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71 Cards in this Set
- Front
- Back
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What does the business cycle look like? |
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What is the difference between long run and short run economic growth? |
Long run economic growth: An increase in the productive capacity of the economy over time. Short run economic growth: An increase in GDP over time, normally per annum. |
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What is the objective for governments regarding economic growth? |
Positive, stable and sustainable economic growth. |
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What is GDP also known as? |
Economic growth refers to growth in GDP, also called output. |
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What does GDP measure? |
The monetary value of our economy. It is the sum total of the final output an economy produces (it only counts final product, not factor markets). |
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What are the 3 ways GDP is measured? |
1) Output: the value of the goods and services produced by all sectors of the economy. 2) Expenditure: how much consumers, firms and the government spend. (Firms only when buying capital). 3) Income: Measures earnings of consumers, firms and government (if in surplus). Each of the three will in theory be the same. |
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Why will real GDP almost always be growing? |
Increasing population and technology advances mean economies will be able to produce more goods and services. |
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What does GDP not measure? |
The non-marketised sector (goods and services people produce for their own consumption e.g. home grown vegetables). The shadow economy, as this activity is illegal. (However, the UK tries to include the shadow economy in its GDP calculations). |
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Rate of growth = ... |
(Change in GDP÷Original GDP) x100 |
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GDP per capita= |
GDP/Population |
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What is real GDP? |
GDP that takes into account inflation. |
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What are the benefits of economic growth? |
1) People have a higher standard of living and economic welfare. 2) More consumer goods and services. 3) More production can mean higher levels of employment, leading to an increase in incomes, leading to an increase in consumer demand. (Short term only) 4) Greater productivity may mean people can enjoy more leisure time. (Long term only) 5) Higher output and income means more tax revenue for the government so public sector services can be improved and poverty reduced. |
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What are the costs of economic growth? |
1) Depletion of natural resources. 2) Reduction in quality of working conditions (longer hours + journey times, more stress). Mostly for developed countries. 3) Increase in income and wealth inequality.The benefits of growth may not be equally distributed and high levels of growth widen the gap between rich and poor. 4) Pollution and other environmental costs. 5) Technological progress may make factor substitution easier, increasing unemployment, which affects everyone's living standards adversely since even the employed have to support the unemployed. 6) Economic growth and rising incomes can cause demand pull inflation. |
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For low income countries, economic growth will lead to... |
Better access to essentials and a wider variety of goods and services. |
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For developed countries, economic growth leads to... |
Additional pressure on essential services, overconsumption. |
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How do you increase long run economic growth? |
Increasing the productive capacity of the economy by improving the quality and quantity if factors of production, or market efficiency. Ways to do this include: investment, changes to technology, a larger work force, education and training, discovery of natural resources, infrastructure, improving worker productivity, supply side policies. |
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What might cause short run economic growth? |
1) Decrease in unemployment 2) Rise in disposable income 3) Increased consumer spending 4) Increase in investment 5) Increase in government spending 6) Increase in exports 7) Decrease in imports |
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Define the unemployed. |
The unemployed are the part of the working population (16-64) that are out of work and actively seeking employment at the current wage rate. |
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Labour force participation rate = ... |
Labour force participation rate = Labour force/working age population x 100 |
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Draw a diagram of the population in regards to employment. |
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How is unemployment measured? |
1) The labour force survey - generated from a quarterly survey of approximately 60,000 households. 2) The claimant count - the number claiming unemployment benefits (JSA). |
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Which measurement will give a higher number? |
The Labour force survey, as there will be unemployed people who do not claim JSA for various reasons. |
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What is the labour force? |
All the people who are willing and able to work (employed and unemployed). The Labour force participation rate is the number of economically active people in the working age population. |
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Unemployment rate = ? |
Unemployment rate = Number of unemployed/labour force x 100 |
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What is the difference between the level of unemployment and the rate of unemployment? |
The level of unemployment is a number, whereas the rate of unemployment is a percentage. |
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What are the 2 ways of decreasing the unemployment rate? |
1) The unemployed get jobs 2) The unemployed leave the workforce and become economically inactive. (E.g. during a bad recession). |
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What are the 3 ways to increase the unemployment rate? |
1) The employed lose jobs 2) The employed leave the workforce and become economically inactive. 3) Lots of unemployed people join the workforce. |
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What are the 5 types of unemployment? |
1) Seasonal unemployment 2) Frictional unemployment 3) Cyclical unemployment 4) Structural unemployment 5) Voluntary unemployment |
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What is frictional unemployment? |
Defined as occuring when people are between jobs. It will occur even when the economy is at full employment, so unemployment will never be 0. |
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What is seasonal unemployment? |
Caused by the seasonal variation if demand in certain industries. (E.g. construction, tourism, agriculture). |
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What is cyclical unemployment? |
Caused by low levels of aggregate demand when the economy is in recession, as falling demand for final products leads to a fall in demand for labour in the whole economy. |
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What is structural unemployment? |
Caused by changes in the structure of the economy over time (e.g. decline in manufacturing and expansion of service sector). It occurs due to geographical and occupational labour immobility, where workers are unable or unwilling to move areas or occupations to find a job. It can lead to depressed areas, where an area has become reliant on an industry which moves or declines as an economy changes. It can occur due to: 1) Factor substitution: where capital is substituted for labour. 2) International competition: Where domestic producers have been replaced by firms based overseas, as the UK may be seen as uncompetitive in terms of price/quality of products and labour. |
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What can be done to minimise Frictional unemployment? |
Improve information for employers with vacancies and job applicants. (E.g. Job centres) |
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What can be done to minimise structural unemployment? |
Help workers retrain so that they have the skills employers want. |
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How would the government help minimise cyclical unemployment? |
By boosting the level of aggregate demand in the economy, through expansionary fiscal and monetary policy. |
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How might seasonal unemployment be solved? |
Industries should be encouraged to diversify their goods and services so to attract demand throughout the year, (E.g. tourism venues hosting conferences). Employees could be encouraged to retrain to compete for jobs in sectors unaffected by seasonal variations in demand. |
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How should the government help depressed regions? |
By providing subsidies to employers in the region, or by improving the geographical mobility of labour. |
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What would help minimise technological unemployment? |
Workers affected by unemployment should retrain to seek new jobs. |
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What can be done to minimise international unemployment? |
Government policies such as quotas or tariffs would reduce imports, or the exchange rate could be manipulated to artificially make UK goods cheaper for overseas buyers. Both policies would attract criticism from the international community. |
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What is inflation? |
An increase in the general price level over a period of time (usually leading to a fall in the purchasing power/value of money). |
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What is the rate of inflation? |
The annual % change in the level of consumer prices. |
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What is the 2% target? |
The target level of inflation set by the UK government. |
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Are the inflation and exchange rates the same? |
No. |
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What are nominal wages/incomes? |
The amount workers earn, not adjusted for inflation. |
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What are real wages/incomes? |
The amount workers earn, adjusted for inflation. |
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Change in real wage (Wr) = |
Change in nominal wage (Wn) - Inflation |
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If nominal wages are constant and inflation is positive, what is happening to real wages? |
They are going down. |
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What are nominal interest rates? |
The reward for saving and the cost of borrowing when inflation is not taken into account. |
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What are real interest rates? |
The reward for saving and the cost of borrowing, adjusted for inflation. |
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When do real wages fall? |
When inflation is higher than growth in nominal wages. |
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What is the UK's principal measure of inflation? |
The CPI |
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What is the CPI? |
A weighted price index which measure the monthly change in price if a typical basket if goods and services. The basket if goods and services is revised each year using data from the Family Expenditure Survey, so the basket reflects changes in household spending patterns. |
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What does the contribution a particular category of good or service makes to the CPI depend on? |
1) The size of the % change in price 2) It's relative weight (intended to reflect its importance to the household budget). |
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A section's contribution to the inflation rate = |
(Weight X Price change) ÷ Total weight. |
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How do you calculate the inflation rate using a price index? |
- Start at a base year, and give it a value of 100. - Then, the weighted price change for each year will be calculated. This will be the sum of '(Price X Weight) ÷ Sum of all weights' across all categories of the CPI. Let's say we get a value of 2.6. - If this is year 2, add 2.6 to the base year index of 100, making the price index for year 2 102.6. - The rate of inflation would be the % change in the price index from one year to another. For year 2, it would be 2.6%. - In year 3, we would add the sum of all the weighted average (e.g. 3.4) to The previous year's base index. So, 102.6 + 3.4 makes the price index for year 3 106. - The inflation rate for year 3 is the % change in price index between year 2 and year 3. - Inflation rate = ((Current year index - Previous year index) ÷ Previous year index) X 100.- So the inflation rate for year 3 = 3.31%. 100. - So the inflation rate for year 3 = 3.31%. |
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What is a base year? |
The first of a series of years in an economic if financial index. Normally given an arbitrary value of 100. |
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Why are new, up-to-date base years periodically introduced? |
To keep index data current, hence why analysts tend to choose recent years as base years. |
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Will years before the base year have values of less than 100? |
Yes, assuming deflation is not occuring. |
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What is disinflation? |
When the inflation rate falls, but remains positive so the price level continues to rise. |
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What are some of the consequences of inflation for consumers? |
1) Loss of consumer confidence - High inflation means consumers do not know the relative prices of goods and services, resulting in them not being sure what they can afford and how much they need to save. This may result in lower consumer spending. 2) 'Shoe leather costs' - As prices change more often, consumers and finds are less certain about where the best prices are, so will spend more time and effort shopping around. 3) Real incomes may fall - If a consumer's nominal income stays the same whilst inflation is occuring, their real wages will fall. This will lead to a fall in their standard if living as thety can no longer afford the same goods and services as before. (Note - This is only if nominal incomes rise by less than inflation). 4) Consumers who are debtors gain - The real value of debt decreases, so repaying it will, in real terms, be cheaper. |
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What are some of the consequences of inflation for producers? |
1) Menu costs - Firms incur additional costs through having to change their prices more often (reprinting menus, hiring consultants etc.) 2) UK becomes less internationally competitive - exports cost more, imports cheaper. Less output = fewer jobs. 3) Creditors lose out - Real value of loans given out decreases due to high inflation. 4) Producers lose business confidence - Uncertainty about future prices and demand may harm investment and economic growth. 5) Labour market conflicts - Workers see real wages fall and want pay rises to compensate for this. They may also anticipate future inflation and demand pay rises higher than the inflation rate, leading to a wage price spiral. More flexibility for producers - Workers may not accept a cut in nominal wages, but may accept a cut in real pay in times of inflation. In times of inflation, consumers may not notice a firm raise prices, leading to smaller fall in demand. Allows producers to maintain profit margins and remain competitive. |
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What are the consequences of inflation for governments? |
1) Government gains as a debtor - the real value of the government's debt falls. 2) Government spends more on benefits - benefits are index linked, so they rise in line with inflation and the government must spend more. 3) The government spends more as an employer - Demands for wage increases will rise, so government will have to spend more to meet these. 4) The government will receive more in tax - When prices and nominal wages rise, the government will receive more in VAT and income tax, as rising nominal incomes mean workers move into higher tax brackets. |
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What are the two types of inflation? |
Demand pull inflation and cost push inflation. |
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When does demand pull inflation occur? |
When Aggregate demand in the economy is too high (close to the economy's productive capacity) and supply cannot rise to meet it. It can be caused by increases in consumer spending, investment, government spending or spending by other countries on an economy's exports. It is always caused by an increase in Aggregate demand. |
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What is the wage price spiral? |
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When does cost push inflation occur? |
When firms' costs of production increase, so they must put up prices to maintain profit margins. |
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What is hyperinflation? |
It begins when a country's government begins printing money to pay for spending. As the money supple increases, prices will rise (as in regular inflation). However, as people expect inflation to continue they try to convert their cash into assets, leading to an increase in demand and even more inflation. It occurs when there is a significant increase in the money supply not supported by economic growth, resulting in an imbalance in the supply and demand of money. |
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What is deflation? |
The opposite of inflation, a sustained decrease in the general price level over a period of time. (Occuring today in Japan). |
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What can cause deflation? |
1) A decrease in costs of production. 2) A fall in demand. |
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What are the costs of deflation? |
1) Debtors and firms struggle - Real value if debts and wages decrease. 2) Reduced consumer spending and investment - Prices are expected to fall further in the future, so put of purchases. Consumer spending and investment fall. 3) Real value of debts increase - Can reduce consumer confidence and consumption and investment will fall. 4) The real cost of borrowing will increase - As borrowers are paying higher real interest rates since nominal interest rates are below real interest rates. 5) Lower profits - Profits fall as prices fall. Unemployment may rise as firms cut costs to maintain profit margins. |
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What policies can be used to address inflation? |
Demand pull - Fiscal and monetary policy/supply side policy. Cost push - tackle the cause of rising costs if production. Inflation targeting helps manage inflationary expectations and can help prevent the emergence of a wage spiral. |
