by education etc.), increase in the quantity of resources & improvements in technology or in another way an increase in the value of goods and services produced by every sector of the economy. Economic Growth can be measured by an increase in a country's GDP (gross domestic product).

Economic development is a normative concept i.e. it applies in the context of people's sense of morality (right and wrong, good and bad). The definition of economic development given by Michael Todaro is an increase in living standards, improvement in self-esteem needs and freedom from oppression as well as a greater choice. The most accurate method of measuring development is the Human Development Index which takes into account the literacy rates & life expectancy which affect productivity and could lead to Economic Growth.


Endogenous growth economists believe that improvements in productivity can be linked directly to a faster pace of innovation plus investment in human capital.

They stress the need for strong government and private sector institutions to nurture innovation, and provide incentives for individuals and businesses to be inventive.

Knowledge industries - typically they are in telecommunications, software or biotechnology - are becoming hugely important in many developed and developing countries.

The main points of the endogenous growth theory are as follows:

Government policies can raise a country’s growth rate if they lead to more intense competition in markets and help to stimulate product and process innovation

There are increasing returns to scale from capital investment especially in infrastructure and investment in education and health and telecommunications. A recent report from the World Bank found that, for low and middle income countries every 10% increase in broadband accelerated GDP growth by 1.38%.

Private sector investment in research & development is a key source of technical progress

The protection of property rights and patents is essential in providing incentives for businesses and entrepreneurs to engage in research and development

Investment in human capital (the quality of the labour force) is a key ingredient of growth

Government policy should encourage entrepreneurship as a means of creating new businesses and ultimately as an important source of new jobs, investment and innovation


Returns to scale: If output increases by less than that proportional change in inputs, there are decreasing returns to scale (DRS). If output increases by more than that proportional change in inputs, there are increasing returns to scale (IRS).

"It is one of our greatest mistakes to judge policies and programs by their intentions, instead of their results" - Milton Friedman

Murray Rothbard ‏@LibertarianView 2 Mar 2014

Every government interference in the economy consists of giving unearned benefit, extorted by force, to some at the expense of others


The Austrian business cycle theory (ABCT) is an economic theory developed by the Austrian School of economics about how business cycles occur. The theory views business cycles as the consequence of excessive growth in bank credit, due to artificially low interest rates set by a central bank or fractional reserve banks.

Low interest rates tend to stimulate borrowing from the banking system. It is argued that this leads to an increase in capital spending funded by newly issued bank credit. Proponents hold that a credit-sourced boom results in widespread malinvestment. In the theory, a correction or "credit crunch" – commonly called a "recession" or "bust" – occurs when the credit creation has run its course. Then the money supply contracts, causing resources to be reallocated back towards their former uses.


Most of the UK's major strategic heavy industries and public utilities were nationalised between 1946 and the early 1950s, only to be returned to the private sector between 1979 and 1990.

Examples of nationalisation

1946 - The Bank of England was the first organisation to be nationalised by the new Labour government of Clement Atlee.

1947 - The Coal industry was nationalised in 1947 when over 800 coalmines were taken under public ownership and a National Coal Board (NCB) was established to manage the industry on commercial lines. The NCB became the British Coal Corporation in 1987, and this was wound up in 1997 as the industry was privatised. (Source: National Archives).

1948 - Railways were nationalised to help rebuild the network infrastructure and re-equip the rolling stock after the destructive effects of the Second World War.

1949 - Steel was first nationalised in 1949, and privatised a year later by the new Conservative government. It was re-nationalised in 1967 when over 90 of steel capacity was put under the control of the British Steel Corporation (BSC). Steel was returned to the private sector once more in 1988.

2008/9 - A number of key UK banks became subject to full or part-nationalisation from early 2008 as a response to the financial crisis and banking collapse. The first bank to become nationalised was the Northern Rock in February 2008, and by March 2009 the UK Treasury had taken a 65% stake in the Lloyds Banking Group and a 68% stake in the Royal Bank of Scotland (RBS).

The advantages of nationalisation

The main motive for nationalisation during the post-war period was to ensure a co-ordinated approach to production and supply to ensure economic survival and efficiency in the face of war, and post-war reconstruction. For example, the advantage of a nationalised rail network, as with other natural monopolies, was that central planning could help create a more organised and co-ordinated service. This argument was applied widely to the so-called commanding heights of the economy.

It can also be argued that much infrastructure provides a considerable external benefit to individuals and firms. For example, a nationally and centrally funded and efficient rail network helps keep road traffic down and hence reduces pollution and congestion. It may also help reduce business costs, which may be passed on to other businesses.

Another advantage of national ownership is that economies of large scale can be gained that would not be available to smaller, privately owned enterprises. For example, a nationalised rail service could purchase materials, rail track, and rolling stock on a large scale, thereby reducing average costs and supplying more efficiently than smaller operators.

In more recent times, the failure of major banks has highlighted the fact that, under national ownership and control, failing banks can be funded more quickly and for larger amounts than under private ownership. This enables the banking infrastructure to be rebuilt, as well as ensure the closer regulation of banks in the future.

The disadvantages

By the late 1970s it became increasingly apparent that many of the industries nationalised between 1945 and 1951 were running into difficulties. The major problems that the industries faced were:

They were being managed ineffectively and inefficiently. The principal-agent problem is highly relevant to public sector activities given that the managers of the utilities were generally not required to meet any efficiency objectives set by the state. There was growing criticism that, because these industries were protected from competition, they had become increasingly ‘X’ inefficient.

Nationalised industries were also prone to suffer from moral hazard, which occurs whenever individuals or organisations are insured against the negative consequences of their own inefficient behaviour. For example, if a particular nationalised industry made operating losses, the government would simply cover those loses with subsidies. Knowing that the taxpayer would come to the rescue meant that the inefficient behaviour could continue. This is, perhaps, the most significant criticism of the recent 'bail out' of failing banks. Given that they know the taxpayer will bail them out this may be an encouragement to continue with their inefficient and highly risky lending activities.

In addition, the nationalised industries had limited scope to raise capital for long term investment and modernisation because they would have to compete with other government spending departments, like education, health and defence. The result was a prolonged period of under-investment in these industries.

By the late 1970s, and throughout the 1980s, most UK's major State owned industries were sold off to the private sector through privatisation. The intention was that, back in the free market, these industries would become more efficient and would be able to modernise by having greater access to the capital markets, and by employing more modern and dynamic management. Privatisation also generated huge revenues for the UK Treasury as well as allowing tax cuts and creating an environment where other supply-side reforms could be implemented.

Following the banking collapse of 2009, nationalisation was put firmly back on the agenda, if only in terms of the financial system.


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