1. Circular Flow Flashcards
What are the main objectives of government macroeconomic policy?
T-rade
I-nflation
G-rowth
E-mployment
What are the additional macroeconomic objectives?
R-edistribution of income
S-tandard of living
P-roductvity
E-nvironment
G-overnment finances
What is the goal for GDP?
What’s the UK’s long run average?
What’s the UK’s GDP roughly?
Why is it “the most important objective”?
- To increase at a stable and sustainable rate
- In the UK the long run average is 2.5%
- £2.2 Trillion
- High growth in GDP means that there is additional spending on goods and services. This means that there will be more demand for workers creating jobs and increasing incomes, improving living standards.
What is the goal for employment?
What is the unemployment rate?
Low levels of unemployment. The target is for full employment (In the UK around 4%)
Is the unemployed as a percentage of the labour force (those willing and able to work) not the entire population.
What is inflation?
What is the goal with inflation?
What is the target? Why?
Who controls the inflation rate and using what policy?
- a sustained increase in the average price level in an economy, measured as a percentage change
- low and stable level of inflation
- 2% (+ or - 1%) because it incentivises spending whereas a falling price level causes people to delay spending
- The bank of England using Monetary Policy
What is the goal for trade?
What can international trade be affected by?
A stable Current Account on the Balance of Payments. We must aim for a similar value of exports and imports.
International trade can be affected by… exchange rates, income levels at home and abroad, relative inflation levels and protectionist policies such as tariffs and quotas.
What is the goal for redistribution of income/ equality?
An equitable (fair) distribution of wealth and income - gap between rich and poor isn’t too great
What is the goal for sound government finances?
Who has been trying to eliminate the budget deficit since it grew during the 2008/09 financial crisis and 2020 pandemic
How long has the UK been running a budget deficit for?
- Balancing tax revenue and government spending to minimise the budget deficit and national debt
- The conservative government
- For around 20 years
What is the goal for the environment?
What tends to happen as a result of growth? Unless…
Achieving growth and better living standards with minimal negative environmental impact
Growth tends to worsen the environment, creating negative externalities. UNLESS the growth is intentionally investing into sustainable materials and processes such as solar and wind energy.
What are the 5 Macroeconomic Indicators?
GDP, Unemployment, Inflation, Trade and Productivity
Define:
Nominal GDP (income)
Real GDP (income)
Real GDP per Capita
Standard of living
Nominal GDP (income): GDP without adjusted for inflation
Real GDP (income): GDP adjusted for inflation (GDP growth rate - inflation rate)
Real GDP per Capita: The value of real GDP per person. Used to measure S.O.L
Standard of living (S.O.L): is the economic well-being of citizens in an economy. An individual’s access to goods and services
What is the unemployment rate?
What is the employment rate?
Unemployed ÷ labour force (employed + unemployed)
Labour force ÷ population
What are 2 ways to measure inflation?
Define them…
CPI (consumer price index): an index that tracks a basket of goods and services bought by an average family that is used to show the change in prices of goods.
RPI (retail price index): a lessur used index of prices
Define productivity…
Output per hour per worker
What are 5 possible conflicts of objectives?
High growth VS Low inflation
High growth VS Trade Balance
Low unemployment VS low inflation
High Growth VS Low inequality
High Growth VS Environmental Stability
Create a chain of reasoning for low spending during a BUST
low spending –> Low demand for G+S –> low derived demand for labour –> HIGH UNEMPLOYMENT –> low income –> FALLING PRICES AND LESS SPENDING ON IMPORTS
Create a chain of reasoning for high spending during a boom
High spending –> HIgh demand for goods and services –> high derived demand for labour –> LOW UNEMPLOYMENT –> high income –> RISING PRICES AND MORE SPENDING ON IMPORTS
(Worse inequality & environmental damage!!)
(Analysis) HIGH GROWTH VS LOW INFLATION:
What happens if there is RAPID economic growth?
What to firms have difficulty with when the economy is growing very quickly?
What will make firms put up prices?
- inflationary pressures will increase, particularly when growth is above the long run trends rate and AD increases faster than AS
- firms have difficulty employing sufficient skilled labour: which can lead to wage inflation and higher wages cause higher prices.
- if demand grows faster than supply, firms will respond to shortages by putting up prices
(Evaluation) HIGH GROWTH VS LOW INFLATION:
How is it possible to have high growth without causing inflation?
What two things should increase at the same time?
- if growth is sustainable - if it is too close to the long run trend rate then LRAS will increase and therefore, we will not see inflation.
- AD and LRAS should increase at the same time to get economic growth without inflation.
(Analysis) HIGH GROWTH VS BALANCE OF PAYMENTS TRADE DEFICIT:
What tends to happen when growth is led by consumer spending? Why? (mention MPM)
With higher economic growth the economy will get closer to full capacity and therefore… (fill in the rest)
What will happen to UK imports if there is a rise in the inflation rate? What is the final effect of this?
- Tend to cause a deficit in the current account, this is because as consumer spending rises there will be a rise in import spending. This is especially true in the UK, where traditionally we have a high marginal propensity to import (MPM)
- … it will put upward pressure on prices and inflation.
- if there is a rise in the inflation rate then UK exports become less competitive and imports relatively cheaper. This will also worsen the current account deficit.
(Evaluation) HIGH GROWTH VS BALANCE OF PAYMENTS TRADE DEFICIT:
How would economic growth not lead to a worsening of the trade deficit?
What is another factor?
- if economic growth is sustainable (if growth is close to the long run trend rate), then inflationary pressures won’t increase and domestic supply is able to keep up with domestic demand. There is less need for consumers to switch to imports from abroad.
- If economic growth is fuelled by capital investment and export demand - then economic growth can be consistent with a current account surplus.
LOW UNEMPLOYMENT VS LOW INFLATION:
What does lower unemployment result in?
What does the phillips curve suggest?
- Lower unemployment should result in higher incomes and therefore more demand in the economy resulting in inflation as there is ‘too much many chasing too few goods’. This is similar to the process by which growth causes inflation.
- The Phillips Curve suggests there is a trade off between these two objectives. For example, a cut in interest rates leads to higher AD. Higher AD leads to higher growth (lower cyclical unemployment) but also higher inflation.
(Evaluating) LOW UNEMPLOYMENT VS LOW INFLATION:
How is it possible to reduce both inflation and unemployment?
If successful supply-side policies are used, you can reduce structural unemployment without causing wage inflation. Also, if the growth is sustainable, inflation will remain low.
(Analysis) HIGH GROWTH VS THE ENVIRONMENT:
What usually occurs due to growth?
- means that pollution and the use of sustainable resources are often overlooked, especially in the short term.
