A Level Macroeconomics 5 - Macroeconomic Objectives

Front 1

What is long run economic growth?

Back 1

The expansion of an economy's productive capacity (capacity to produce goods and services).

Front 2

What is short run economic growth?

Back 2

An increase in real GDP over time.

Front 3

Draw a diagram showing long run economic growth.

Back 3

Front 4

Draw a diagram showing short run economic growth.

Back 4

Note: can also be achieved by shifting SRAS.

Front 5

How does the UK government define a recession?

Back 5

As 2 consecutive quarters of negative economic growth.

Front 6

How does the exam board define a recession?

Back 6

Any period if negative economic growth.

Front 7

What is the government's objective for long run economic growth?

Back 7

Positive, stable and sustainable long run economic growth.

Front 8

What's the governments objective for short run economic growth?

Back 8

To minimise impact of short run fluctuations in GDP.

Front 9

What does the government aim to do to output gaps?

Back 9

Reduce the size of both positive and negative output gaps, to smooth fluctuations in the business cycle.

Front 10

Why are negative output gaps bad?

Back 10

The economy has spare capacity (unused factors of production). Unemployment, etc.

Front 11

Why are positive output gaps bad?

Back 11

The level of production is not sustainable, factors of production are being overutilised (e.g. overtime).

Front 12

Why do we measure GDP?

Back 12

It is a measure of the overall size of the economy.

It tells us where we are on the business cycle in order to let us make policy decisions.

It helps evaluate the effectiveness of policy decisions.

It is used to determine amounts of aid, contributions to international organisations, ability of governments to afford debt.

Front 13

What is the formula for calculating GDP growth?

Back 13

[(current GDP - original GDP)/original GDP] X 100

Front 14

If GDP was £1271 billion in 2011, up from £1252 billion in 2010, what was GDP growth in 2010/2011?

Back 14

[(1271bn - 1252bn)/1252bn] X 100

= 1.52%

Front 15

What are some of the difficulties in measuring GDP?

Back 15

Exclusion of real transactions: only items purchased and sold through the market are included. (e.g. For developed countries it includes childcare by nannies but not by house-husbands and wives) (e.g. for developing countries is does not include subsistence agriculture).

Does not take into account the value of leisure.

Does not take into account the underground economy (transactions hidden from tax collectors/government) (e.g. tax avoidance/evasion, breaking the law, etc).

Does not take into account zero priced goods (e.g. a free software update on an old computer/free internet services).

Difficult to account for inflation: making international comparisons in terms of GDP requires using real, rather than nominal, GDP figures. You need to use a GDP deflator to convert nominal to real GDP.

Front 16

How do we calculate real GDP without using a GDP deflator?

Back 16

Take the number of good A in year X and multiply it by the price of good A from the base year. Add all the goods and services together to get GDP.

Front 17

What is the GDP deflator?

Back 17

An index of prices for a basket of goods and services, used to put the output of year X into the prices of a base year.

It gives us the change in nominal GDP from the base year that cannot be attributed to a change in real GDP.

Front 18

What is the difference between the GDP deflator and CPI?

Back 18

GDP deflator is all goods and services whilst CPI is just consumer goods and services.

GDP deflator includes only domestic goods and nothing imported, whereas CPI includes imports purchased by consumers.

Front 19

This economy produces only ice cream and candy. Using 2015 as a base year, calculate real GDP for 2015, 2016 and 2017.

Back 19

2015: 2(100,000) + 1(200,000) = $400,000

2016: 2(120,000) + 1(220,000) = $460,000

2017: 2(150,000) + 1(230,000) = $530,000

Front 20

What is the equation for the GDP deflator?

Back 20

GDP deflator = (nominal GDP/real GDP) X 100

Front 21

What is the equation for Real GDP, using the GDP deflator?

Back 21

Real GDP = (nominal GDP/GDP deflator) X 100

Front 22

What is GDP per capita? And what is it often used to indicate?

Back 22

It is GDP divided by population.

It is often used to estimate standard of living in a country.

Front 23

Why is GDP per capita not a perfect measure of standard of living in a country?

Back 23

It does not take into account levels of income inequality within a country.

Front 24

What are the causes of short run economic growth?

Back 24

An increase in AD (caused by any factors that increase C, I, G or (X-M)

An increase in SRAS (caused by any factor that lowers costs of production)

Front 25

What causes long run economic growth?

Back 25

Any factor that increase LRAS will increase long run economic growth.

(Quality of FoP, quantity of FoP, efficiency with which FoP are used).

Front 26

What are the benefits of economic growth.

Back 26

Higher incomes.

Lowe levels of unemployment (firms sell more products as income rises, so require more workers to increase output to meet demand. Firms also have more profit which they can use to employ more workers).

A higher standard of living (incomes rise and unemployment falls, so households can afford to purchase more goods and services including health and education).

Increased government revenue (higher incomes and lower unemployment means more income tax revenue. Higher spending also means more VAT revenue. Governments can reduce their budget deficit or increase spending on things that will increase standard of living/reduce poverty).

Higher levels of economic development (higher incomes mean households can spend more on health and education and more tax revenue means governments can spend more on infrastructure, health and education).

Higher levels of FDI (due to higher relative growth rates. FDI may lead to increased exports and decreased unemployment).

Front 27

What are the costs of economic growth?

Back 27

Economic growth may not lead to higher standards big living because of...

- increased pollution and environmental costs (because of higher levels of industry. This depends on environmental policies. Developed countries are more likely to spend on less polluting technologies).

- inflation (demand may outstrip the productive capacity of the economy, leading to firms raising prices. Consumers will have a higher cost of living).

- workers may need to work longer hours/commute further/have less leisure time

- diseases of affluence such as obesity and diabetes.

- increasing income inequality (the benefits of growth may go mostly to top-earners, meaning that quality of life increases will be smaller).

- growth driven by substituting capital for labour may not decrease unemployment.

- short run growth, which will not lead to higher output and incomes as it is not sustainable. (In fact, if it is financed by consumption there will be less savings which may lead to less investment and decreased growth in the future. This is the opportunity cost of short run growth).

Front 28

How should I evaluate economic growth?

Back 28

The effect of growth on living standards depends on what type of goods are made. (If more consumer goods and services are produced, living standards will rise. If more capital goods are produced, it may take longer for living standards to rise. If more demerit goods are produced, people may not feel better off).

If growth is caused by substituting capital for labour, unemployment may increase.

For living standards to rise, real GDP has to increase by more than population (so GDP per capita increases).

If income is unequally distributed, only a small portion of the population may benefit from growth (depends on government policies to redistribute income).

The more sustainable growth is, the more beneficial it is likely to be.

Front 29

What are the costs of a recession?

Back 29

Higher unemployment

Falling real incomes

Falling inflation/deflation (due to steep discounts offered by businesses on excess stock).

Falling investment by firms (negative accelerator effect).

Capital flight (FDI leaves the country).

Low levels of consumer and business confidence.

Increased inequality (because unemployment benefits are much lower than wages).

More business failures.

Reduced tax revenue+increased benefits payments lead to worsening budget deficit.

Hysterisis (when an economy fails to return to its long run green growth after a recession, LRAS has shifted to the left. This is due to a loss of human capital during periods of unemployment, and s loss of investment (capital falls into disuse if firms close permanently and is not replaced).

Front 30

What are the three things you can always use to analyse GDP?

Back 30

Size

Duration

Cause

Front 31

What policies can you use to affect short term growth?

Back 31

Demand side (fiscal and monetary) policies.

Front 32

What policies can you use to affect long run growth?

Back 32

Supply side policies

Front 33

What is inflation?

Back 33

A sustained increase in the general price level over a period of time (leading to a fall in the purchasing power of money).

Front 34

What is deflation?

Back 34

A decrease in the general price level over a period of time.

Front 35

What is disinflation?

Back 35

A reduction in the rate of inflation (e.g. from 3% to 2%). Price level is still rising, but at a slower rate.

Front 36

What is hyperinflation?

Back 36

Very high and usually accelerating rates of inflation, rapidly eroding the value of the local currency.

Front 37

What is the general objective that governments have for inflation?

Back 37

Low, positive and stable inflation (price stability).

Front 38

What is the UK government's inflation target?

Back 38

2% (+/- 1%) using the CPI.

Front 39

What does inflation actually measure?

Back 39

The cost of living.

Changes in the average cost of buying a basket of different goods and services for a typical household.

Front 40

What are the 2 measures of inflation that we use in the UK?

Back 40

RPI (Retail price index)

CPI (Consumer price index)

Front 41

Which if these is the main official measure of inflation in the UK?

Back 41

CPI

Front 42

How do we calculate the CPI?

Back 42

1. The ONS uses the family expenditure survey to decide which goods and services are bought by a 'typical' British household.

2. Using the FES, the ONS will decide how to weight each category of goods and services, based on their importance to the household budget.

3. Use the formula

(%price change X weight)/sum of all weights

for each category, to find the weighted price change for each category. Add all the weighted price changes together to get the total index change for that year.

4. Use the formula

[(Current year index - previous year index)/previous year index] × 100

to calculate the inflation rate using the change in the index.

Front 43

What is a base year?

Back 43

The first of a series of years in an economic or financial index, normally set to an arbitrary value of 100.

Front 44

What does the contribution a particular good or service makes to the the overall change in CPI depend on?

Back 44

The % change in its price

It's relative weight/importance to the household budget.

Front 45

In this table:

In which year were prices stable?

In which year were prices highest?

In which year was inflation highest?

Back 45

Prices were stable in 2017

Prices were highest in 2019

Inflation was highest in 2016

Front 46

What is the formula to calculate the change in the purchasing power of money?

Back 46

(CPI in original year/CPI in target year) × 100

Front 47

The CPI in 2000 was 181.3, the CPI in 2009 was 219.235. What was the change in the purchasing power of money?

Back 47

(CPI 2000/CPI 2009) × 100

(181.3/219.235) × 100 = 82.69%

Purchasing power has fallen by 100 - 82.69 = 17.31%

Front 48

How would you calculate the equivalent amount of money after inflation?

Back 48

(CPI target year/CPI original year) × money amount

Front 49

How much was £500 in 2000 worth in 2009?

Back 49

(219.235/181.3) × 500 = £604.62

Front 50

What are some of the difficulties in measuring inflation?

Back 50

The basket of goods and services may not be representative. (Because only a selection of goods and services are included and it is difficult to judge what is a typical household).

New technology enters the market and makes it difficult to calculate a change in price.

Doesn't take into account increasing quality (e.g. smartphones).

Doesn't account for shrinkflation.

Smoking errors

Consumers may switch to cheaper products if prices rise to much, so the cost of living may not increase as much as CPI.

Front 51

What things are linked to RPI?

Back 51

Student loans

Savings

Treasury income and expenditure

Taxes on fuel, alcohol and tobacco

Private pensions

Government debt repayments

Front 52

What things are linked to CPI?

Back 52

Benefits

Inflation-linked bonds

Inflation targeting

Public pensions

Front 53

Why is using RPI better than CPI?

Back 53

Continuity, as data chat be compared if methods of measuring change.

Front 54

Why so CPI better than RPI?

Back 54

CPI is more accurate and less volatile.

Front 55

Which index is used for international comparisons?

Back 55

CPI

Front 56

Which groups does RPI exclude?

Back 56

Too wage earners (top 4%) and lower eating households.

Front 57

Why would switching to CPI save the treasury money?

Back 57

CPI is typically about 1% lower than RPI, so increases in pensions and benefits may be less so the treasury has to pay less.

Front 58

What was the purpose of the first cost of living measure in the UK?

Back 58

To help ordinary workers argue for fair cost of living wage rises.

Front 59

Why was CPI developed?

Back 59

To allow the EU to compare inflation rates across Europe to see who's as fiscally responsible enough to join the EU.

Front 60

What is the 'formula effect'?

Back 60

The difference between CPI and RPI due to them using different formulas.

Front 61

Why doesn't CPI include housing costs?

Back 61

Because no-one can agree how to include them.

Front 62

How does CPIH try to include housing costs?

Back 62

By calculating how much it would cost if you were to rent, rather than own, your property.

Front 63

What is a kitemark and why does CPIH not have one?

Back 63

A Kitemark is the UK statistics authority's seal of approval, but they disapprove of CPIH's method of measuring housing costs.

Front 64

What are the two possible types of causes for inflation?

Back 64

Demand side factors (leading to demand pull inflation)

Supply side factors (leading to supply side inflation).

Front 65

When does supply side inflation occur?

Back 65

When cost increases force businesses to raise prices for consumers to maintain profit levels.

Front 66

Draw a diagram showing cost push inflation.

Back 66

Front 67

What factors might cause cost push inflation?

Back 67

Anything that increases firms' factor costs, such as...

An increase in raw material costs

Interest rates rise

Taxes rise (corporation tax, VAT)(the burden of an indirect tax rise may he passed onto the consumer with higher prices. Depends on PED)/subsidies fall

Rents rise

Rising labour costs (real wage increases greater than improvements in productivity. In times of 'tight' labour markets, workers have more power to demand higher wages).

Falling exchange rates (increased prices of imported raw materials).

Expectations (an initial rise in prices triggers higher pay claims as workers look to maintain real income and living standards. If workers anticipate inflation, they will demand higher wage increases which lead to more cost push inflation). (This is the wage price spiral).

Front 68

(Evaluation) what does the effect if cost push inflation depend on?

Back 68

If it is permanent or temporary (cost push factors like a lower exchange rate/decreased subsidies may prove temporary so central banks may tolerate a higher inflation rate if it is cost push).

The size of the rise in costs of production.

Whether workers continue to expect higher inflation in the future, leading to a wage price spiral (less likely to happen if central bank targets are credible, as workers will expect the target rate of inflation).

The extent to which firms pass on higher costs of production to consumers.

Front 69

What causes demand pull inflation?

Back 69

An increase in AD, especially one that outstrips the productive capacity of the economy.

Front 70

Draw a classical diagram showing demand pull inflation.

Back 70

Front 71

What must governments make a trade-off between?

Back 71

(Inflation and economic growth) and employment

Front 72

Draw a Keynesian curve showing the area where there is a trade off between inflation and unemployment/growth

Back 72

Front 73

Why is there no trade off in the other sections of the curve?

Back 73

In the perfectly elastic section, growth can increase without price level increasing.

In the perfectly inelastic section, price level can be decreased without growth decreasing.

Front 74

What can cause demand pull inflation?

Back 74

Any factor that causes AD to increase:

Depreciating exchange rate (increased price of M decreases demand for M, decreased price of X increases demand for X).

Expansionary fiscal policy

Expansionary monetary policy

Faster economic growth in other countries providing a boost to UK exports.

Front 75

What is monetary inflation?

Back 75

When the money supply in the economy is increased by households, firms and governments borrowing more money from banks to find extra spending. The extra money lent creates more demand and prices are driven up.

Front 76

What are the possible causes of deflation?

Back 76

A decrease in AD (usually through a fall in C)

A fall in costs of production

A fall in the money supply (this increases the value of money and so reduces prices. Not having enough money in circulation causes those with money to hold onto it instead of spending it as it's value increases).

Front 77

Which if these causes of inflation is the least harmful?

Back 77

A fall in costs of production.

Front 78

What are the costs of deflation?

Back 78

Falling asset prices.

Lower consumer confidence leads to lower consumption and investment.

Real cost of borrowing is higher.

Front 79

What are the benefits of low inflation?

Back 79

Managing expectations to avoid a wage price spiral.

Avoiding problems of inflation/deflation.

Real cost of borrowing higher.

Front 80

What are money or nominal wages?

Back 80

The amount workers earn in money terms.

Front 81

What are real wages/incomes?

Back 81

The amount workers earn when inflation is taken into account.

Front 82

% change in real wage = ?

Back 82

% change in nominal wage - inflation rate

Front 83

What are the consequences of inflation?

Back 83

Real incomes may fall

Fall in the real value of savings

Loss of consumer confidence

Shoe leather costs

Higher wage demands

Increased income inequality

UK becomes less internationally competitive

Menu costs

Producers lose business confidence

Front 84

Why does inflation lead to a fall in real incomes?

Back 84

Because the purchasing power of money has fallen, so the cost of living has increased. This means that consumers will not be able to afford the same goods and services as before and their standard of living has fallen.

Front 85

When might inflation not lead to a fall in real incomes?

Back 85

When nominal pay is increasing at a rate equal to or greater than inflation.

Front 86

What is the nominal interest rate?

Back 86

The interest rate without taking inflation into account. The interest rate listed on a loan, bond or savings account.

Front 87

What is the real interest rate?

Back 87

An interest rate that has been adjusted to remove the effects of inflation. This reflects the real cost of funds to the borrower and the real yield to the lender or investor.

Front 88

Real interest rate = ?

Back 88

Nominal interest rate - rate of inflation

Front 89

Why might inflation lead to a fall in the value of savings?

Back 89

Because nominal interest rates may be lower than the inflation rate, meaning that savings will be able to purchase less goods and services than before.

Front 90

Who might be more severely affected by a decrease in the value of their savings?

Back 90

People living off the savings (e.g. pensioners).

Front 91

When might inflation not lead to a fall in the real value of savings?

Back 91

When the nominal interest rate is higher than the inflation rate.

Front 92

Why might inflation lead to a fall in consumer confidence?

Back 92

Because unstable prices mean there is greater uncertainty for consumers about what they can and can't afford.

This may lead consumers to bring forward purchases in order to avoid paying higher prices in the future.

Front 93

Why might inflation lead to shoe leather costs?

Back 93

Because consumers are less sure about prices in different parts of the market. This means it will take time and resources for consumers to gather information about prices due to rapid and frequent price changes.

Front 94

Why might inflation lead to higher wage demands for firms?

Back 94

Because workers will want to maintain their real wage. This will lead to more industrial disputes. This will lead to lower productivity.

It may lead to a wage price spiral.

It may also lead to increased costs for the government as an employer.

Front 95

Why might inflation lead to increased income inequality?

Back 95

Some nominal incomes will rise with inflation whilst others will see their real incomes fall. This depends on whether incomes are index-linked of fixed, on the strength of different trade unions and on wage premiums.

Front 96

Why might higher (relative) inflation lead to the UK becoming less internationally competitive?

Back 96

Higher domestic prices make exports more expensive in foreign markets so there is less demand for exports.

Higher price level will also lead to increased demand for cheaper imported goods rather than domestic ones.

This means the CAD will increase.

Front 97

Why will inflation lead to menu costs for firms?

Back 97

Because rapidly changing prices means firms have to adjust their price list more frequently. This means firms have additional costs of production.

Front 98

Why does inflation lead to producers losing busines confidence?

Back 98

There is increased uncertainty as firms are unsure of future prices and therefore unsure about their potential profit. This means firms will be more hesitant to invest so long run economic growth will fall.

Front 99

What does the effect of inflation depend on?

Back 99

Size (a higher inflation rate will be more problematic than a low one).

Rate relative to other countries (a country with a low relative inflation rate may become more internationally competitive as prices increase).

Duration (longer periods of inflation lead to less price stability).

Causes of inflation (cost push inflation is more harmful as it is associated with a fall in output).

Front 100

What is a common result of hyperinflation?

Back 100

Prices rise so rapidly that money becomes worthless.

Front 101

What are the possible causes of hyperinflation?

Back 101

If a government can't raise money buy selling bonds (because of insufficient demand) and can't cover it's spending commitments through taxes, the central bank can print new money which the government then 'borrows into existence' and spends in the economy, increasing AD and inflation.

Once high inflation is expected, consumers will bring forward their purchases, firms will raise prices and workers will demand higher wages.

This causes prices to rise rapidly (hyperinflation).

Front 102

What are the consequences of hyperinflation?

Back 102

Similar to the consequences of inflation but much more severe.

E.g. a fall in real incomes leads to consumers being unable to afford necessities such as food and medicine.

Front 103

What policies will reduce demand pull inflation?

Back 103

Contractionary fiscal (increased taxes and lower spending) and monetary (increased interest rates) policy.

Front 104

What policies will a government adopt to deal with high cost push inflation?

Back 104

Trying to tackle the cause of rising costs of production.

Front 105

What type of inflation will supply side policies help decrease?

Back 105

Both types (as the productive capacity of the economy will increase).

Front 106

What is the effect of inflation targeting?

Back 106

People expect inflation to be low and stable, so they will act in a way that causes inflation to be low and stable. (E.g. consumers will not bring forward their purchases, workers may accept lower wages).

This may prevent a wage price spiral.

It also makes central banks and governments more accountable.

Front 107

What are the consequences of deflation?

Back 107

Reduction in consumer spending.

The real value of debts increase

Real cost if borrowing increases

Lower profits.

Real wage unemployment

Deflationary spiral

Front 108

Why might deflation lead to a reduction in consumer spending?

Back 108

Because consumers expect prices to fall further in the future. This means they hold onto their money and delay purchases (particularly if big ticket items). This leads to further falls in consumer spending and thus AD.

Front 109

Why doe deflation lead to an increase in the real value of debts?

Back 109

The amount of goods and services which can be purchased with the value of the debt has increased. This means that there is a fall in consumer confidence and consumer spending, since consumers with debts will spend more in real terms paying there debts, which can lead to further falls in AD.

Front 110

Why does deflation lead to an increase in the real cost of borrowing?

Back 110

As real interest rates rise above nominal rates, borrowers would find the real value of their debt repayments increases. This means firms and consumers are more reluctant to take on new debts, thus there is a decrease in investment and consumer spending leading to lower short and long run economic growth.

Front 111

Why does deflation lead to lower profits for firms?

Back 111

Because profits are squeezed as prices fall. This means that, unless costs fall faster than prices, unemployment may rise as firms try to reduce their costs by reducing the size of their workforce. This also leads to a fall in investment and therefore long run economic growth.

Front 112

Why does deflation lead to real wage unemployment?

Back 112

Because labour markets often exhibit 'sticky downwards wages' as workers resist nominal wage cuts. This means that in periods of deflation, real wages rise. This leads to higher costs of production for firms. This leads to higher unemployment.

Front 113

Why might deflation lead to a deflationary spiral?

Back 113

Because consumers may delay their purchases and firms may postpone their investment in expectation that Rockies will be lower in the future. The reduction in AD may lower prices and result in output declining even more. Such deflation can reduce consumer and business confidence, which can reduce the effectiveness of any government policy measures designed to increase economic activity.

Front 114

What is stagflation?

Back 114

A condition of slow economic growth and relitavely high unemployment - economic stagnation - accompanied by rising prices or inflation.

Front 115

Draw a diagram of stagflation.

Back 115

Front 116

Define the unemployed?

Back 116

That part of the labour force that are out of work and actively seeking employment at the current wage rate.

Front 117

What is underemployment?

Back 117

When people who have a job would prefer to work longer hours or have a job below their skillset.

Front 118

What 4 groups make up the population of a country?

Back 118

Population not of working age (younger than 18/older than 64)

Economically inactive (stay at home parents, students, early retirees, disabled, discouraged workers)

The unemployed

The employed

Front 119

Of those groups, which 2 make up the working age population?

Back 119

Economically inactive

Unemployed

Employed

Front 120

Which groups make up the labour force?

Back 120

Unemployed

Employed

Front 121

What is the formula for the participation rate?

Back 121

Labour force/working age population

Front 122

What is the formula for the inactivity rate?

Back 122

(economically inactive + unemployed)/population of working age

Front 123

What is the formula for the unemployment rate?

Back 123

Unemployed/labour force

Front 124

What is the governments objective for unemployment?

Back 124

Low and stable unemployment

Front 125

What is full employment?

Back 125

Yfe

When an economy is operating at an output considered to be at full capacity. It is not possible to increase real output because all resources are fully utilised.

Front 126

Is the unemployment rate at Yfe zero?

Back 126

No, because some workers will always be between jobs, or may not have the right skills for the job available.

Front 127

What will happen if an economy has an unemployment rate between the rate of full employment?

Back 127

Inflation will increase.

Front 128

What is the labour force?

Back 128

All people who are willing and able to work. It represents the economic resource of labour. Increasing the size of the labour force increase the quantity of labour which increases productive capacity and LRAS.

Front 129

What are the two main methods of measuring unemployment in the UK?

Back 129

The labour force survey (generated from a quarterly survey of approximately 60,000 households.

The claimant count - the number of people claiming JSA (job seekers allowance).

Front 130

Which measure can be used for international comparisons?

Back 130

The labour force survey, because it is based on international standards from the ILO (International labour organisation).

Front 131

What are some difficulties with measuring unemployment?

Back 131

Both methods underestimate unemployment, because:

- they don't include part time workers who would like full time work of people with jobs below their skill level (underemployment).

- some of the unemployed are moved from unemployment to disability benefits (areas of the country with high unemployment also tend to have high disability rates).

Front 132

Which method will generate a higher figure?

Back 132

The labour force survey, because there will be unemployed workers who do not claim JSA.

Front 133

What are some of the causes of unemployment?

Back 133

Cyclical/demand deficient unemployment.

Frictional unemployment.

Seasonal unemployment

Structural unemployment (including international unemployment, technological unemployment and regional unemployment).

Real wage/classical unemployment.

Voluntary unemployment.

Front 134

What causes cyclical/demand deficient unemployment?

Back 134

Low levels of AD in the economy during a recession leads to reduced demand for labour. This occurs when there is a negative output gap.

Front 135

What do the solution to demand deficient unemployment?

Back 135

Governments boosting the level of AD in the economy using expansionary fiscal or monetary policy.

Front 136

What is frictional unemployment?

Back 136

It occurs when people are 'between jobs', and will exist even if the economy is at full employment.

Front 137

How can governments help decrease frictional unemployment?

Back 137

Improving information for employers with vacancies and job applicants (e..g job centres).

Front 138

What is seasonal unemployment?

Back 138

Caused by the seasonal variation of demand in certain industries or sectors of the economy (e.g. construction, tourism and agriculture). It is included in full employment.

Front 139

What are some solutions to seasonal employment?

Back 139

Industries affected can be encouraged to diversify their products so as to attract demand throughout the year (e.g. tourism venues competing for income from the conference market).

Employees in the affected sectors can be encourage to retrain to compete for jobs in sectors unaffected by seasonal variations of demand.

Front 140

What is structural unemployment?

Back 140

Caused by changes in the structure of the economy over time (e.g. decline of UK manufacturing sector). Due to labour immobility this can result in high levels of unemployment in regions where the old industries were located. This causes workers to have to retrain or relocate. It occurs when the economy is at full employment. Cyclical unemployment can lead to structural unemployment if industries leave the country or close down due to a recession.

Front 141

What can the government do to decrease structural unemployment?

Back 141

Provide subsidies to employers in regions with high levels of unemployment.

Improve labour mobility (occupational and geographical).

Governments need to help workers retrain so that the skills they have match what employers want.

Note: expansionary policy can't decrease structural unemployment. If that's all that's left it will only generate inflation.

Front 142

What are the different types of structural unemployment?

Back 142

International unemployment

Technical unemployment

Regional unemployment

Front 143

What is international unemployment?

Back 143

Where domestic producers are replaced by firms based overseas, due to the UK being seen as uncompetitive in terms of price and/or product quality.

This is included in full employment.

Front 144

How might the government decrease international unemployment?

Back 144

Using protectionist policies (e.g. tariffs, quotas, subsidies, exchange rate manipulation).

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What is technological unemployment?

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Firms substituting capital for unskilled or semi-skilled labour.

E.g. the car industry.

This type of unemployment is included in full employment.

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How might the government decrease technological unemployment?

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Workers affected by technological unemployment must retrain to seek new jobs.

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What is regional unemployment?

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Where there are high levels of unemployment located in specific areas. This type of unemployment tends to exist in areas which were previously home to a concentration of industries that have declines as the economy has changed.

If a region loses a key industry it can become a depressed area with higher unemployment than the national average. As people leave the area, more businesses close and house prices fall.

This kind of unemployment is included in full employment.

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What can the government do to decrease regional unemployment?

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Offer regional aid, including incentives for new industry to relocate to the area.

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What is real wage unemployment?

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Occurs when wages are artificially set above the equilibrium level causing the supply of labour to be greater than the demand.

E.g. minimum wage, trade unions.

This is included in full employment.

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What is voluntary unemployment?

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When workers choose not to work at the current equilibrium wage rate. This may occur if unemployed workers choose not to accept a job because they are waiting for a better off. These workers may be unemployed due to any of the other causes of unemployment.

Voluntary unemployment is thus included in full employment.

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What are some solutions to voluntary unemployment?

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Decrease benefit payments relative to minimum wage (reduce unemployment trap).

Reduce benefit payments if people refuse to accept job offers.

Make working more attractive by allowing low paid worker to keep more do their income e.g. working families tax credit, minimum wages personal allowance.

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What are the economic costs of unemployment to individuals?

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Loss of income to the individual.

Loss of employability skills (loss of human capital).

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What are the economic costs of unemployment to the economy as a whole?

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Higher unemployment benefits and other income related benefits.

Loss of tax revenue (indirect and direct).

Foregone output.

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What are the benefits of unemployment?

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It is easier for firms who want to expand to employ new workers without pushing wages up.

Unemployment may discourage industrial action (e.g. strikes and calls for higher wages).

More time for unemployed workers to search for a more rewarding job.

Note: it is generally accepted that the costs of unemployment above a really low level outweigh any possible benefits.

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How can you evaluate unemployment?

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Size: the higher the rate of unemployment the greater the costs are likely to be.

Duration: if unemployment is sustained over a long period this may lead to falls in human capital (hysterisis).

Cause: structural unemployment tends to have the highest costs as it tends to be on a large scale and result in high levels of involuntary unemployment, leading to large social impacts. Structural unemployment will be quite costly, especially if it lasts a long time. Frictional unemployment has quite low costs.

The costs of unemployment are likely to be less if the labour force is quite occupationally and geographically mobile.

The costs of unemployment may not be born evenly, but by particular regions or age groups.