2.1 Flashcards
Define macroeconomics
the study of interrelationships between economic variables at an aggregate (macroeconomic) level.
What is meant by GDP?
stands for Gross Domestic Product, it is the measure of all economic activity over a period.
What are the four different ways of measuring performance in an economy?
Economic growth, unemployment, inflation, balance of payments (trade)
Define economic growth
the % change in GDP over a time period
Define nominal GDP
the value of GDP based on current prices, taking no account of changing prices through time
Define real GDP
an estimate of the volume of GDP taking account of changing prices through time
what is an index number
a device for comparing the value of a variable in one period or location with a base observation
define potential economic growth
an expansion in the productive capacity of the economy
what is gross national income (GNI)
GDP plus net income from abroad
what is actual economic growth
the rate of growth of real GDP in a period
what is the trade (business) cycle
a phenomenon whereby GDP fluctuates around its underlying trend, following a regular pattern
what is meant by seasonal adjustment
a process by which seasonal fluctuations in a variable are smoothed to reveal the underlying trend
Name some advantages of GNI
- It is relatively straightforward and widely understood
- It is a well established indicator and one that is available for almost every country in the world, so that it can be used to compare income levels across countries
What is GNI per capita
the average level of GNI per head of population
what are purchasing power parities
It adjusts GDP to take into account different costs of living, so is a more accurate way of comparing living standards across countries
Name some limitations of GDP
- Doesnt include the informal economy
- Goods sold and not declared - black market
- increased GDP does not always increase welfare
what is meant by inflation
the rate of increase in the general price level in an economy
what is meant by deflation
the rate of decrease in the general price level (negative inflation)
what is meant by disinflation
a fall in the rate of inflation (the price level is still rising, inflation is still positive)
How do we calculate Consumer Price Index (CPI)?
- Consumer expenditure survey, done once a year, and 700 goods to be included in the basket and weights (% of income spent on each item)
- A price survey is collected - 100000 prices - monthly from 150 different locations in UK
- an index is created using the weights of each item, and this tracks the price level of all goods in the basket and a comparison is made to the base year, using % change, when the index number is 100.
What is meant by a base year
the year with which the changes are compared to
what is a weight
Reflects the relative importance of the item (eg in a price index the weight will depend on the % of total spending on the item)
what is weighted index
an index number where the relative importance of the item is taken into account when calculating the average change
what is meant by CPI inflation?
consumer price index, a measure of the general level of prices in the UK, the rate of change of which has been used as the government’s inflation target
why do the items in the basket of goods have to be updated every year?
as changes in the consumption patterns of households need to be accomodated if the index is to remain representative
how do you calculate unemployment rate
(unemployed/active labour force) x 100
how do you calculate employment rate
employed / population ages 16-64
how do you calculate active labour force
employed + unemployed
what is meant by employment
people over the age of 16 who did more than one hour of paid work a week
what is meant by unemployment
people over the age of 16, without a job, who have actively sought work in the last four weeks, and who are available to work in the next two weeks
what is meant by inactivity
people who are not in employment who have not sought employment in the last four weeks, and/or are not available to work in the next two weeks.
what is meant by unemployment level
total number of people over 16 who are looking for work and are available for work but cannot find work
what is meant by unemployment rate
the % of people in the economically active population who are not in work
what is structural unemployment
caused by the decline of an industry
what is frictional unemployment
caused by the time it takes to find a job once one has been lost - i.e. the people in between a job
what is seasonal unemployment
when people are unemployed at certain times of the year e.g leisure and tourism
what is voluntary unemployment
when someone chooses not to take a job at the current wage rate e.g because of welfare benefits, or the job is below their skill level
what is involuntary unemployment
when someone is willing and able to work, but cannot find a job
what are discouraged workers
people who have been unable to find employment who are not looking for work, for a variety of reasons.
what is full employment
a situation where people who are economically active in the workforce and are willing and able to work are able to find employment
what is Claimant Count
the number of people aged 18-65 claiming Job Seekers Allowance each month
what is ILO (international labour organisation)
a measure of the % of the workforce aged 16+ who are without jobs but are willing and able to work in the next two weeks
why might ILO > Claimant Count?
- some people are looking for work, but not claiming benefits so counted in ILO, but not in CC
- ILO is over 16, CC is over 18
What is underemployment
where an individual is employed in a second choice occupation, or is only able to work part time but would like to work full time
what is cyclical unemployment
unemployment that arises during the downturn of the economic cycle, such as a recession
what is demand-deficient unemployment
unemployment that arises because of a deficiency of aggregate demand in the economy, so that the equilibrium level of output is below full employment
what is real wage inflexibility
an argument that if real wages do not adjust downwards the result would be persistent unemployment
name some advantages of migration
- increase in the labour force
- increase in consumer spending
- can fill skilled gaps if migrants are skilled
- can reduce pressure if migrants employed in NHS, school etc
- dependency ratio rises
name some disadvantages of migration
- dependency ratio falls
- can decrease wages in lower paid jobs
- can displace domestic workers
- can put pressure on public services
what are the impacts of unemployment on workers
falling incomes, depression, poverty, health problems, poor standard of living, debt problems
what are the impacts of unemployment on the economy
crime (negative externalities)
higher fiscal deficit as tax revenues fall and welfare payments rise
income inequality
loss of workers to foreign countries
what are the two causes of unemployment
- Demand side factors:
- the demand for labour from firms
- factors include health of firms, confidence of firms, overall strength of economy etc
- Supply side factors:
- the supply of labour by workers
- factors include labour market inflexibility, skills of workers, occupational and geographic mobility of workers
consequences of unemployment - social issues
- high levels of unemployment can be associated with increasing crime rates etc
- these cost the government through expenditure on policing and also give rise to negative externalities
consequence of unemployment - reduced output
- if unemployment is not due to workers being replaced with capital, it is likely that real GDP will fall with increased unemployment
- reduced confidence and multiplier effects could magnify the negative impact upon an economy
consequences of unemployment - fiscal issues
the government would recieve less income tax and so would not have as much revenue to invest in public services to address the problems caused
increase in gov spending from unemployment benefits
what is meant by hysterisis?
the history of a system affects the future of the system
define dependency ratio
the ratio of people who are economically active as a proportion of all people of working age
what is meant by balance of payments
a financial record of all the trade between one country and the rest of the world
what is meant by imports
currency flowing from the UK to overseas - a debit item
what is meant by exports
currency flowing from the overseas to the UK - credit item
what is meant by current account of the balance of payments
an account identifying transactions in goods and services between the residents of a country and the rest of the world
what is meant by capital account of the balance of payments
an account identifying transactions in (physical) capital between the residents of a country and the rest of the world
what is meant by financial account of the balance of payments
an account identifying transactions in financial assets between the residents of a country and the rest of the world
explain why the overall balance of payments must always balance (zero)
because in some way or other we have to pay for all we consume and receive payment for all that we sell
what is meant by a surplus and deficit in balance of payments
surplus - a positive balance on the financial account
deficit - a negative balance on the current account
What might cause a current account deficit or surplus?
Deficit: - lack of international competitiveness - high exchange rate - domestic incomes rising Surplus: - high international competitiveness - domestic incomes rising - low exchange rate
what is cost push inflation
when there is an increase in the price level due to an increase in costs of production , which shifts SRAS to the left
what is demand pull inflation
when an increase in AD causes inflation, which then leads to workers negotiating higher wages, which decreases SRAS
