11 - Economic Performance Flashcards
(205 cards)
1
Q
What is the ONS?
A
An independent body who collate data about things which affect the UK. They report on inflation figures, and economic growth.
2
Q
What challenges has the UK economy faced?
A
Covid-19, Global Financial crisis.
3
Q
What are the current rates of economic growth?
A
0.1-0.3%.
4
Q
What is Economic Growth?
A
The growth of the total value of goods and services in an economy year on year.
5
Q
What is the primary sector?
A
Involves extraction of raw materials.
6
Q
What % of GDP did the primary sector make up in 1952, compared to now?
A
1952 - 8.09%. 2016 - 1.30%.
7
Q
What is the secondary sector?
A
Involved transforming raw materials into a finished product. e.g. Textiles, Manufacturing.
8
Q
What % of GDP did it make up in 1952, compared to now?
A
1952 - 38.19%. 2016 - 15.11%.
9
Q
What is the tertiary sector?
A
Involves service and retail, and the provision of goods. e.g. financial institutions, schools, Hotels.
10
Q
What % of GDP did it make up in 1952, compared to now?
A
1952 - 53.72%, 2016 - 83.59%.
11
Q
What is the quaternary sector?
A
Intellectual services, research and development. e.g. Programmers, IT services, Artists.
12
Q
What fuels short term economic growth?
A
Changes in Aggregate Demand.
13
Q
How can firms increase output in the short run?
A
Increasing output, by fully utilising all factors of production.
14
Q
Which diagram shows short run economic growth?
A
PPF Diagram.
15
Q
Which Factors affect Aggregate Demand?
A
Consumption, Investment, Government Spending, Imports, Exports.
16
Q
What do further increases of Aggregate Demand lead to?
A
Higher Inflation.
17
Q
Which supply side factors lead to short run economic growth?
A
A fall in money supply, A fall in taxes imposed on firms.
18
Q
What is the trend growth rate?
A
The rate at which output can grow on a sustained basis without putting pressure on inflation.
19
Q
What is the current trend growth rate of the UK?
A
Below 2%.
20
Q
What has happened to the number of economically inactive people?
A
It has increase, as people have left the workforce since COVID.
21
Q
What are the causes of Long Run Economic Growth?
A
Improvements in Technology, Investment, Increase in the size of the labour force, Improvements in productivity.
22
Q
What do supply side reforms do to the economy?
A
Increase labour productivity.
23
Q
How does Aggregate Demand play a role in Long Run growth?
A
Firms will only produce more goods or services if there is enough demand to absorb extra output.
24
Q
What does the neoclassical growth theory state?
A
A sustained increase in investment increases growth rate temporarily, Ratio of capital to labour goes up, product of capital declines.
25
What is the weakness of the neoclassical theory?
It doesn't explain why technological progress occurs.
26
What does the new growth theory state?
It says there are three main sources of technological progress, which explains long run growth.
27
What are the three factors stated in the new growth theory?
Profit seeking research, openness to foreign idea, accumulation of human capital.
28
What are the benefits of economic growth?
Increases standard of living, provides new, more environmentally friendly technologies.
29
What are the disadvantages of economic growth?
Uses up finite resources, pollution and environmental degradation, Destroys local culture and community, widening inequality.
30
What is the economic cycle?
The way an economy moves through the four stages of boom, slowdown, recession, and recovery.
31
What are the characteristics of a Boom?
High inflation, High consumer spending, low unemployment, low interest rates, high consumer confidence, higher taxes.
32
What are the characteristics of a recession?
High unemployment, high taxation, low consumer confidence, high business failure, low tax revenue, low inflation.
33
What are the characteristics of a slowdown?
Decreasing consumer confidence, decreasing spending, increasing business failures, falling demand.
34
What are the characteristics of a recovery?
Rising consumer confidence, rising consumer spending, rising business start ups, decreasing unemployment, low interest rates.
35
What are the causes of changes in the economic cycle?
Fluctuations in Aggregate Demand, Supply side factors, outside shocks, multiplier theory.
36
What do output gaps measure?
Real output, compared to the trend output level.
37
What is the output gap?
A gap between the change in demand and output levels.
38
What can a positive output gap lead to?
Cost - push, or demand - pull inflation.
39
What can a negative output gap lead to?
A lower price level, a rise in unemployment.
40
What happened to the UK's output gap between 2000-2008?
The UK had a positive output gap, which accompanied a booming economy.
41
What happened to the output gap in 2008?
It was negative, after the global financial crisis.
42
What has happened to real incomes since 2008?
They have fallen, due to consecutive pay freezes.
43
What are the examples of demand side shocks?
Economic Downturn in a country's major trading partner, tax increases, cuts in state benefits, Financial crises, rise in unemployment.
44
What are the examples of supply side shocks?
Steep rise in oil and gas prices, natural disasters, conflict, production technology, lockdown of citizens.
45
What is a shock?
An unexpected event that affects the economy, or economic growth.
46
What is an endogenous shock?
An unexpected event, which is internal.
47
What are exogenous shocks?
An unexpected event happening outside of the economy.
48
What are the examples of endogenous events?
Changes in income of a country, economic growth, availability of credit, conflict, extreme weather.
49
What are the examples of exogenous events?
Fall/rise in global oil prices, migration levels rise/fall. Health crises, war, global recession.
50
What is the criteria of being officially unemployed?
Of Working age, willing and able to work, actively seeking work.
51
How is unemployment measured?
The Labour Force survey, which asks households to self identify as employed, unemployed, or economically inactive.
52
What are periods of high unemployment linked to?
Contraction of economic growth.
53
What has unemployment stayed above in the last 50 years?
3.5%.
54
What can the national unemployment rate hide?
Regional and local variations, variations in gender, age, ethnicity, doesn't say duration of joblessness.
55
What has the unemployment rate been compared to other G7 nations?
The UK has never had the highest unemployment rate in the G7, and has a similar rate to Canada, and the USA.
56
What is the difference between long term unemployment and mass unemployment?
Long term unemployment is people who have been unemployed for 12 months or more. Mass unemployment is where 1 in 10 people at least are out of the Labour Force.
57
What is Hidden Unemployment?
People who don't have jobs, and aren't actively looking for work, but are willing and able, so are not counted in the official rate.
58
What are the examples of hidden unemployment?
Students, Stay at home parents, people unable to work due to disability.
59
What does Structural unemployment result from?
The structural decline of industries unable to adapt, when there is changing demand.
60
What does technological unemployment result from?
Successful growth of new industry, using labour saving technology.
61
What is an example of structural unempoyment?
Changes in technology leading to changes in the pattern of demand.
62
What does growth of solar panels lead to?
Job losses when coal power stations shut down.
63
Why can structural unemployment be hard to separate from other causes of unemployment?
Changes in Aggregate demand can be hard to measure.
64
What happened to manufacturing between 1993-2008?
Manufacturing output grew, manufacturing employment fell.
65
What does cyclical unemployment believe?
A lack of aggregate demand for goods and services is a cause of persistent unemployment.
66
What does cyclical unemployment lead to?
A downturn in the economic cycle, and says that the economy could settle at an under-unemployment equilibrium.
67
Is cyclical unemployment voluntary or involuntary?
Involuntary, as it's not caused by workers, and people shouldn't be blamed.
68
What are the causes of cyclical unemployment?
The economic cycle, aggregate demand decreases, so workers have to be laid off.
69
What does deficient aggregate demand lead to?
The economy producing inside the PPF.
70
What are the causes of hidden unemployment?
Many long term unemployment give up actively searching for work. A large cohort of people are sidelined onto benefits. A growing number of people are unemployed, as they care for elderly relatives.
71
Why may unemployment figures not be accurate?
LFS can't always be representative of the whole UK, there is always scope for error. Measured unemployment excludes economically inactive people. Unemployment isn't the same as under employment.
72
What are the examples of seasonal unemployment?
Farming, Tourism, Retail, Hospitality, Construction, Tuition.
73
What are the causes of structural unemployment?
New jobs require new skills, unaffordable housing, employer discrimination, erosion of skills, welfare system.
74
How can frictional unemployment be reduced?
By making information on jobs more available, making job search more affordable.
75
What are the causes of frictional unemployment?
School and college leavers entering labour market, people searching for work following a career change, early retired people returning to the labour market, mothers returning.
76
What type of unemployment is workers being made redundant from a steel plant during a downturn in construction?
Cyclical.
77
What type of unemployment is a graduate who spends six months searching for work after leaving university?
Frictional.
78
What type of unemployment is a mother actively searching for work, unable to accept a job offer due to childcare?
Structural.
79
What type of unemployment is an unemployed farmer finding it hard to find new work?
Structural.
80
What type of unemployment is people working in aircraft freight businesses losing their jobs due to a contraction in trade?
Cyclical.
81
What is real wage unemployment?
Unemployment caused by wages being too high relative to the productivity of workers.
82
Why may firms be unwilling to hire workers at current wage rates?
They believe workers aren't worth that much.
83
What do classical economists believe?
That unemployment would disappear if wages were adjusted downward, as workers would be willing to work for less.
84
What do Keynesians believe is true, in terms of wages?
Wages are 'sticky' because of long term labour contracts, and trade unions.
85
What are the reasons for voluntary unemployment?
Pursuing education, leisure, taking time off for personal interests.
86
What are the reasons for involuntary unemployment?
Recession, Job market conditions, lack of jobs in a specific industry.
87
What is the Natural rate of Unemployment?
The level of unemployment that exists in an economy when operating at full potential.
88
What are the components of NRU?
Structural unemployment, Frictional unemployment.
89
What are the consequences of unemployment?
Reduces international competitiveness, higher business taxes, shrinks the size of the PPF curve, Mental Health.
90
How does unemployment reduce international competitiveness?
It reduces incentives for firms to invest in state of the art technology, which leads to increased export competitiveness.
91
How does unemployment lead to higher business taxes?
Businesses will have to fund increased welfare payments, which leads to lower investment.
92
How does unemployment shrink the size of the PPF?
The economy starts adjusting to a new amount of employees, so inactive workers are seen as unemployable.
93
How does unemployment lead to lower mental health?
Lower living standards can lead to unemployed people feeling marginalised, and self esteem is reduced. Reduction in quality of diet.
94
What are the government policies to reduce unemployment?
Improving geographical immobility of labour, Improving occupational mobility of labour, reducing employment search periods, supply side policy.
95
How does improving geographical immobility reduce unemployment?
Makes it easier for families to move from one region to another.
96
How does improving occupational immobility reduce unemployment?
Improving OM by providing retraining schemes, improving information about jobs, so people can find jobs outside their skill set.
97
How does reducing search periods reduce unemployment?
JSA attempted to reduce search periods between jobs, and creates an incentive for unemployed to accept lower wages.
98
How does supply side policy reduce unemployment?
De-industrialisation created conditions for service industries to grow, to replace manufacturing.
99
What was inflation in February 2024?
3.4%
100
Why did inflation in the UK fall in 2024?
A slowdown in food price rises.
101
What has food inflation been in the UK in the last 2 years?
25%.
102
What is inflation?
A sustained rise in an economy's general price level.
103
What is deflation?
A sustained period when the general price level for goods and services falls.
104
What is disinflation?
Consumer prices still rising at a slower rate, because of a drop in the rate of inflation.
105
What is hyperinflation?
Extremely rapid inflation, result of mass money printing by government.
106
What is the consumer price index?
A weighted index which measures the average change in the price of products from month to month.
107
Which items were added to the ONS basket in 2024?
Air fryers, vinyls, rice cakes, gluten free bread, spray oil.
108
What is Stagflation?
A mixture of a stagnating economy and high inflation.
109
What are the causes of inflation?
Falling exchange rates, availability of credit, increased energy prices, increased VAT, increased exports, economic boom.
110
What is cost push inflation?
A rising price level caused by an increase in the costs of production.
111
What are the causes of cost push inflation?
Rising labour costs, depreciation in the value of currency, higher global prices for raw materials, increase in indirect taxes,
112
What does cost push inflation cause?
A negative output gap.
113
What does the cost push inflation graph show?
A contraction of the AD curve due to rising prices, firms are less willing to supply due to high cost.
114
What is demand pull inflation?
A rising price level caused by an increase in AD, where the economy grows too quickly, and services outstrip supply.
115
What are the causes of demand pull inflation?
Economic growth, low interest rates, increase in money supply, tax cuts, increased spending.
116
What does demand pull inflation cause?
A positive output gap.
117
What does the demand pull inflation diagram show?
An economy which uses up spare capacity, but overuses factors of production.
118
Who is Milton Friedman?
A 20th century economist who supported free market policies, and came up with the theory of monetarism.
119
What does monetarism argue?
The money supply plays a crucial role in determining the rate of inflation.
120
What happens if money supply increases rapidly, according to monetarism?
It leads to inflation, as there is too much money chasing too few goods.
121
What does monetarism say about fiscal policy?
It is critical of using it to manage the economy, as it argues fiscal policy is unpredictable, and leads to economic instability.
122
What is the equation for the quantity theory of money?
MV=PQ.
123
What do the different components stand for in the quantity theory of money equation?
M = Money Supply. V = Velocity of Money.
P = Price Level. Q = Quantity of goods and services produced.
124
What are the problems with high inflation?
Erodes the value of money, less long term investment, leads to unemployment, higher interest rates, higher wage demands, uncertainty and instability.
125
What has the rate of inflation been in the UK in the last 35 years?
It has stayed on or around 2% for most of the period of the last 35 years.
126
What happened to inflation in the 1990s and 2008?
It increased while the economy was going into recession.
127
What happened to inflation in 2022?
It increased to over 11%, following covid-19 and the war in Ukraine.
128
What are inflation expectations?
What people and businesses expect inflation to happen to consumer prices in the future. This can cause higher wage claims, and a wage price spiral.
129
What is the effect of CPI being a weighted index?
Housing and household services account for 30% of the overall inflation calculation, and food and drink accounts for less than 10%.
130
What are the limitations of the consumer price index?
Not fully representative of all households, may hide true cost of goods, inaccuracies in data, many services in the digital economy don't have a price, rising quality of products may not be fully reflected in the price.
131
What are the challenges of measuring inflation?
The basket may not always represent what people are buying, substitution bias, quality adjustments, geographic variation, demographics.
132
Who are the winners of high inflation?
Workers with strong bargaining power, producers, debtors.
133
Who are the losers of high inflation?
Workers in low paid jobs, lenders, retired people, savers if real returns are negative.
134
What has happened to inflation in China?
Deflation due to a contraction in demand, where spending by consumers fell despite the lunar new year.
135
Why are economists concerned about China's inflation?
They may start to rely on demand from other countries.
136
What are deflationary expectations?
Downward inflation, people spend less today, as they expect cheaper prices tomorrow.
137
What is the importance of the inflation rate?
Affects competitiveness in international trade, imbalances in trade if one country has high inflation, and another has low inflation, Problems with debt crises.
138
What was the UK's inflation rate, compared to the G7, from 2016?
The UK's was the same as Germany and the USA from 2016 to 2020. The USA's inflation rate rose more quickly than the UK's and Germany's, following the pandemic.
139
What are the benefits of high inflation for the government?
Fiscal drag, more tax revenue for the government, reduces value of government debt, negative interest rate on government debt, could help businesses make more profit.
140
What are the costs to the government to high inflation?
Pressure to raise the value of welfare benefits, causes slowdown of real GDP growth, lower tax revenue, increased interest rates, government borrowing is more expensive, worsening of international competitiveness.
141
What is the wage price spiral?
Rising inflation, falling real incomes, workers bid for improved wages, labour costs increase, firms raise their prices, rising inflation.
142
What are the policies to tackle inflation?
Interest rates, tax rises, buying government bonds, more flexible labour market, decreased trade union power, quantitative easing.
143
What are the effects of increased interest rates?
More expensive to borrow, people are discouraged from making big purchases, decrease in Aggregate demand, fall in general price level.
144
What is the effect of trade union reform?
Makes it harder for trade unions to go on strike, collective bargaining power is reduced, less wage price increases, avoid wage price spiral, less cost increases for businesses.
145
What are the consequences of deflation?
People postpone big ticket item buying, erodes business confidence, triggers recession, negative multiplier effect, credit crunch.
146
What policies can you use to avoid deflation?
Lower interest rates, fiscal stimulus, lower value of exchange rate, higher taxes on savings.
147
How do lower rates of interest cause inflation?
Encourages demand, expands supply of credit in the banking system.
148
What happens if people expect the rate of inflation to be high next year?
They behave in an inflationary way now, and deliver high inflation next year.
149
What happens if people expect the inflation rate to fall?
They behave in a way that allows low inflation to be achieved.
150
What is inflation psychology?
The idea that many groups in society with strong bargaining positions, such as home owners, have done well with inflation, and want it to continue.
151
What happened between 1997-2007?
The government was able to convince people that inflation would be low, making it easier to control inflation.
152
What used to be the main cause of cost push inflation in the UK?
Rising wages, public sector workers, bankers, footballers, business executives.
153
What is the current cause of cost push inflation?
Rising prices of food, energy, raw materials.
154
What happens when the global economy is doing well?
The UK imports inflation from goods in the rest of the world, leads to price of imported food and raw materials.
155
What happens when the world economy is suffering?
Pressure on inflation is reduced, could lead to deflation or disinflation, because of falling worldwide demand for UK exports.
156
What does an American downturn mean for the UK?
Downward pressure on the UK inflation rate.
157
Why did UK inflation reduce in the long term?
Reduced as a result of falling prices of manufactures goods from China.
158
What are the policies to control inflation in the UK?
Higher interest rates, lower indirect taxes, subsidising energy bills, increase in direct taxes.
159
How do higher interest rates lower inflation?
Increased cost of borrowing, decreased spending, AD shift inward. Risks causing a recession.
160
How do lower indirect taxes cause lower inflation?
Is an extra cost for firms, so reduces cost for consumers. Suppliers may not pass on the tax cut.
161
How does subsidising energy bills cause lower inflation?
Lowers bills, causing people to spend less on energy, offsets high global high price of energy. Short-term and very expensive.
162
How do increases in direct taxes cause lower inflation?
Less disposable income, inward shift of AD. Real disposable incomes are hit.
163
What is the Phillips Curve?
An economic model showing the inverse non-linear relationship between the unemployment rate and the rate of inflation.
164
Who was the Phillips curve proposed by?
AW Phillips in 1958, to show the relationship between inflation and unemployment.
165
What does U1-P1 show on the Phillips curve?
Unemployment is high, inflationary pressure is weak.
166
What does U2-P2 show on the Phillips curve?
Significant fall in unemployment, small rise in inflation, spare capacity is being used up.
167
What does U3-P3 show on the Phillips curve?
Unemployment falls further, wage pressures start to accelerate, gradient of curve steepens.
168
What does U4-P4 show on the Phillips curve?
Unemployment falls to low levels, rise of significant inflation increases. Likelihood of a positive output gap, shortages increase in wage inflation, faster rise in consumer prices.
169
When does the trade off become unfavourable?
At U4-P4, because inflation is accelerating, and the central bank usually starts increasing interest rates.
170
Why is there low inflationary pressure with high unemployment?
Negative output gap, balance of wage negotiation power goes towards employees, real spending power is depressed.
171
Why is there high inflation with low unemployment?
Firms compete for workers, upward pressure on wages and prices, shortage of inputs - cost push inflation.
172
What was the balance between inflation and unemployment between 2008-2012?
Rising unemployment after financial crisis, low inflationary pressure.
173
What was the balance between 2013-2015?
Falling unemployment, falling inflation.
174
What was the balance between 2016-2019?
Falling unemployment, rising but low inflation.
175
What was the balance between 2020-2023.
High inflation, Low unemployment.
176
What are the challenges to the Phillips curve?
Was accepted in 1960s and 70's, USA and other developed nations experienced high inflation and high unemployment at the same time. Stagflation led to some economists stating that the Phillips curve wasn't a reliable guide to economic policy.
177
What is the expectations-augmented Phillips curve?
Shows the relationship between inflation and unemployment. If people expect inflation to be high, inflation will be higher for a given rate of unemployment in the labour market.
178
What does U3-P3 mean on the EA Phillips curve?
Higher expected inflation.
179
What is the NAIRU?
Non-accelerating inflation rate of unemployment below which the rate of inflation might be expected to accelerate.
180
Which factors affect NAIRU in the economy?
Relative wage bargaining power, factors which affect structural unemployment, Globalisation, migrant workers.
181
How does Wage bargaining power affect NAIRU?
Workers are able to use collective bargaining power to demand higher wages.
182
What is an example of wage bargaining power affecting NAIRU?
Labour shortages in public sector - health and social care, increased bargaining power. Long term - Fall in unionisation.
183
Which factors affect structural unemployment?
Skills gap, High childcare costs, transport costs impede mobility.
184
How does globalisation and migrant workers affect NAIRU?
Causes decreased pricing power of businesses, eases shortages in skilled labour.
185
What % of the labour force does NAIRU make up?
4.5%.
186
What is Stagflation?
Stagnant or negative economic growth, rising unemployment, high and rising inflation.
187
What is the wage price spiral?
Workers bid for higher wages, as real incomes are eroded by fast/rising prices.
188
What was average wage inflation between 2001-2007?
2.7% per year.
189
What was average wage inflation between 2008-2009?
Fell by 2.3%.
190
What was average wage inflation between 2010-2019?
Rose between 0-4%.
191
What was wage inflation in 2020?
Fell by 1%.
192
What was average wage inflation between 2021-2023?
Rose by 9%.
193
Which policies can help achieve an inward shift in the Long Run Phillips Curve?
Improve occupational mobility of the labour force, attract more people into searching for work, reduce occupational mobility, improve labour productivity.
194
How does improving occupational mobility help achieve an inward shift?
Decreases the natural rate of unemployment, such as more education and training.
195
How does attracting more people into the search for work help achieve an inward shift?
Welfare system, punish people in order to claim benefits. Income tax cuts, more job information.
196
How does reducing occupational mobility help achieve an inward shift?
Improve transport infrastructure, more affordable housing, improve communications infrastructure.
197
How does improving labour productivity help achieve an inward shift?
Work incentives, profit sharing schemes, training on how to use software.
198
Which policies cause the Phillips Curve to shift or flatten?
Supply side policies, Labour market reform, International trade.
199
How do supply side policies cause the Phillips Curve to shift?
Aimed at improving productive capacity - Infrastructure investment, education. Increase output potential of an economy, flattens Phillips curve.
200
How does labour market reform cause the Phillips curve to flatten?
Improve work incentives, boosting inward migration of skilled workers, improving labour mobility, doesn't create extra inflation.
201
How does international trade cause the Phillips curve to flatten?
Increased overseas trade leads to more contestability, lower prices for goods and services - lower inflation, flatter Phillips curve.
202
What does a shift in AD cause, and lead to?
Increases output, causes inflationary pressure. Increases inflation, decreases unemployment.
203
What does a derived demand for labour lead to?
Movement along P curve from A to B, workers adjust expectations, demand higher wages, increasing costs of production. Causes inward shift from SRAS 1 to SRAS 2.
204
How does an inward shift cause more inflationary pressure?
Upwards shift of the SRPC, increasing inflation, unemployment returns to NRU.
205
What does higher inflation at the NRU lead to?
Creates the LRPC, is the same as LRAS, all factors of production are fully utilised. Stable inflation rate if there are no external shocks.
