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Edexcel IGCSE Economics - Paper 2 > 2022 Advance Information > Flashcards

2022 Advance Information Flashcards

1
Q

Define ‘economic growth’.

A

The rise in an economy’s national income over a period of time (usually a year)

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2
Q

Define ‘GDP (Gross Domestic Product)’.

A

The total value of goods and services produced in an economy in a year

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3
Q

What are the 3 benefits of using GDP as a measure of growth?

A

Relatively simple measure
Allows for comparison between countries - widely adopted
Allows for comparison between years to assess growth rate

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4
Q

What are the 8 limitations of using GDP as a measure of growth?

A 
Value of home-produced goods
Inflation
Black market
Environmental damage/improvement
Population
Income inequality
Cost of living 
Statistical errors
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5
Q

How is the black market a limitation of using GDP as a measure for economic growth?

A

It involves the unrecorded transaction of goods, leading to the GDP being underestimated

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6
Q

How is the value of home-produced goods a limitation of GDP as a measure of growth?

A

Goods that are produced at home and aren’t sold (eg. home-grown food, homemade clothes) aren’t recorded, leading to the GDP being underestimated

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7
Q

Define ‘the economic cycle’.

A

The overall state of the economy as it goes through four stages in a cyclical pattern

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8
Q

What are the 5 stages of the economic cycle?

A 
Growth
Boom
Downturn
Recession
Recovery
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9
Q

What are the 4 features of the ‘Growth/Recovery’ stage of the economic cycle?

A

GDP starts to rise
Unemployment falls due to increase in demand
Prices start to rise
Business/consumer confidence increases

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10
Q

What are the 4 features of the ‘Boom’ stage of the economic cycle?

A

Peak of the cycle
Economy is doing well
Jobs are created as demand rises
New firms enter the market

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11
Q

What are the 4 features of the ‘Downturn’ stage of the economic cycle?

A

Economy still growing but slower
Demand for G&S begins to fall
Unemployment starts to rise
Firms stop expanding due to falling profits

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12
Q

What are the 4 features of the ‘Recession’ stage of the economic cycle?

A

Bottom of the cycle
Economy isn’t doing well - GDP begins to fall
Unemployment rises sharply due to fall in demand
Bankruptcies are common

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13
Q

What are the 4 positive impacts and 2 negative impacts of economic growth?

A 
Pros:
Increased employment
Improved standards of living
Improved poverty rates
Increased productive potential

Cons:
Increased inflation
Risk of environmental damage

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14
Q

Define ‘inflation’.

A

The general and persistent rise in the prices of goods and services over a period of time

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15
Q

Define ‘deflation’.

A

The general and persistent fall in the prices of goods and services over a period of time

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16
Q

Define ‘CPI (Consumer Price Index)’.

A

Measure of the general price level which includes house prices and council tax

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17
Q

In 4 steps, how is the consumer price index measured?

A
  1. Government records prices of 720 G&S purchased by a sample of 180,000 families every month
  2. Weights added to prices to account for proportion of expenditure
  3. Average monthly price worked out
  4. Price compared to base year price to set inflation rate
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18
Q

What are the 4 types of inflation?

A

Deflation - fall in prices
Low and steady (1-3%)
High inflation (> 8%)
Hyperinflation (>15-20%)

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19
Q

What are the 2 possible causes of inflation?

A

Demand-pull inflation

Cost-push inflation

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20
Q

How does demand-pull inflation occur?

A

When any component of AD increases, causing AD to shift out, GDP to increase and prices to go up

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21
Q

How does cost-pull inflation occur?

A

When the costs of production for all firms are rising, causing prices to be pushed up by firms

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22
Q

What is the relationship between inflation and interest rates?

A

Low interest rates leads to increased borrowing, increased spending and therefore demand-pull inflation

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23
Q

What is the impact of inflation on prices?

A

It increases them, reducing the purchasing power of money

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24
Q

What is the impact of inflation on wages? (3 effects)

A

Workers need them to increase to compensate for loss in purchasing power - achieved through negotiation with employers

Firms may need to increase prices due to this - can lead to a spiral developing

Demand for higher wages can cause conflict between employers and unions, leading to strikes

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25
Q

How does inflation affect exporters?

A

Their goods become less attractive and internationally competitive so demand for them decreases

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26
Q

What is the impact of inflation on unemployment?

A

If caused by increase in demand, unemployment decreases as labour is derived demand

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27
Q

Define ‘menu cost’.

A

The administrative cost of firms replacing signage/labels as prices increase

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28
Q

Define ‘shoe leather cost’.

A

Cost of funding new suppliers of raw materials as prices continually increase

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29
Q

What is the effect of inflation on uncertainty?

A

Increases it - makes investment decisions more difficult

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30
Q

What is the impact of inflation on business and consumer confidence?

A

Consumers may become more anxious - less willing to borrow money and save more

Businesses may postpone growth plans or reduce spending on product development - less likely to take risks

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31
Q

What is the impact of inflation on investment?

A

Declines due to uncertainty and a lack of business confidence

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32
Q

Define ‘unemployment’.

A

When people are actively seeking work but unable to find it

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33
Q

In what 2 ways is unemployment measured?

A

Labour Force Survey (LFS)

Claimant Count - number of people who’ve claimed unemployment benefits

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34
Q

What are the 5 types of unemployment?

A 
Cyclical
Structural
Frictional
Seasonal
Voluntary
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35
Q

What is cyclical unemployment?

A

Unemployment linked to the economy cycle that occurs due to low levels of AD in the economy during a recession/depression

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36
Q

What is the issue with cyclical unemployment?

A

Dependent on the cycle - unless economic growth occurs, it is hard for it to be reduced

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37
Q

What is structural unemployment?

A

Unemployment that occurs due to a change in the structure of an economy

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38
Q

What are the 3 types of structural unemployment?

A

Sectoral
Technological
Regional

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39
Q

What is sectoral unemployment?

A

Structural employment that occurs due to the decline of a particular industry

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40
Q

What is technological unemployment?

A

Structural unemployment that occurs due to the replacement of certain jobs by automated machinery

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41
Q

What is regional unemployment?

A

Structural unemployment that occurs in a particular region of a country

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42
Q

What is the issue with structural unemployment?

A

Workers need to be adaptive and perhaps need to retrain or relocate

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43
Q

What is frictional unemployment?

A

Short-term unemployment that occurs as people transition from one job to another

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44
Q

What is seasonal unemployment?

A

Temporary unemployment due to workers only being required during a certain season

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45
Q

What is voluntary unemployment?

A

Unemployment from people choosing not to work due to the idea of work or the level of wages

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46
Q

What is the impact of unemployment on output?

A

Levels of output lower than they should be - productive potential not being fully exploited

Output could increase due to increased productivity caused by introduction of new technology

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47
Q

What is the impact of unemployment on the use of scarce resources?

A

Resources wasted, leads to lower national incomes

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48
Q

What are the 5 effects on unemployment on individuals?

A

A fall in income

Lower standard of living

Loss of homes - unable to pay mortgage

Family breakups

Lower self-esteem

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49
Q

What are the 4 effects on unemployment on businesses?

A

Redundancy packages paid to laid-off employees

Demotivation of workers

Spare capacity - unused machinery and desks

Fall in demand - especially for luxury goods

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50
Q

What are the 5 effects of unemployment on the economy?

A

Lower national income - people don’t contribute to the GDP

Wastage of resources

Fall in tax revenues

Increased government spending

Increase in taxes and debt in the long-run

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51
Q

What are the 4 effects of unemployment on the local community?

A

Fall in community spirits

Crime rate increases

Businesses start to struggle - bankruptcy and foreclosure

Community rends to look shabby - areas look run-down

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52
Q

Define ‘balance of payments’.

A

A statistical statement that records an economy’s transactions with other countries relating to international trade

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53
Q

Define ‘exports’.

A

Goods or services produced in one country that are sold in another country

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54
Q

Define ‘imports’.

A

Goods and services brought in from abroad for sale

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55
Q

What does the current account show?

A

The exports and imports between countries over a period of time, usually a year

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56
Q

What are the 3 reasons a country might have a current account deficit?

A

Income - high domestic income = greater ability to spend on foreign imports

Price - domestically produced goods are more expensive

Non-price - Exports may use inferior technology

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57
Q

What are the 2 advantages and 3 disadvantages of a current account deficit?

A

Pros:
Less demand-pull inflation
Financial account surplus

Cons:
Less economic growth
Unemployment increasing
Greater government spending to support unemployment

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58
Q

What are the 6 possible causes of a current account surplus?

A

Weak domestic income growth causing lower demand for imports

Strong growth in foreign countries - higher demand for exports

Exports more competitive than imports quality-wise

Exports more price competitive than imports

Lower rates of domestic inflation

Weak exchange rate

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59
Q

What are the 8 steps in the chain of reasoning for a current account surplus?

A

1) X > M
2) Injections > Leakages
3) AD↑ ((X-M)↑)
4) Economic growth ↑ (export-led growth)
5) Demand-pull inflation pressure
6) More jobs - labour is derived demand
7) Unemployment ↓
8) Increased incomes

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60
Q

Define ‘exchange rate’.

A

Value of one currency in terms of another

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61
Q

What is the effect of a strong exchange rate on the current account?

A

Strong Pound Imports Cheaper Exports Dearer

Worse for net trade - can cause current account deficit

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62
Q

What is the effect of a weak exchange rate on the current account?

A

Weak Pound Imports Dearer Exports Cheaper

Better for foreign trade - can cause current account surplus

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63
Q

What are the 5 business activities that damage the environment?

A 
Mining 
Power generation
Chemical processing
Agriculture
Construction
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64
Q

What are the 4 ways businesses damage the environment?

A

Visual pollution
Noise pollution
Air pollution
Water pollution

65
Q

Name 6 ways the government can reduce environmental damage.

A 
Taxation
Subsidies
Regulation
Fines
Pollution permits
Provision of parks
66
Q

In what 2 ways does taxation help reduce environmental damage?

A

Taxes imposed on those who damage the environment

Helps balance social cost by placing it on those responsible

67
Q

How do subsidies help reduce environmental damage?

A

Grants and tax allowances act as incentives for companies to become more environmentally friendly

68
Q

How does government regulation help reduce environmental damage?

A

Laws, legislations and permits can be put in place to limit the amount of environmental damage firms can make

69
Q

How do fines help reduce environmental damage?

A

Reduces firms’ profits - acts as an incentive to comply to environmental laws

70
Q

How do pollution permits reduce environmental damage (2 steps)?

A

Puts physical quota on how much pollution companies can expel
Money transacted when buying permits can be reinvested into the environment

71
Q

How does the provision of parks help reduce environmental damage?

A

Helps increase number of trees and greenery - especially within urban environments

72
Q

Define ‘income inequality’.

A

The differences in income that exist between different groups of individuals in the economy

73
Q

Define ‘absolute poverty’.

A

Conditions where household income is insufficient to afford basic necessities of life (food, clothing and shelter)

74
Q

Define ‘relative poverty’.

A

When households receive less than 60% of the average median income as their income

75
Q

Give 3 reasons why poverty and inequality need to be reduced.

A

To meet basic needs
To raise standards of living
Ethical reasons

76
Q

Give 3 ways the government reduces inequality and poverty.

A

Progressive taxation
Redistribution through benefit payments
Investment in education and healthcare

77
Q

How does progressive taxation reduce inequality and poverty?

A

Proportion of income paid rises as taxpayer’s income does - places the burden of taxation more heavily on the rich

78
Q

How does redistribution through benefit payments reduce inequality and poverty?

A

Payments help boost incomes of at-risk people in society

79
Q

How does investment in education and healthcare reduce inequality and poverty?

A

Education - people become more employable by learning new skills

Healthcare - affects key indicators: reduces child mortality rates, increases life expectancy and reduces suffering

80
Q

What is fiscal policy and what are its two ‘instruments’?

A

The use of government spending, taxation and no borrowing to achieve macroeconomic objectives
Government spending
Taxes

81
Q

What are the two types of government expenditure?

A

Mandatory spending - pensions, unemployment benefits

Discretionary spending - building new schools and infrastructure

82
Q

What are the two types of taxes used in fiscal policy?

A

Direct taxes - imposed on individuals and firms

Indirect taxes - placed on spending eg. VAT

83
Q

What are the 3 types of taxation?

A

Progressive - more income you earn, the greater the tax

Proportional - everyone pays the same percentage based on their income

Regressive - everyone pays the same tax regardless of income, affects poor more than wealthy

84
Q

Define ‘budget surplus’.

A

When the government’s income is greater than their expenditure

85
Q

Define ‘budget deficit’.

A

When the government’s expenditure is greater than their income

86
Q

State and explain the two types of fiscal policy.

A

Expansionary - lower taxes and increase government spending to boost the economy and increase AD

Contractionary - increases taxes and lower government spending to slow down the economy and decrease AD

87
Q

What is the aim and 6 steps of fiscal policy being used to combat inflation?

A 
Aim: Stable prices
1. Too much inflation - AD growing too fast (Boom)
2 Pursue contractionary policies (FP)
3. Taxation↑, Govt. spending↓
4. Consumer's disposable income↓
5. C↓, AD↓
6. Inflationary pressure is reduced
88
Q

What is the aim and 6 steps of fiscal policy being used to combat a recession?

A 
Aim: Economic growth
1. Recession - low AD (Bottom of the cycle)
2 Pursue expansionary policies (FP)
3. Taxation↓, Govt. spending↑
4. Consumer's disposable income↑
5. C↑, AD↑
6. Economic growth is stimulated
89
Q

What are the 6 steps of fiscal policy being used to combat a current account deficit?

A
  1. Heavy reliance on imports and low exports (M > X)
  2. Domestic incomes are high
  3. Pursue contractionary policies (FP)
  4. Taxes↑
  5. Disposable income↓
  6. Less demand for imports - current account deficit reduced
90
Q

What are the 3 advantages of fiscal policy?

A

Government can stimulate/simmer the economy

Can be localised on areas, industries and income groups that need it the most

Government capital spending can increase quality of factors of production in the economy

91
Q

What are the 3 disadvantages of fiscal policy?

A

Time lags/time gaining approval and effect

Conflicts with other macroeconomic objectives

Can have impacts on the government budget/national debt

92
Q

What 5 factors are used to evaluate fiscal policy?

A

Size of income tax cut - detrimental to standards of living?

Type of tax rise/cut - regressive?

Impact on budget deficit - capacity to spend?

Focus on particular region - benefits everyone?

Consumer confidence - people likely to spend or save?

93
Q

Define ‘monetary policy’.

A

The use of interest rates and the money supply to control aggregate demand in the economy

94
Q

Define ‘interest rates’.

A

The price of borrowing and the reward for saving

95
Q

Define ‘base rate’.

A

The minimum interest rate commercial banks are permitted to lend at

96
Q

What is the effect of the base rate on commercial banks’ interest rates?

A

Base rate ↓, IR ↓

Base rate ↑, IR ↑

97
Q

What are the 6 steps of monetary policy being used to combat low economic growth?

A

1) Economic growth is slow
2) Pursue expansionary policies (MP)
3) Interest rates ↓, Quantitative easing ↑
4) C↑, I↑, (X - M)↑
5) AD↑, GDP↑
6) Economic growth increases

98
Q

What are the 6 steps of monetary policy being used to combat inflation?

A

1) Too much inflation
2) Pursue contractionary policies (MP)
3) Interest rates ↑, Quantitative easing ↓
4) C↓, I↓
5) (X - M)↓, AD↓
6) Inflation is reduced

99
Q

What are the 6 steps of monetary policy being used to combat high unemployment?

A

1) Too much unemployment
2) Pursue expansionary policies (MP)
3) Interest rates ↓, Quantitative easing ↑
4) More attractive to borrow, less attractive to save
5) C↑, I↑, (X - M)↑, AD↑
6) Unemployment is reduced

100
Q

What are the 6 steps of monetary policy being used to combat a current account deficit?

A

1) Economy struggling with current account deficit
2) Pursue contractionary policies (MP)
3) IR↑, QE ↓ - attractive to save
4) M↓
5) (X - M)↑, AD↑
6) Current account deficit is reduced

101
Q

What are the 2 effects of increased interest rates on the economy?

A

Consumers - incentivised to save, less likely to borrow

Firms - reluctant to invest

102
Q

What are the 6 steps of quantitative easing?

A
  1. Electronically created money for Bank of England
  2. Central Bank buys back government bonds from commercial banks, pension funds and insurance firms
  3. Central Bank gives firms more cash to spend
  4. Investment into small firms encouraged - injection into circular flow
  5. Greater investment (I↑) and consumption (C↑)
  6. AD↑
103
Q

What are the 3 advantages of monetary policy?

A

Direct and powerful effect on household spending

Interest rates can be adjusted quickly and frequently

Arguably quicker than fiscal policy

104
Q

What are the 4 disadvantages of monetary policy?

A

Policy trade-offs - trying to achieve one policy will lead to another being unsatisfied

Some time lags in it taking effect

Low interest rates in a deep recession may not work - people lack confidence to spend

Quantitative easing difficult to control - interest rates preferred

105
Q

What 3 factors does the effectiveness of monetary policy depend on?

A

The size of the interest rate increase/reduction

Consumer and investor confidence

Proportion of people affected

106
Q

Define ‘supply-side policies’.

A

Government measures designed to increase aggregate supply in the economy

107
Q

What do supply-side policies aim to do?

A

Improve the quality and quantity of the factors of production

108
Q

What are the four types of supply-side policies?

A

Labour market policies
Incentive-related policies
Product market policies
Capital market policies

109
Q

What are the 3 types of labour market policies?

A

Improving health and education - makes workers more productive and employable

Restoring work incentives for workers

Reducing trade union power/minimum wage

110
Q

What are the 3 types of incentive-related policies?

A

Lowering taxes on work and enterprise - stimulates investment
Incentive to invest in R&D
Incentive to invest in capital

111
Q

What are the 3 types of product market policies?

A

Privatisation - promotes competition by breaking up state monopolies

Deregulation - relaxing regulations that restrict competition

Helping small firms

112
Q

What are the 3 types of capital market policies?

A

Investment in infrastructure
Investment into technology
Investment into R&D

113
Q

What are the 6 advantages of supply-side policies?

A

Achieves economic growth and low/steady inflation without any tradeoff

Encourages R&D - better quality of goods and services, SOL↑

Induces competition

Increases productivity

Encourages innovation

Higher incomes for workers

114
Q

What are the 5 disadvantages of supply-side policies?

A

Some can cause harm to consumers, workers or the environment

Time lags - takes time for benefits to be repeated

Expensive - worsens the government budget

Difficult to get them politically approved

Some can increase income inequality

115
Q

What are the 4 types of policy trade-offs?

A

Inflation vs Economic growth
Inflation vs Unemployment
Economic growth vs Current account deficit
Economic growth vs Environmental damage

116
Q

What are the 6 features of a boom where contractionary demand-side policies are used?

A 
Unsustainably high economic growth
High inflation
Very low unemployment
High current account deficit
Greater environmental damage
Rising inequality
117
Q

What are the 6 features of a recession where expansionary demand-side policies are used?

A 
Low economic growth
Low inflation
Very high unemployment
Low current account deficit
Lower environmental damage
Falling/rising inequality
118
Q

Define ‘free trade’.

A

International trade that is conducted without any restrictions

119
Q

What are the 5 advantages of free trade?

A

Lower prices

Increased choice for consumers

Wider markets for businesses

Provides new job opportunities

Cultural tolerance

120
Q

What are the 4 disadvantages of free trade?

A

Domestic businesses shut down as they can’t compete with MNCs - reduces competition

Overspecialisation

Wastage of resources

Overreliance on imports - current account deficit

121
Q

Define ‘protectionism’.

A

The restriction of free trade/protection against imports

122
Q

What 6 reasons do countries use protectionism for?

A

Preventing a current account deficit (X < M)

Helping infant industries grow

Protecting jobs and small businesses

Preventing ‘dumping’ of foreign goods

Generating government revenue

Offsetting low wage competitions from LDCs

123
Q

Define ‘infant industries’.

A

New industries yet to establish themselves

124
Q

Define ‘dumping’.

A

When an overseas firm sells large quantities of a product below cost in the domestic market

125
Q

What are the 6 disadvantages of protectionism?

A

Retaliation - can lead to trade wars

Unemployment if exports fall - labour is derived demand

May harm LDCs - stops access to rich markets

Loss of choice

Increased cost of production for firms importing raw materials

Cost-push inflation - higher prices

126
Q

What are the 3 types of protectionism?

A

Tariffs
Quotas
Subsidies

127
Q

Define ‘tariff’.

A

A tax on imports

128
Q

How do tariffs reduce the level of imports?

A

Increases the price of imports, incentivising consumers to buy domestically

129
Q

What are the 2 advantages of tariffs?

A

Generates government revenue

Improves current account (X > M)

130
Q

What are the 2 disadvantages of tariffs?

A

Higher prices for consumers

Cost-push inflation

131
Q

What 3 factors does the effectiveness of tariffs depend on?

A

The product taxed
How long it is kept
Size of tariff

132
Q

Define ‘quota’.

A

A physical restriction on how many goods can be imported

133
Q

How do quotas reduce the level of imports?

A

Limits the number of goods imported to a country

134
Q

What are the 2 advantages of quotas?

A

More demand for domestic goods

Economic growth and employment (M↓, AD↑)

135
Q

What are the 2 disadvantages of quotas?

A

Expensive and difficult to monitor

Higher prices and less choice for consumers

136
Q

What 2 factors does the effectiveness of quotas depend on?

A

Size of quota

Type of good it is placed on

137
Q

How do domestic subsidies reduce the level of imports?

A

Reduces the price of domestic goods and makes them more attractive

138
Q

What are the 4 advantages of domestic subsidies?

A

Less likely to lead to retaliation

Improved quality of domestic goods - export-led growth

Increased employment

Improvement of current account

139
Q

What are the 4 disadvantages of domestic subsidies?

A

Costs government money - potential impacts on inflation

Opportunity cost

Takes time to work/not guaranteed

Inefficiency due to overreliance

140
Q

What 3 factors does the effectiveness of domestic subsidies depend on?

A

Size of subsidy
How long it is given for
Which industry receives it

141
Q

What are the 6 factors that affect the demand for a currency?

A 
Demand for exports ↑
Increased FDI in home country
Relatively high interest rates
Relatively low inflation
Increased tourism
Increased speculation of appreciation
142
Q

What are the 6 factors that affect the supply of a currency?

A 
Demand for imports ↑
Increased FDI in foreign countries
Relatively low interest rates
Relatively high inflation
Decreased tourism
Increased speculation of depreciation
143
Q

How does the demand for exports increasing affect the exchange rate? (2 steps)

A

1) Demand for home currency increases

2) Causes currency to appreciate

144
Q

How does the demand for imports increasing affect the exchange rate? (2 steps)

A

1) Increase in demand for imports leads to more supply of home currency available
2) Causes the currency to depreciate

145
Q

How does increased FDI in a country affect its exchange rate? (2 steps)

A

1) Causes demand for home currency to increase

2) Causes currency to appreciate

146
Q

How does increased FDI in foreign countries affect the home country’s exchange rate? (2 steps)

A

1) Domestic companies investing in foreign countries leads to FDI in other countries
2) Causes home currency to depreciate

147
Q

How do relatively high interest rates affect the exchange rate? (2 steps)

A

1) They can attract more “hot money” inflow - demand for currency increases
2) Currency appreciates

148
Q

How do relatively low interest rates affect the exchange rate? (2 steps)

A

1) Can cause “hot money” flow outwards

2) Causes currency to depreciate

149
Q

How does relatively high inflation affect the exchange rate? (3 steps)

A

1) Can cause exports to become less competitive
2) Preference for imports increases
3) Supply of currency increases - depreciation

150
Q

How does relatively low inflation affect the exchange rate? (3 steps)

A

1) Domestic goods become more competitive

2) Demand for exports increases - appreciation

151
Q

How does increased tourism affect the exchange rate? (2 steps)

A

1) Increased demand for foreign currency

2) Appreciation

152
Q

How does decreased tourism affect the exchange rate? (2 steps)

A

1) Tourists leave the domestic economy - increased supply of currency
2) Depreciation

153
Q

How does increased speculation of appreciation affect the exchange rate?

A

1) Demand for currency increases

2) Appreciation

154
Q

How does increased speculation of depreciation affect the exchange rate?

A

1) Supply of currency increases

2) Depreciation

155
Q

Define ‘depreciation’.

A

When one currency gets weaker against another

156
Q

Define ‘devaluation’.

A

When the official exchange rate is intentionally reduced in strength against another currency

157
Q

How does a depreciation of a currency affect the 4 macroeconomic objectives?

A

Economic growth: ↑
Inflation: ↑
Unemployment: ↓
CA: improves

158
Q

How does a depreciation of an exchange rate affect the current account? (3 steps)

A

Weak Pound Imports Dearer Exports Cheaper

Demand for imports decreases, demand for exports increases

(X - M)↑ - current account improves

Edexcel IGCSE Economics - Paper 2 (9 decks)

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