The Effect of the Macro-Economy

External Influences

The Macro-economy

The production and exchange process of the whole economy as opposed to individual markets within the economy. Businesses are affected by changes in the macro-economy and by government processes towards the macro-economy. Government economic policies change a lot. (E.g. labour made bank of England independent on their first day in office.)

Instead of dividing the economy into different sectors (e.g. retail, cars etc) we look at the economy of the country as a whole.

Government Macro-economic objectives:

* Control of inflation - 2.5%

* Maintain full employment-all who want a job can get one.

* Control of balance of payments. Imports vs. exports

* Stability of exchange rate. Could stabilise exchange rate by joining euro.

* Maintain steady economic growth -2%-2.5%. That means that the country as a whole does better next year than it does this year.

Inflation is a general rise in the price level over a period of time.

Inflation in the late 70's in the U.K was 27%. That meant that if bread was 100p, the next year it would be 127p

We can measure inflation by:

* Looking at the standard retail price index. This is where the government agrees a standard shopping basket e.g. food, petrol, mortgage.

* RPIX-RPI take away mortgages

* RPIY-RPIX takes away taxes and local authority taxes.

* HICP-adopted by all EU countries. This was made to try and determine with the position is within Europe. They have decided not to include for example, housing costs in each country, they are looking for a general price rise in general retail goods. However it is expensive in any city to live there, so housing costs are an extremely important factor. It does include university fees, to measure how good an economy is in any country. Because students are future of economy, the more students you can produce (theoretically) the better.

Balance of payments

* A record of trade between U.K and other countries. (although it applies between all countries)

* It is the difference of imports and exports

* Some imports/exports are visible (e.g. laptops, watches, toys etc), some not visible (e.g. financial services, insurance, shipping. Providing a service to other countries, e.g. leasing out ships to other countries, tourism) The bigger the gap between imports and exports the worse. Ideally exports should be higher than imports, but as Britain doesn't make a great deal of things to export it could result in trouble. China will make more and more to export.

Full Employment

* Full Employment- Used to be a job for all, now a job for all those who want one. Affected by economy-if economy is good, more jobs, if you are going through a recession then that is not the case. If you are over 21 the minimum wage is Ј4.85 for over 21's, for under 18's just Ј3.

* The EU convention of Human rights, Article 23 states that everyone has the legal right to work. This means that if the person doees not have a job through no fault of their own, they must be compensated for. This is why must governments have a state system to provide for them.

* In U.K there is a period of time where you get unemployment benefit linked to housing and family sizes. After an unemployment of 6 months, if you want to keep unemployment benefits you must sign up for training or education.

* Full Employment differs from what it used to mean, it used to mean everyone should work but now it means what it says above.

* The 'Poverty Trap' is where you get benefits, then accept a job and get less money

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