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Macroeconomics > 2.0 > Flashcards

2.0 Flashcards

1
Q

Output gap

A

Output gap is to do when we are not at long run economic equilibrium

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2
Q

What happens if real GDP is above full employment level

A

We say there is a inflationary gap or a positive output gap

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3
Q

What happens if real gdp is below full employment level

A

We say there is a deflationary gap or a negative output gap

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4
Q

What is a business cycle

A

An economic cycle or business cycle is the natural variation in economic activity (real GDP) over time

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5
Q

What is a full business cycle composed of ?

A

Recession,recovery, boom and slowdown phase

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6
Q

What is a recession ?

A

It is a fall of real GDP accompanied by unemployment. A recession is defined in the UK as two quarters of falling real GDP. A deep recession would be a situation where actual output remains below potential output for servers quarters.

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7
Q

What is the recovery phase

A

The economy is still in a negative output gap but real GDP is steadily rising and unemployment may start to go down

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8
Q

What is a “boom”?

A

Actual output is above potential output. Real GDP is increasing at a faster rate than the trend rate of growth. The price level tends to rise rapidly (inflation)

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9
Q

What is the “slowdown phase”

A

There is still a positive output gap but it is shrinking as the growth rate of real GDP starts to fall

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10
Q

What is short run economic growth ?

A

Short run economic growth is an increase in real GDP of an economy at a given period of time, using current resources and technology.
Short run economic growth is actual economic growth.
Short run equilibrium real GDP can increase due to an increase in either aggregate demand or short run aggregate supply.

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11
Q

What is long run economic growth

A

Increase in an economy’s potential level of real output over time (an increase in the productive capacity of an economy)

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12
Q

Causes of long run economic growth

A

Anything which increase the quantity or quality of factors of production will increase long run aggregate supply

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13
Q

Meaning of productivity

A

Output per unit of factor input in a given period of time.

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14
Q

What is infrastructure

A

This is the large scale capital that is necessary for economic activity to take place
The majority of large scale capital is funded/provided by the government

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15
Q

Meaning of institutions

A

This refers to the established system of rules which facilitate socio-economic interactions

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16
Q

Characteristics of a highly efficient institution

A

-a stable and democratic political system
-a well functioning legal system
-free press
-developed welfare systems
- effective institution means that firms are more likely to undertake investment and entrepreneurs are more likely to take a risk to make a profit. This leads to an increase in the productive capacity over time

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17
Q

Benefits of economic growth

A

higher employment
Higher living standards
Increased tax revenue
Multiplier and accelerator effect
Increased business confidence
Greater opportunity for the government to redistribute income

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18
Q

Costs of economic growth

A

Growth might become unsustainable
Rising income and wealth inequality
Growth and happiness

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19
Q

Higher employment - economic growth

A

Economic growth will lead to an increase in employment as firms demand more labour to produce goods and services
However, may not be true because growth might come from increased capital, higher productivity, increased mobility of labour

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20
Q

Higher living standards - economic growth

A

Economic growth leads to higher employment which leads to higher income for households, which leads to a higher consumption of goods and services. If there is an increase in real gdp we can say there is a higher standard of living.

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21
Q

Increased tax revenue

A

Economic growth has a positive effect on government finances, there will be higher tax revenue generated and less money spent on benefit payments. If this extra revenue is spent on education, health or infrastructure then this can also increase output

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22
Q

Multiplier and accelerator effects - economic growth

A

Economic growth encourages investment in capital by firms (accelerator) and the increased investment can lead to further multiplier effects on national income. If increased investment increase the quantity and/or quality of capital then this will increase LRAS and further enhance growth

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23
Q

Increased business confidence - economic growth

A

Economic growth has a positive effect on profits and business confidence. Positive impact on stock market and could encourage entrepreneurship and growth of business

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24
Q

Redistribution of income - economic growth

A

Government finances are likely to improve with economic growth, the government can introduce policies to reduce inequality and poverty

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25
Q

Unsustainable growth - cost of economic growth

A

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

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26
Q

Rising income and wealth inequality Growth- cost of economic growth

A

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

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27
Q

Growth and happiness - cost of economic growth

A

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.

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28
Q

What is the basic ides of Harrod domer model

A

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

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29
Q

The importance of savings

A

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)

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30
Q

Equations of Harrod domer model

A

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

31
Q

Equation of growth rate

A

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

32
Q

Definition of savings gap

A

This is where savings are inadequate in developing countries

33
Q

Difficulty in closing savings gap - developing countries

A

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

34
Q

Definition of economically active individuals (labour force)

A

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

35
Q

Definition of economically inactive

A

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.

36
Q

calculating labour force participation rate

A

(Labour force / population of working age) x 100

37
Q

Definition of unemployed

A

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

38
Q

Calculating unemployment rate

A

(Unemployed/(unemployed+employed)) x 100

39
Q

Calculating employment rate

A

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

40
Q

Definition of underemployed

A

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

41
Q

Labour force survey

A

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

42
Q

Advantages of labour force survey

A

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

43
Q

Disadvantages of labour force survey

A

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

44
Q

What is claimant count

A

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)

45
Q

Advantages of claimant count

A

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

46
Q

Disadvantages of claimant count

A

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

47
Q

Reasons why unemployment is usually underestimated

A

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

48
Q

What is frictional unemployment.

A

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

49
Q

Search unemployment - frictional

A

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

50
Q

Casual unemployment - frictional

A

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

51
Q

Seasonal unemployment - frictional

A

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

52
Q

Structural unemployment

A

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

53
Q

Regional unemployment - structural

A

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

54
Q

Technological unemployment - structural

A

If workers lose their jobs due to technological advances

55
Q

International unemployment - structural

A

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

56
Q

What is occupational mobility

A

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

57
Q

What is geographical mobility

A

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

58
Q

What is cyclical unemployment

A

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

59
Q

Consequences of unemployment

A

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

60
Q

Potential costs of unemployment for other countries

A

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

61
Q

Possible benefits of unemployment

A

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

62
Q

Natural rate of unemployment

A

Structural plus frictional

63
Q

Policies to reduce unemployment

A

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)

64
Q

Reducing frictional unemployment

A
  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
  3. Improve information provision about job ability
65
Q

Reducing cyclical unemployment

A

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

66
Q

Expansionary monetary policy - reducing cyclical unemployment

A

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

67
Q

Possible policies for reducing natural rate of unemployment - neoclassical

A

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

68
Q

Inflation definition

A

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

69
Q

Deflation definition

A

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

70
Q

Difficulties in measuring inflation

A

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 no 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

71
Q

Demand pull inflation

A

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

72
Q

Causes of demand pull inflation

A

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

73
Q

Cost push inflation

A

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

74
Q

Causes of cost push inflation

A

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

Macroeconomics (2 decks)

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