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Economics Theme 2 (Macro) > 2.1 > Flashcards

2.1 Flashcards

1
Q

What does GDP stand for?

A

Gross Domestic Products

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2
Q

What’s the definition for GDP?

A

The standard measure of the value of goods and services in a country during a certain period.

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3
Q

What are the four things an economy needs? (BUGS)

A

B-balanced trade
U-Unemployment to be low
G-Growth to be stable and positive
S-stable Prices (no high inflation)

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4
Q

What’s Macroeconomic Equilibrium? What does it determine?

A

SR macroeconomic equilibrium occurs when SRAS is equal to AD. This equilibrium determines the GPL and RGDP level. Changes (shifts) in SRAS or AD will bring about a range in equilibrium.

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5
Q

What are the three different ways to measure GDP? What do they mean?

A

-Expenditure: Consumption, Gov spending, Investment spending, changes in stock, Ex-Imp
-Factor Income: Jobs/self-employment, profit of public/private businesses, Rental income
-Value of Output: Value added from each sector. Construction, Manufacturing etc….

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6
Q

What does Value Added mean?

A

Increase in Market Value of goods and services during each stage of production of supply. Value Added=Value of Production

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7
Q

What are some examples of low and high value added industries?

A

Low Value Added Industries:
-Mass Produced food/textiles
-Food delivery services
-Industrial farming

High Value Added Industries:
-Info Tech
-Renewable Energy
-Bio-Tech

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8
Q

What is manufacturing?

A

A business that produces tangible goods in factories such as new vehicles/smartphones. (10% of UK GDP and 8%bof all jobs in 2020)

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9
Q

What are Services?

A

e.g. health and social care, hospitality, education etc… (80% of UK economic output and 82% of employment in 2021)

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10
Q

What’s Economic Growth?

A

Increase in Real Value of Goods and Services produced and its measured by annual % change in GDP.

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11
Q

What are the 8 types of ways to measure Economic Growth?

A

GDP
RGDP
GNI
RGDP per capita
Nominal GDP
Green GDP
Purchasing Power Parity
GNHI

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12
Q

What’s Real GDP?

A

Takes inflation into account so makes the data more accurate.

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13
Q

How is Real GDP calculated?

A

Real GDP= Nominal GDPx100/Price index in year

Nominal GDP= Monetary value of natural output of goods and services at current prices

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14
Q

What’s GDP per capita?

A

Real income per head of population

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15
Q

What’s Real Disposable Income?

A

Income after tax deduction and benefits and inflation. Money you have left over to spend on things you don’t neccesarily need (Luxuries)

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16
Q

What’s Gross National Income?

A

Total income earned by a country’s people and businesses, even if it was earned outside the country. It’s a measure of national wealth that can be used as an alternative to gross domestic product

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17
Q

What’s the equation for GNI?

A

GNI= GDP+ net property income from overseas

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18
Q

What’s Purchasing Power Parity (PPP)?

A

Measures how many units of a countries currency are needed to buy the same basket of goods and services bought with a given currency. If Relative cost of living is high e.g. Norway and Scotland then there will be a downward adjustment to the nations PPP which will adjust GNI per capita. Big Mac Index can test this as it compares the process of a big mac in different countries as its available everywhere so is a good comparison.

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19
Q

How do you measure the standard of living?

A

The main indicator for the standard of living is GNI per capita expressed at PPP. Living standards improve when rise in GNI happens. This is known as an inclusive growth.

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20
Q

What’s the benefit of using Real GDP when assessing the changes in living standards?

A

-Its easy to make overtime comparisons by looking at % rate of economic growth.
-Easy to compare different countries.
- Public GDP data is subject to errors when measuring.
-Shadow economy includes illegal activities such as drug production, distribution, prostitution, theft, fraud etc…

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21
Q

What is Gross National Happiness/Economic Wellbeing? What country started it?

A

Measures progress in GNH. It looks at phycological wellbeing, Health, Education, Cultural diversity, Living standards. It started in Bhutan but has now spread to other countries. Typically believed more money will make a person happier.

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22
Q

What’s the equation for GDP per Capita?

A

Real GDP/Population

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23
Q

What’s the equation for GDP per Capita?

A

Real GDP/Population

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24
Q

What are the advantages of using GDP Per Capita to measure Economic Growth?

A

-Gives info about economy size
-Shows economies performance

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25
Q

What are the disadvantages of using GDP Per Capita to measure Economic Growth?

A

-doesn’t show how wealth is spread
-doesn’t take into account the cost of living
-doesn’t consider earnings of illegal workers or volunteering
-only takes money into account

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26
Q

What can affect GDP Per Capita?

A

-Nations population growth
-Tech Progressions
-Illegal immigration as isn’t counted

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27
Q

What’s Real GDP?

A

Real GDP is an inflation adjusted measure that reflects the value of goods and services produced in an economy.

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28
Q

What’s Real GDP used for?

A

It’s used to compare countries economic outputs:

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29
Q

What are the advantages of using
Real GDP to measure Economic Growth?

A

-cross country comparisons
-long term trends
-policy evaluation
-shows economic performance

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30
Q

What are the disadvantages of using Real GDP to measure Economic Growth?

A

-ignores non-market activities (illegal)
-ignores environmental costs
-ignores quality of life
-doesn’t reflect change in economic structure and tech

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31
Q

What’s GNI?

A

Measures total domestic and foreign value added at a given period(usually a year). It’s alternative to GDP as a measure of economy as it calculates income instead of wealth.

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32
Q

What’s the equation for GNI?

A

GNI=GDP+(EX-IM)

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33
Q

What are the advantages of using GNI to measure Economic Growth?

A

-recognises all income in national economy’s whether earned within country or outside
-provides another perpective promoted by GDP. Complete picture of activity

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34
Q

What are the disadvantages of using GNI to measure Economic Growth?

A

-Misleading when comparing countries as doesn’t take into account the population
-only accounts for income and not quality of life
-different currencies will be different so won’t accurately reflect specific country’s purchasing power

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35
Q

What’s the Gross National Happiness Index?

A

It identifies 4 groups of people: Unhappy,narrowly happy, extensively happy and deeply happy.
Measures health change over times and can be tracked alongside GDP.

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36
Q

What are the advantages of using GNHI to measure Economic Growth?

A

-Offers alternative perspective to measure economic growth
-prioritises well-being and sustainability
-Thought provoking method of research

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37
Q

What are the disadvantages of using GNHI to measure Economic Growth?

A

-Happiness Is subjective
-Focuses on traditional Bhutan values
-Only focuses on social and environmental goals
-massive trade off in policies
-Bhutan isn’t a representative index (bias sample)

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38
Q

What is the balance of payements?

A

It’s a stately that records the economic transactions of a country’s residents in a specific period of time. It’s like a receipt as it all of the money coming in and out of the country. The BofP can be in surplus, deficit or balance.

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39
Q

What’s a surplus in the balance of payements?

A

A surplus occurs when the inflows (imports) are greater than the outflows (exports).

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40
Q

What’s a deficit in the balance of payements?

A

A deficit occurs when the outflows (exports) are greater than the inflows (imports).

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41
Q

What’s a balance in the balance of payements?

A

When the inflows and the outflows are the same as they are balanced.

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42
Q

Why do most countries have a balance of payements?

A

Most countries have a BofP because of its importance to national planning and it’s impact on the economic development and policy making.

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43
Q

What are the three comprenants that the balance of payements is split into?

A

Current Account
Capital Account
Financial Account

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44
Q

What’s the Current Account in the Balance of Payements?

A

The transactions involving goods, services, income foreign investments and transfers with other countries. E.g. manufactured goods and raw materials like transport. It includes the transactions covering labour costs which are salaries and also the payements made from one nation to another when importing and exporting.

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45
Q

What’s the Capital Account in the balance of payements?

A

The flows or transactions of cash such as grants and donations for investment purposes. Also records the purchase of non-financial assists such as copyright and trademarks between non-residents and residents.

46
Q

What’s the Financial Account in the Balance of Payements?

A

Records the flow of transactions between residents and non-residents which involve financial assets. E.g. cross-border investments such as subsidiaries, loans and other investments.

47
Q

What are the causes of a current account deficit? What’s a current account deficit?

A

When a country spends more on important than it earns from exports and so it’s unbalanced as the outflows exceed the inflows.
This could be because of:
-An overvalued exchange rate that makes imports cheaper and exports more expensive
- A high economic growth which means the demand increases for imports
-If countries have to borrow money from other world countries then it will lead to deter action in current account positioning.

48
Q

What are the causes of a current account surplus? What’s a current account surplus?

A

A current account surplus means that the country has more exports and incoming payments than imports and outgoing payments to other counteries.
It can be caused by factors such as:
-Low inflation and exchange rates which means a country can export more and so they are in surplus
-Strong demand for a counteries goods and services mean that the country has a surplus
-Government sometimes makes it easier to trade so this means countries export more

49
Q

What are the consequences of a current account deficit?

A

When a country expierences deficiency in its current accounts the demand for goods and services decreases as people have less money to spend. This then slows down the economic growth and as a result can result in unemployment. Means there is lower demand for domestic goods and so this lack of goods leads to a decrease in domestic employment opportunities.

50
Q

What is the consequence of a Current account surplus?

A

With an increased supply of money when a country has a current account surplus it means that the country may have inflammatory pressure. This will lead to low wage growth.

51
Q

What is Purchasing Power Parity (PPP)?

A

It’s the idea that Items should cost the same in different countries based on the exchange rate at the time. It measures how many units of one countries currency are needed to by the same basket of goods/services as can be bought with given amount of another currency.

52
Q

What are some countries that have a high cost of living? How will this affect PPP?

A

In countries such as Norway and Switzerland there is a high relative cost of living soo will have a low PPP and so will be able to buy less with your money.

53
Q

What are some countries that have a low cost of living? How will this affect PPP?

A

In countries such as India there is a low relative cost of living and so PPP will be higher as you can buy more with your money.

54
Q

What’s PPP used for?

A

It’s used to account for the difference in price levels between countries. By adjusting income figures with PPP we can better understand affordability of goods/services in different countries.

55
Q

What’s inflation?

A

A sustained increase in the cost of living or GPL leading to a fall in purchasing power of money.

56
Q

How is inflation measured? (Not an equation)

A

Measured by the annual percentage change in consumer prices.

57
Q

What’s the government set inflation rate and what did they use to set this?

A

2% and it was using the consumer price index (CPI) that this was found out

58
Q

What happens to the general price level when there is deflation?

A

The general price levels fall.

59
Q

What’s disinflation?

A

It’s a fall in the rate of inflation but not sufficient to bring about deflation. Consumer prices are still rising but at a slower price.

60
Q

What’s the consumer price index? What does it measure?

A

It measures inflation. A base year for prices is selected and a family expenditure survey is carried out. It tracks what people are buying from month to month.

61
Q

How many goods and services are in the Consumer price index survey?

A

700 goods and services are used for a representative basket and weight is attached to each item based on its importance. Price is then changed in basket for every time been in. Then price changed are totales to calculate inflation rate.

62
Q

What are the limitations of the consumer price index?

A
  • It’s not fully representative as will be different for non typical households
    -Spending patterns are different with single people compared to people with three children
  • Although price of goods and services may change its probably because of better quality of goods and services.
    -CPI is slow to respond to new products/services because it’s only changed each year
    -Doesn’t account for regional costs of living. Monthly costs of living in Cardiff compared to London will be different.
63
Q

What is CPIH? How is it different to CPI as a measure of inflation?

A

It’s another measure of inflation that includes owners housing costs and costs associated like maintaining, owning and living. It’s different to CPI as it includes Housing costs whereas CPI doesn’t.

64
Q

What are some causes of inflation?

A

-External: Inflationary pressure from countries increase in global price of oil and gas and other commodities.
-Domestic: Inflationary pressures within
Domestic economy such as increase in wages costs and increase in price and costs of component parts and raw materials including energy.
-Importance of inflation expectations: once inflation is established it’s hard to remove
-Cost-Push inflation: Occurs when cost of production for businesses increases. This can bring about stagflation.

65
Q

What’s demand pull inflation?

A

Occurs when total demand for goods and services exceeds total supply. As an economy approaches full employment labour and raw material shortages occur more which makes it harder for businesses to meet rising demand.

66
Q

What’s cost push inflation?

A

When there is rising costs of raw materials, increased labour costs due to higher wages, increased import costs due to a weak pound, and higher indirect taxes imposed by the government.

67
Q

What are the effects of inflation? Both good and bad and who for

A

Inflation affects different groups of stakeholders in different ways.

Can be good for:
- workers with strong bargaining power jobs
-producers price/costs rise to higher profit margins
Can be bad for:
-Retired people on fixed incomes
-workers in low bargaining power jobs
-make country less attractive for foreign investment

68
Q

What do governments target with inflation and why?

A

Many Governments target a low inflation as they believe high 6 can have damaging consequences.

69
Q

What are some risks of inflation? 7 Risks

A

-Inequality: Has bigger effects on low income families in developing countries
-Falling Real Incomes: increased income= lower wages so worse living standards
-Negative real interest rates: If interest on savings is lower then inflation will cut savings
-Cost of Borrowing: Increased inflation leads to higher interest rates and so more debt, higher costs of mortgages etc..
-Risks or wage inflation: Increased labour costs and decreased profit for businesses.
-Business competitiveness: Increased inflation= Decreased competitiveness so will lower demand for exports in overseas markets
-Business Uncertainty: Volatile inflation is bad for a business as they can’t make prediction or Costs and prices are likely to be. This could lead to a fall in capital investment.

70
Q

Effects of inflation depend on?

A
  • Temporary high inflation
    -Other countries inflation
    -whether wage bargaining power is good
71
Q

What are the four types of inflation?

A

Inflation
Disinflation
Deflation
Hyperinflation

72
Q

What is inflation?

A

Is a sustained rise in an economies General Price Level (GPL). This means on average goods and services prices are going up over time.

73
Q

What’s disinflation?

A

A fall in the rate of inflation but not sufficient enough to bring about price deteration. Consumer prices are still rising but at a slower rate.

74
Q

What’s deflation?

A

The general decline of the price level of goods and services. Annual rate of inflation is negative.

75
Q

What’s hyperinflation?

A

Phase of extremely rapid inflation nearly always the result of mass money printing by the government.

76
Q

What’s the Real Price Index (RPI)?

A

A survey that includes 6000 households. It’s a report on what the household has spent and the proportion of their money they’ve spent on each item. Its a measure of inflation, which in turn is the rate at which prices for goods and services are rising.

77
Q

How many households does the CPI use?

A

It surveys 40,000 households.

78
Q

What’s the difference in survey sample size in the RPI and the CPI?

A

RPI includes 6000 households whereas CPI includes 40,000 households soo you could argue CPI is better as shows a bigger sample.

79
Q

What are the main causes of inflation?

A

-Money/credit booms
-Falling in exchange rates
-Higher wage costs
-Higher Indirect Taxes
-Increased energy bills
-Economic Boom

80
Q

What’s unemployment?

A

People who are economically active but not in employment. The number of working age people who are looking for work but can’t find any.

81
Q

To be counted as unemployment what must you be?

A

Of working age and who is willing and able to work and actively seeking work.

82
Q

What are the main reasons for Economic Inactivity?

A

-People who remain in full time education at sixth form, college or university
-People who retire early before the retirement age
-People who have been discouraged from finding work time after time (repeated failure)

83
Q

What’s the Labour Force Survey?

A

The survey asks 60-70,000 Uk households to self-classify as being employed, unemployed or economically inactive

84
Q

What’s the Claimant Count?

A

This counts the total number of recipients of Job seekers allowance (JSA) added to those looking for work to claim universal credit (UC)

85
Q

What are the advantages and disadvantages of using the Labour Force Survey to measure unemployment rate?

A

Advantages:
-Criteria doesn’t change much which shows more accurate changes over time.
-Allows international comparisons
Disadvantages:
-Time consuming
-Expensive
-May be sampling errors/unrepresentative
-Only done quarterly

86
Q

What are the advantages and disadvantages of using the Claimant Count to measure unemployment rate?

A

Advantages:
-Easier
-Cheaper
-Easy to see local and regional differences
-Data is collected monthly
Disadvantages:
-Easy to manipulate by the government
-Many unemployed people who don’t meet the criteria for JSA or UC e.g. under 18s, Anyone who has employed partner, If you have savings- so not fully accurate

87
Q

What hidden unemployment?

A

When people aren’t counted in government as unemployed but don’t have work because they have stopped looking for a job or they work less than they want to.

88
Q

What are the causes of hidden employment?

A

-Many long-term unemployed give up the active search for work and then become economically inactive.
-A large cohort of people leave sidelined onto disability benefits with one or more chronic illnesses (risen since the pandemic)
-A growing number of people are non-employee because they must care for elderly relatives. May have to switch from full to part time employment.
-There has also been a rise in self employment, people working 0 hour contracts and agency work.

89
Q

What’s underemployment?

A

Underemployment is when a purpise has the ability to work longer hours but are working less. E.g. Could work 40 but are working 32. People in lier paid jobs may be looking for extra hours. People might be over-qualifiers for a particular job.

90
Q

What are the Causes of unemployment?

A

Structural
Frictional
Seasonal
Demand deficiency and Cylical
Real wage inflexibility

91
Q

What’s Structural unemployment?

A

Unemployment due to a lack of skills or mobility to find a job. Occurs when industries die out.

92
Q

How significant is structural unemployment? ( Severe, high, moderate, low)

A

severe

93
Q

What’s Frictional unemployment?

A

People talking time off as they switch from one job to another. Not severe as it’s short term. This is why the government targets 4% unemployment and not 0%.

94
Q

How significant is frictional unemployment? ( Severe, high, moderate, low)

A

Low as only short-term

95
Q

What’s Seasonal Unemployment?

A

People working in seasonal roles become unemployed after the season ends. More severe than frictional but still short term.

96
Q

How significant is seasonal unemployment? ( Severe, high, moderate, low)

A

Moderate because short term but more severe than frictional

97
Q

What’s Cyclical Unemployment?

A

Unemployment rising during economic downturn as AD falls. It’s severe during long recessions. Certain industries struggle more than others so certain workers hit harder (e.g. Retail, service)

98
Q

How significant is Cyclical unemployment? ( Severe, high, moderate, low)

A

High

99
Q

What’s Real wage Inflexibility Unemployment?

A

Wages sticking at higher rates causing unemployment. Firms to hire as many staff as they can. Workers struggle to find jobs at lower wage rates and remain unemployed.

100
Q

How significant is Real Wage Inflexibility unemployment? ( Severe, high, moderate, low)

A

High as stops people from getting jobs

101
Q

What are 5 different types of stakeholders?

A

Firms
Employees
Employers
Consumers
Government

102
Q

What are the consequences of high unemployment?

A

-Unemployment is a waste of scarce resources
-Leads to list output, slower growth and potentially a reduction in country’s rate of growth
-large fiscal costs for government with increased welfare benefits and decreased tax revenues
-high long term unemployment can worsen income inequality
-symptom of range of labour market failures

103
Q

What are the economic costs of high unemployment?

A

-lost output and productivity
-reduced consumer spending
-lower tax revenue
-increased gov spending on welfare benefits

104
Q

What are the social costs of high unemployment?

A

-Decreased self-esteem and mental health
-family breakdown
-reduced social mobility
-increased inequality

105
Q

What is invisible and visible trade?

A

Visible Trade-Trade in Goods
Invisible Trade-Trade in Services

106
Q

What is primary and secondary income?

A

Primary Income-Flow of Profits, dividends and interest from uk investments in other counteries
Secondary Income-overseas aid/debt relief

107
Q

What do visible, invisible trade + primary and secondary income all make up?

A

Current Account

108
Q

What must the balance of payements be at the end?

A

0- So it’s balanced

109
Q

What are the Causes of a Current Account Deficit? (Demand Side)

A

-Strong domestic growth
-Recession overseas
-Strong exchange rates (SPICED)

110
Q

What are the Causes of a Current Account Deficit? (Supply Side)

A

-Low investment
-Low productivity
-High relative inflation
-High unit labour costs
-Poor quality
-Depletion or resources

Economics Theme 2 (Macro) (12 decks)

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