2.1 Economic growth Flashcards
(actual) Economic growth
measure of an increase in real GDP
GDP
total amount of goods and services produced in a country in 1 year
potential economic growth
measure of the increase in the productive capacity of an economy (shown by shift of PPF)
recession
when an economy suffers 2 consecutive quarters of negative economic growth
nominal GDP
money value of all goods and services produced by a country in one year
real GDP
nominal GDP adjusted for inflation (can measure volum of output over time)
GDP per capita
GDP divided by a country’s population - (better indicator of living standards)
volume of output
-amount/number of goods produced
value of output
-amount of goods produced (volume) x price sold at
GNI
income received by a country both domestically (GDP) and via net incomes from overseas
Purchasing power parities - PPP’s
the rate at which the currency of one country would have to be converted into that of another country to buy the same amount of goods and services in each country.
PPP exchange rate
-equalises purchasing power of different currencies
-aims of making more accurate standard of living between countries
PPP example - CD costs £10 to buy in UK & $10 in US
exchange rate = £1.00: $1.50
PPP rate = £1.00 : $1.00
this means..
-pound is overvalued
Using GDP to compare standards of living
-can be used to compare over time / between countries - has to be real GDP
-standard of living refers to qol (housing/health/environment/safety)
Quality of life
-is a measure of living standards that takes into account more than income/ GDP
limitation of using GDP to compare standards of living
- different populations not accounted for
-different rate if inflations (not comparable if not adjusted for inflation)
-type of spending by gov (welfare/fiscal)
-doesn’t show income inequality/ wealth gap
-quality of g/s not reflected
-hidden economy unaccounted
absolute poverty
-household income below necessary level to maintain a basic living standard ($2.00)
National happiness
-some govs take national happiness surveys given limitations of GDP
-uk - regular surveys about well-being
-measure strongly related to aspects of QOL (e.g health)
-attempt to measure subjective happiness
relationship between real income and subjective happiness
-positive relationship
-once income beyond marginal gains it plateus/falls
-Easterlin paradox
- policy as a result form paradox shows govs should focus on other measures (e.g macroeconomic objectives) , not just economic growth
Inflation
-sustained rise in general price level
deflation
-sustained fall in general price level
disinflation
-fall in the rate which the general price level is rising
CPI (consumer Price Index)
-a measure of the average change over time in the prices paid by consumers for a weighted average basket of goods and services
CPI usefulness
-used to measure inflation (changes in CPI)
-cane be used to make international comparisons of rates
-CPI is an index number -shown as a % relative to base year(100)
formula CPI
change/original x100
CPI calculated
-ONS collects prices on 710 products from 20,000 locations
-data collected once a month
-weights assigned to each avg household item bought
-price change x weights = give price index
-inflation rate = % change of index
weights
-proportion of income spent on items
-shows impact of price change on avg household spending
limitations of CPI
-doesn’t include housing costs (mortgage interest/rent/council tax)
-sampling - generalised /not representative of population
-spending patterns not reflected
CPIH
-preferred measure of inflation by ONS
-extend the CPI to include owner occupiers housing costs and council tax
Retail price index (RPI)
-Does include payments on mortgages but isn’t as reliable as the CPI for international comparisons
-calculate the cost of a typical basket of goods the difference in price for this basket from one year to the next gives rates of inflation
-housing costs included
Demand pull inflation
Occurs when aggregate demand in the economy increases at a faster rate than aggregate supply therefore causing inflationary pressure
Cost push inflation
occurs when aggregate supply decreases i.e the. total costs of production increases
Causes of demand pull inflation
-A decrease in interest rates
-rise in the level of business and consumer confidence
-an increase in gov spending
-exports rising relative to imports
-depreciation of the exchange rate - increasing demand for exports and reducing demand for imports
Causes of cost push inflation
-Arise in oil prices and/or raw materials
-fall in the exchange rate making imports more expensive -rise in taxes on businesses
-increase in the minimum wage or wages
-increased regulations E.g. environmental health safety that increase costs
monetarism
based on the belief that inflation is always a problem of too much money in the economy
Inflation effects on consumers
(SAY RATE OF INFLATION)
-for those on fixed incomes - inflation mean REAL income decreases so PP would decrease
-REAL value of savings decreases - if inflation rate higher than interest rate of savings
- REAL value of loans fall = more manageable -if Inflation higher than interest rates on loans
-if inflation rising faster than wages in nominal terms = worse off
Inflation effects on firms
-fall in exports - if inflation higher than its trading partner , international competitiveness will fall as firms exports become more expensive in foreign markets and imports seem cheaper weakening trade balance
-uncertainty - high inflation makes it difficult for firms to set budgets -low animal spirits - fall in investment
-lower profits - cost-push inflation = decrease in profits
-impact on monetary policy - high inflation = MPC could increase interest rates - investment may fall - (TIGHT MONETARY POLICY)
-some inflation allows firms to increase revenue if demand-pull = inc profits = encourage to reinvest
Inflation effects on govs
-fall in real value of national debt - inflation reduce value of debt
-increased inequality - inflation= more difficult for lower income households with fixed incomes widening inequality gap
-weakened trade balance - fall in exports/increase in imports (see firms
-unemployment - low inflation - low demand high unemployment
Tight Monetary policy
-Monetary Policy Comittee (MPC)
-reduces rate of inflation
-by raising interest rates
-reversing QE
-makes it more difficult for firms and consumers to borrow money.
employment rate
- no. of people in work as a % of the working age population
International Labour Force survey / UK Labour force survey (lazy fuckers survey)
-sample households - 60,000 h - 100,000 people
-16-65 if out of work over last 4 weeks and available to start in 2
-international comparison - International labour organisation
Claimant Count
-no. of people claiming benefits
-from Jobseekers Allowance (JSA) or Universal Credit (UC)
-criteria - not everyone eligible / some don’t claim
-only UK no - international comparison
Unemployment
-when a person of working age (16-65) is actively seeking for employment and is unable to find work
-can be measured as a level or a %
-not a static concept
labour force
economically active between 16-65 who are either employed and underemployed
underemployment
-includes individuals who are seeking or available for additional work
-ONS measures measures this all the workers wanting to work more hours and available to start in 2 weeks
-OECD also includes to people who are working in jobs where skills are not adequantly utilised i.e overqualified
benefits of increasing in employment rate
-increased GDP - higher employment- higher productivity - higher output
-increased revenues and profits for firms
-increased incomes -inc living standards
-improved skills - of workers (human capital)
-higher gov taxation revenue - more people pay tax and spend more VAT
human capital
-the knowledge and skills of a workforce and determine its productivity
-can be improved by education & training
effects of decrease in unemployment rate
-fall in gov spending by JSA / UC
-increased employment
-job market becomes less flexible (fewer workers for employers to choose from)
economically inactive
- refers to people not in education, employment or training and who are not actively seeking work within the last 4 weeks and who are unavailable to work within the next 2 weeks
-includes students / stay at home parents / retired early/ too sick to work
increase in inactivity rate
- productive capacity of country will fall
-there may be more claims on state benefits - the dependency ratio will increase
-however if increase due to more people in higher education , likely to result in an increase in skills for future workforce
dependency ratio
-the number of inactive people that active and employed people are supporting, directly or indirectly
causes/ types of unemployment
- cyclical
-structural
-frictional
-seasonal
-classical/real wage inflexibility
-voluntary
cyclical unemployment
-lack of spending in the economy/recession means that people out of work - expect this type of employment in a recession
-High unemployment as firms produce less due to lack of demand
Structural unemployment
-Where industries are in decline and Waka skills are becoming obsolete (out of date)
- due to lack of transferable skills/tech changes
Frictional unemployment
Where people are between jobs (two weeks)
Seasonal unemployment
Where people are out of work for some periods of the year for example ski instructors in summer
Classical or real wage inflexibility unemployment
-Where there are problems with the supply side of labour E.G minimum wage is too high above & equilibrium wage
-therefore firms need to reduce the cop and let some workers go
Migration
Refers to the movement of people i.e immigration/immigration
Net migration
Overall balance - number of immigrants minus emigrants
Immigration
When people enter the country for a long term stay
Emigration
When people exit a country for long-term stay in another country
Reasons for migration
-Employment / education
-higher income
-QOL
-join other family members
-escape conflict
-avoid high tax
-remittances (migrate to send money back home)
-environmental
Significance of migration
-Fill vacancies in the workforce increasing employment
-may displace other people from their work -unemployment rate may rise
-public finances migrants who work pay tax
-remittances - affect the current account of the balance of payments/doesn’t contribute to GDP
Significance of skills for employment/unemployment
-Highly skilled workforce is likely to be more productive = economic growth
-earnings of highly skilled workers likely to be more than unskilled
-highly skilled workers are less likely to be unemployed/they have more stable and secure employment
-this all means income inequality and poverty are likely to be lower than if there was a large larger proportion of unskilled workers
Effects unemployment on consumers
-Decrease in living standard
-loss of consumer confidence
-danger of mental illness
-fall in personal wealth
-Loss of skills
-lower living standards
-loss of income
Effects of unemployment on firms
-Easier to recruit new employees
-less consumer spending so revenues and profits fall
-surplus labour means firms can reduce COP by holding wage down
Effects of unemployment on government/society
I-ncrease spending on welfare benefits
- less revenue from income tax/indirect taxes
-opportunity cost: g/s that could’ve been produced by unemployed workers
-inequality may increase- may increase other factors like crime
Balance of payments
Record of all financial transactions between economic agent of a country and all the other countries
Balance of trade
Trade in goods balance + trade in services balance
( g exp- g imp) + (s exp -s imp) *value of …
The current account
Records payments for transactions between countries in the present year
-balance of trade + investment income + current transfers
-Investment Income: earnings of foreign investments - payments made to foreigners
-current transfers: transfers money/goods/services e.g aid
Current account surplus
Occurs when more money is flowing into the country than out
-positive value
Current account deficit
Because when more money is flowing out of the country than in
-negative value
Causes of a current account deficit
-Currency too strong -less internationally competitive- G/S cheaper abroad
-High rate of inflation
-high wage costs
-high rate of economic growth (more imports)
Causes of a current account surplus
-Currency two weak - more internationally competitive exports attractive
-low rate of inflation
- low-wage costs
-low rate of economic growth (less imports)
Relationship current account and macro economic objectives
-Persistent current account deficit country’s goods uncompetitive increasing level of unemployment = fall in rate of economic growth
-not true if deficit caused by lower exports due to boom and high spending/imports = fall in countries exchange rate increase imports maybe inflationary
International trade causes
-Interconnectivity
-interdependence e.g. global supply chains
-flow of resources
-may be beneficial because it reduces costs and promotes corporation can result in trade blocks which can be unfair
