2.0 Flashcards

Question

Unsustainable growth - cost of economic growth

Answer 1

Meaning that Current growth in the productive capacity of the economy leads to a fall in the potential output for future generations For example, exhaustion of non renewable resources

Answer 2

The benefits of economic growth tend to benefit the upper echelon of society and this may carry on to future generations

Answer 3

Research shows that happiness and income are positively related, at low levels of income. Beyond a certain point, further consumption of good and services does not make any different to happiness.

Answer 4

Increase in investment -> higher capital stock -> rise in real GDP -> higher factor incomes -> increasing in national savings -> increase in investment (repeat)

Answer 5

LR economic growth occurs through an increase in the capital stock market Investment is the purchase of new capital Investment in an economy is finance through saving (People save money in banks, firms come to banks and banks lend this money to firms)

Answer 6

S=sY. Saving is a proportion of national income. s can be thought of as the average propensity to save Investment is the change in a capital stock. I=deltaK Marginal capital output ratio (the additional capital required to produce a certain level of extra output) = k=deltaK/delta Y A low k is preferable as it shows capital is productive Investment is financed by saving therefore I=S

Answer 7

s/k = delta Y/Y Therefore, this tell us economic growth requires high saving rate at lower incremental capital output ratio This is because: A higher savings rate leads to more investment And technological progress can lower the incremental capital output raio

Answer 8

This is where savings are inadequate in developing countries

Answer 9

Higher savings is unlikely to be turned into higher investment if the economy lacks an efficient financial system to bring borrowers and lenders together Higher investment is unlikely to generate economic growth if the economy lacks human capital and infrastructure People might choose to save abroad because it is deemed more secure and yields higher returns Foreign aid and loans can be squandered due to corruption, foreign debt can build up rapidly and interest payments become unsustainable

Answer 10

Those of working age who are willing and able to work. This includes people who are employed and unemployed.

Answer 11

People of working age who are not able and/or not willing to work. The economically inactive are not part of the labour force. For example, people in full time education, stat at home parents, early retirement, disability.

Answer 12

(Labour force / population of working age) x 100

Answer 13

The part of the economically active/ labour force without paid work, available for work, and actively seeking employment at the going wage rate

Answer 14

(Unemployed/(unemployed+employed)) x 100

Answer 15

(Number of employed workers/population of working age) x 100

Answer 16

Workers who are in paid work, but experiencing a lack of enough of paid work or work that does not make full use of their skills or abilities

Answer 17

Quarterly survey of a sample of approximately 25,000 uk households In this measure, the level of unemployed is the total of those of working age who declared themselves

Answer 18

A wide measure which is thought to give a more accurate reflection of the number of people who are unemployed than the claimant count Other information bout the nature of unemployment/employment is collected in the survey The LFS is an internationally comparable measure

Answer 19

Samples may be unrepresentative and subject to response errors as well as low rate of response Relatively costly to administer Takes time to compile data and can be subject to time lags

Answer 20

Is a measure of the individuals claiming unemployed related benefits. In the UK unemployed benefits is called job seekers allowance (JSA) The claimant count often tends to generate a different level and rate of unemployment as compared to the LFS as not all unemployed individual will claim JSA due to various reasons (eligibility)

Answer 21

Easy to collect as it is simply a tally of those receiving unemployed related benefits Relatively cost less to obtain An accurate measure of those claiming unemployed related benefits

Answer 22

Heavily influenced by eligibility rules There maybe be fraudulent benefit claims Not internationally compatible as different countries have different eligibility requirements

Answer 23

LFS does not include part time worked who would like full time work (unreflective of underemployment) Measure of unemployment do not include those in jobs below their skill level (unreflective of underemployment) Some individuals are not classified as unemployed. E.g. moving from employment to inactivity Areas with high unemployment have high inactivity levels. This may mask greater true employment

Answer 24

Is a short term unemployment occurring when workers are out of work and are between jobs

Answer 25

Unemployed workers take time to find suitable, or most appealing jobs

Answer 26

Those who work on an occasional basis may be between periods of employment or in between contracts e.g. actors

Answer 27

Those who are employed in seasonal industries may be unemployed when there is low demand for labour at particular times of the year e.g. construction workers in winter

Answer 28

Is workers losing jobs due to the change in the ‘structure’ of an economy because of changes in patterns of economic activity

Answer 29

Caused by the decline of certain industries and occupations, concentrated in geographical areas

Answer 30

If workers lose their jobs due to technological advances

Answer 31

Due to outsourcing and loss of competitiveness to international sources of production

Answer 32

Occurs when workers are willing and able to move between different types of jobs and occupations

Answer 33

This is where workers are willing and able to travel further to work, and also to move between different areas and regions for work

Answer 34

This occurs due to a lack of aggregate demand. When an economy experiences a downward turn in economic activity, unemployment increases. Occurs when the total supply of labour is greater than the total demand for labour at the going wage rate in the short run. Keynesians believe this unemployment will last in the long run Neoclassical economists believe in only frictional and structural unemployment

Answer 35

Fall in income and living standards Increased income inequality between employed and unemployed Fall in consumer spending (lower AD) in the economy Output (real GDP) foregone/ opportunity cost of higher unemployment Increased government spending to support unemployed workers and their families Loss of self esteem for the unemployed Increased spending on policing, if higher unemployment leads to higher crime rates Possible emigration

Answer 36

Loss of export earnings due to reduced demand for countries with high unemployment Possible social instability in economies with immigration from countries with high levels of unemployment

Answer 37

Firms wishing to expand will be able to draw from a larger pod of available workers Wage inflation is likely to be reduced, as firms are less likely to raise wages to attract workers There maybe a reduction in pay related industrial actions (strikes) Unemployment allows workers to search for the most suitable job Unemployment can also provide an opportunity for workers to retain and increase occupational mobility in future

Answer 38

Structural plus frictional

Answer 39

government can provide direct regional assistance (helping , cost affected areas by creating new jobs) Retraining unemployed workers to match employers requirements The government can provide improved transport infrastructure (increase in geographical mobility of workers) In the case of international unemployment, the government can introduce protectionist policies to protect domestic workers A government/central bank may also manipulate the exchange rate to artificially make good and services less expensive to foreign buyers, which would increase demand for labour by domestic firms (only for countries with fixed exchange rates)

Answer 40

1. Industries affected by seasonal fluctuations in demand may be encouraged to diversify their products and to provide greater range of goods/services to attract demand throughout the year 2. Workers affected by seasonal and / or causal frictional unemployment can be encourage to train to compete for jobs in a variety of sectors 3.reduce unemplomyent benefits to increase the incentive to spend less time between jobs and reduce time spent searching for jobs 4. Improve information provision about job ability

Answer 41

Expansionary fiscal policy: is increase spending or decreasing taxation to end a recession Increased government spending on goods and services produced by domestic firms will increase aggregate demand. (Because AD= C+G+I+X-M) Reduced taxation lead to greater disposable income for household and firms which should increase consumer expenditure and investment thus increasing AD

Answer 42

Reducing central bank rate - this filters through to other market interest rates - households and firms are more likely to borrow and less likely to save - increasing consumer spending and investment - higher AD - higher output - lower cyclical unemployment

Answer 43

Lower unemployment related benefits / make them more difficult to claim Reduce the power of trade unions Cut income tax rates Reduce any unnecessary labour market regulations Reduce or remove national minimum wage

Answer 44

Inflation is defined as the sustained increase in the average price level of an economy over a given period of time

Answer 45

The sustained decrease in the average price level of an economy over a given period of time

Answer 46

The basket may not be representative for any specific household as it is based only a section of products and it is difficult to judge a typical household Changing technology can make it difficult to accurately calculate a change in price level (might take a while for a new item to be included) Time lags in inflation calculations as the basket is fixed Difficult to account for increasing quality Shrinkflation: changing the side of products Sampling errors and errors in producing estimates Consumers may switch to relatively cheaper alternatives of some products meaning the cost of living will not increase as much as CPI CPI does not include price of owner occupying housing costs especially as a large proportion of income is spent on housing Method of using inputs value of owner occupying housing costs is relatively new and may not be comparable to other countries

Answer 47

The price level has been pulled up by increase in the aggregate demand

Answer 48

Anything the causes an increase in AD C+G+I+X-M

Answer 49

This is where the price level has been pushed up by a sustained increase in the cost of production and a decrease in short run aggregate supply

Answer 50

Anything that increases the cost of production for firms -increasing wage costs -increasing raw material costs -increasing cost associated with regulation -increase cost of finance

Answer 51

Classical economists believe in the theory of money, where inflation is caused by a persistent increase in the supply of money. The price level is directly related to the quantity of money in the economy. If the money supply expands faster than the increase in real GDP, household and firms have access to extra money balances and, when spent, will pull up the price level. Or in simpler terms more money chasing a fixed amount of goods and services will pull up the price level

Answer 52

Menu costs: additional cost incurred by firms when they need to change their prices (catalogue menus, price lists and website prices) Shoe leather costs: costs incurred in terms of time and effort to ensure money does not lose its value. When inflation is high the central bank raises interest rates. Households and firms are less likely to hold on to cash and will make more trips to the bank. In the modern economy, this is less of an issue Administrative cost: cost of negotiating contracts with customers, costs incurred adjusting accounts and costs of increased negotiation with workers/ unions over wages

Answer 53

Reduction in the value of money: the purchasing power of money falls as price increases. The same amount of money now will buy progressively less over time and the cost of living increases Redistribution effects: if some workers do not receive wage increases that keep pace with inflation, while others do, there can be redistribution effects. Fall in real income and standards of living: if nominal wages do not rise by the inflation rate then real income will fall. This means that households will not be able to afford the same goods and services as before. This could lead to an increase in relative poverty.

Answer 54

Redistribution from savers to burrowers: inflation leads to fall in the real value of savings because nominal interest rates may not rise by the same rate as inflation. Accumulated stocks of saving may purchase less goods. This means people who save lose out. Debtors gain because the value of debt falls in real terms Inflationary ‘noise’ : rising prices can lead to market signals being distorted. It is difficult for consumers to recognise if price increases are due to the general level of inflation or if they reflect a change in price relative to other products. This could further decrease the confidence of firms and households and there may be greater shoe leather costs and search costs Fiscal drag: if tax brackets do not change in line with price rises, there can be redistribution from taxpayers to government. As price rises, more economic transactions are taxed, and some at a higher rate. If tax payers pay a higher proportion of their income in tax, there will be fiscal drag. If the government does not adjust tax thresholds and tax bands as income increase this can be a way the government increase overall tax burden on households and firms.

Answer 55

Inflation causing further inflation: inflation can lead to expectations that prices will continue to rise in the future AD may increase as goods and services are demanded. Increased wage demands due to expectation of future inflation may lead to more inflation. Uncertainty: firms will be less certain of future costs and prices they will receive for their products. Firms experience a loss of business confidence and are less likely to spend on capital goods, reducing investment. Consumers will be less certain about the future spending. Loss of international confidence: if domestic inflation is higher than in other countries, this may lead to domestically produced goods and services becoming less price competitive in international markets. This is likely to reduce demand for exports and possible increase demand for imports, which are now relatively cheaper.

Answer 56

1. Greater certainty for firms and consumers, increasing business confidence and consumer confidence 2. Low expectation of future inflation 3. More flexibility for producers to decrease real wages by not increasing nominal pay at the same rate as inflation 4. Avoiding deflation - the consequences of deflation may be far more significant than any possible costs associated with inflation

Answer 57

The rate of inflation The inflation rate relative to other countries The duration Cause of inflation ( cost push inflation is likely to be more harmful than demand pull it is likely to be associated with a fall in output) Distribution of income - may be harmful to some and less harmful to others

Answer 58

A reduction in the rate of inflation. Price level is rising at a slower rate

Answer 59

1. Benign deflation - occurs when the price level is falling due to falling costs of production shown by a shift to the right of the SRAS curve 2. Malign deflation - when the price level is forced down by lower total spending on goods and services produced in the domestic economy shown by a shift to the left of the AD curve

Answer 60

Increasing value of money - the purchasing power of money increases as price falls. Thus, there will be less incentive to spend money. Thus increasing savings and slowing down economic activity Reduce consumer spending - consumers expect the price level to fall further in the future. They delay purchases particularly of ‘big ticket’ items like cars. Fall in consumer spending ——> fall in AD Reduced investment - as price falls more investment opportunities are deemed unprofitable as the real value of the borrowing to fund investment rise relative to the income. Increased real cost of borrowing ——-> lower profit for firms Government fiscal harm ——-> the real value of outstanding debt increases. This will reduce the ability of the government to borrow more in the future

Answer 61

1. Improved national price competitiveness - deflation in the domestic economy and inflation in the foreign economy = the domestic product become more internationally price competitive. This causes a rise in exports and a fall in imports 2. Possible increase in output - deflation from increased efficiency and lower costs of production can increase the willingness and ability of firms to supply good and services, shifting the SRAS curve to the right.

Answer 62

1. The rate of deflation 2. The cause of deflation (malign is likely to be more harmful) because a fall in AD is likely to be associated with lower output and higher unemployment 3. The international trade effect - the extent to which the economy experiences the beneficial effect of an increase in price competitiveness depends on PED for import and PED for exports. If both are responsive, there will be a more significant improvement 4. The level of indebtedness in the economy - the greater the level of existing debt, the more likely the decline in the level of economic activity

Answer 63

Money paid as the reward to labour per period of time at current prices. The nominal wage rate does not take inflation into account

Answer 64

Reward paid to labour for work adjusted for inflation. Another way we can think about it is real wage reflect the amount of good and services the nominal wage can buy.

Answer 65

%change real wage rate is approximately equal to %change in nominal wage rate - rate of inflation

Answer 66

Rising inflation -> falling real incomes -> workers bid for improved wages -> lead to high labour costs - > firms raise their price levels -> rising inflation (so on and so forth)