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Economics > 2.1 Government and the Economy > Flashcards

2.1 Government and the Economy Flashcards

1
Q

Budget deficit

A

amount by which government spending is greater than government revenue

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2
Q

Macroeconomics

A

study of large economic systems such as those of a whole country or area of the world

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3
Q

Microeconomics

A

study of small economic systems that are part of national or international systems

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4
Q

Economic growth

A

increase in the level output by a nation

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5
Q

6 Macroeconomics objectives

A
  • reducing unemployment
  • protect the environment
  • balance of payments
  • economic growth
  • controlling inflation
  • restribution of income
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6
Q

Which objective of macroeconomics is the most important?

A

ECONOMIC GROWTH

this means that the government introduces policies designed to help grow incomes, output and employment of the economy. However, the government needs to ensure they are not increasing prices when doing so and that imports are not significantly greater than exports

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7
Q

National income

A

value of income, output or expenditure over a period of time => as economies grow this will rise

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8
Q

Gross domestic product (GDP)

A

market value of all final goods and services produced in a period (usually yearly), an internationally recognised measure of national income => used to measure national income

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9
Q

7 Limitations of GDP as a measure of growth

A
  • inflation (price increases can mean growth rates are misleading)
  • population changes (population growth is needed to be taken into consideration when calculating growth)
  • statistical errors (gathering the data needed to measure GDP is complicated. The government collects millions of documents from firms, indivisuals and other organisations so errors can be made as some can be inaccurate or left out)
  • the value of home produced goods (some goods or services are not traded so economic activity is not recorded. So the value of national income is underreported)
  • the hidden economy (sometimes people may do a variety of jobs for cash and not record transactions. e.g. a friend may drive a family to an airport for $25)
  • GDP and living standards (GDP is used to measure living standards. But, just because GDP rises, it does not automatically mean living standards rise. Other factors need to be taken into account such as: the amount of leisure time or quality of goods or services)
  • external costs (GDP does not take into account external costs such as environmental costs. As a result, GDP does not measure how these costs impact the well-being of society)
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10
Q

Economic cycle

A
  1. boom
  2. downturn
  3. recession
  4. recovery
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11
Q

Boom

A

peak of the economic cycle where GDP is growing at its fastest

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12
Q

Depression or slump

A

bottom of the economic cycle where GDP starts to fall with significant increases in unemployment

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13
Q

Downturn

A

period in the economic cycle where GDP grows, but more slowly

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14
Q

Recession

A

period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in 2 successive quaters

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15
Q

Impact of a BOOM on the economic cycle on growth, employment and inflation

A
  • during the boom, GDP is growing the fast because the economyis performing well
  • existing firms will be expanding and new firms enter the market
  • demand will rise, more jobs created, wages rise and profit by firms rise
  • but prices may also be rising
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16
Q

Impact of a DOWNTURN on the economic cycle on growth, employment and inflation

A
  • a boom is followed by a downturn
  • the economy is still growing but at a slower rate
  • demand for goods and services will stop increasing or begin to fall, unemployment will start to rise and wages increases will slow down
  • many firms stop expanding, profits may fall and some fiirms will leave the market
  • prices rises slowly
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17
Q

Impact of a RECESSION/DEPRESSION on the economic cycle on growth, employment and inflation

A
  • at the bottom of the economic cycle, GDP may fall flat
  • if GDP starts to fall, the bottom of the cycle may be referred to as a depression or slump. Such period is often associated with widespread poverty
  • demand will start to fall for many goods and services - in particular the non-essentials
  • unemployment rises sharply, business confidence is low, bankrupcies rise and prices become flat
  • prices may even fall
  • a less severe version of a depression is a recession
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18
Q

Impact of a RECOVERY on the economic cycle on growth, employment and inflation

A
  • when GDP rises again, there is a recovery or a upswing in the economy
  • businesses and consumers regain their confidence and economic activities increase
  • demand starts to rises, unemployment begins to fall and prices start to rise again
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19
Q

6 Impacts of economic growth

A
  • employment
  • standard of living
  • poverty
  • productive potential
  • inflation
  • the environment
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20
Q

Explain the impact of economic growth on EMPLOYMENT

A

economic growth is the result of businesses generating more output. As businesses produce more, they need more workers. Thus, reduces unemployment. Governments also tend to spend more during times of economic growth so will create more jobs

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21
Q

Explain the impact of economic growth on STANDARD OF LIVING

A

increase in GDP means people have more income. With more disposable income, people can buy more goods and services. Also, as the economy grows, it is possible to spend less time working because there are significant improvements in efficiency. Finally, with economic growth, people can live longer as people can afford healthier diets and there has been advances in technology => helps increase life expectancy, improving life expectancy

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22
Q

Explain the impact of economic growth on POVERTY

A

economic growth in developing countries has helped reduce poverty. Expansion of existing businesses and the development of new businesses creates job to which will be taken by the poor. In addition, a growing economy means that the government is able to collect more tax revenue so the government can spend on services. Extra government spending is often targetted to help reduce poverty

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23
Q

Explain the impact of economic growth on PRODUCTIVE POTENTIAL

A

growth can raise productive potential of a country which means they can produce more goods and services. This can be shown on a PPC curve

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24
Q

Explain the impact of economic growth on INFLATION

A

if economic growth is too fast, the economy can overheat causing inflation which is bad for the economy

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25
Q

Explain the impact of economic growth on the ENVIRONMENT

A

environmental groups believe that the benefits of growth are lower than the costs generating growth. For example, more cars or flights are taken which contribute to the greenhouse gases causing global warming. Also, growth uses up non-renewable resources such as oil or gas which after being used, cannot be replaced. This means future generations will have fewer resources => referred to as unsustainable growth

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26
Q

Overheat

A

if an economy overheats, demand rises too fast, causing prices and imports to rise, a situation that governments may try to correct by raising taxes and interest rates

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27
Q

Unsustainable growth

A

economic growth that is not possible to sustain without causing environmental problems

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28
Q

Inflation

A

rate at which prices rise, a general and contributing rise in prices

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29
Q

Deflation

A

period where the level of aggregate demand is falling

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30
Q

Aggregate demand

A

total demand in the economy including consumption, investment, government expenditure and export minus imports

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31
Q

Consumer price index (CPI)

A

measure of the general price level (excluding housing costs)

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32
Q

Retail price index (RPI)

A

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

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33
Q

What are the 2 types of inflation?

A
  1. demand-pull inflation
  2. cost-pull inflation
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34
Q

Demand-pull inflation

A

inflation caused by too much demand in the economy relative to supply

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35
Q

What is demand-pull inflation caused by?

A
  • rising consumer spending encouraged by tax cuts or low interest rates
  • sharp increases in government spendings
  • rising demand for resources by firms
  • booming demand for exports
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36
Q

Cost-push inflation

A

inflation caused by rising business costs

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37
Q

Interest rates

A

price paid to lenders for borrowed money; it is the price of money

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38
Q

Monetarists

A

economists who believe there is a strong link between growth in the money supply and inflation

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39
Q

The relationship between inflation and interest rate

A

monetarists believe that there is a strong link between inflation and growth in money supply. The money supply is the stock of notes and coins, bank deposits and financial assets in the economy.

Inflation may be caused when households, firms and the government borrow more money from banks to fund extra spending. This adds to the money supply as there are now more bank deposits (borrowed money increases bank balances).

The extra money lent by the banks create more demand and prices go up. This type of inflation is more likely to happen if interest rates are low because borrowing is likely to increase when they are low.

But if interest rates rise, borrowing will fall as it becomes more expensive, less supply of money and demand falls. As a result, pressure on prices are relieved and inflation falls.

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40
Q

9 Impacts of inflation

A
  • prices
  • wages
  • exports
  • unemployment
  • menu costs
  • shoe leather costs
  • uncertainty
  • business and consumer confidence
  • investment
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41
Q

Explain the impact of PRICES by inflation

A

inflation makes prices rise so reduces the purchasing power of money. This means that people cannot buy as much with their income. Therefore, households will experience a fall in their living standards unless incomes rise faster than prices, it may not become a problem

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42
Q

Purchasing power of money

A

amount of goods and services that can be bought with a fixed sum of money

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43
Q

Explain the impact of WAGES by inflation

A

when prices are rising, workers need to increase their wages to compensate for the loss of purchasing power. If workers can negotiate higher wages with their employers, they will get more money. However, as a result of higher wages, firms may need to raise their prices as costs have risen. If this pattern is repeated, a wage/price spiral develops. So demand for higher wages when their is inflation can cause conflict between employers and trade unions which could result in a strike and both workers and firms would lose out

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44
Q

Explain the impact of EXPORTS by inflation

A

if inflation is higher at home than in other countries, firms may find it difficult to sell in overseas markets. Because the prices for exports will rise so demand for exports fall which means that the balance of payments is affected negatively. Falling demand may result in job losses for those people employed by businesses that sell abroad

45
Q

Explain the impact of UNEMPLOYMENT by inflation

A

high levels of inflation usually mean that aggregate demand is rising. As a result, firms will be keen to increase output since the prices goods is increasing. This means that firms will need to recruit more workers, which reduces unemployment.

However there can be times where the government intervenes where they want to reduce inflation so needs to accept the high levels of unemployment

46
Q

Explain the impact of MENU COSTS by inflation

A

if inflation is rapid, firms will have to increase their prices frequently. This will cost money as firms need to make new brochures, update website and inform sale staff => called menu costs because, for a restaurant, when prices are increased a new menu has to be printed

47
Q

Menu costs

A

costs to firms of having to make repeated price changes

48
Q

Explain the impact of SHOE LEATHER COSTS by inflation

A

when prices change frequently, consumers and firms will have to spend more time looking forthe lowest price or the best value for money => this involves “shopping around” which is a cost because it takes time and wears out the leather on your shoes so are called the shoe leather costs inflation

49
Q

Shoe leather costs

A

costs to firms and consumers of searching for new suppliers when inflation is high

50
Q

Explain the impact of UNCERTAINTY by inflation

A

if inflation is high and varying, firms will not be able to predict what prices will be. This makes decision making and investment decisions difficult for firms to plan for the future as these decisions will affect them in the long term

51
Q

Explain the impact of BUSINESS AND CONSUMER CONFIDENCE by inflation

A

the uncertainty caused by inflation may effect their confidence.

e.g. if consumers are anxious about inflation, they may become cautious => less willing to borrow money and spend their income on goods or services. So they save up more which will reduce demand affecting the economy

businesses may postpone plans for growth or reduce spending on product development => not confident so no taking risks

If hyperinflation exists, it increases the worries of businesses and consumers and could be able to destabilise an country

52
Q

Hyperinflation

A

very high levels of inflation; rising prices get out of control

53
Q

Explain the impact of INVESTMENT by inflation

A

inflation causes a decline in business investment because it requires spending lots of money now in hope of returns in the future. Uncertainty about future prices by inflation, lack of confidence among decision makers, investment projects are likely to be postponed or cancelled => negative growth and affect employment in the economy

54
Q

Transactions

A

payment, or the process of making one

55
Q

Unemployment

A

when those actively seeking work are unable to find a job

56
Q

How is unemployment measured?

A

survey (used in EU) is called the Labour Force Survey (LFS) and is carried out every month. In the survey, the International Labour Organisation (ILO) defines unemployment => people without a job and those out of work. This definition is used internationally so that comparisons can be made

57
Q

Laying off

A

to stop employing someone because there is no work for them to do

58
Q

5 Types of unemployment

A
  • cyclical or demand deficient unemployment
  • structural unemployment
  • seasonal unemployment
  • voluntary unemployment
  • frictional unemployment
59
Q

Cyclical or demand deficient unemployment

A

unemployment caused by falling demand as a result of a downturn in the economic cycle.

this is linked to the economic cycle. When an economy moves from a boom into a downturn, business activity slows down and people are laid off. This will continue to worsen if the economy goes into a recession or depression. People lose their jobs because demand for goods and services fall so firms start laying off workers

60
Q

Structural unemployment

A

unemployment caused by changes in the structure of the economy such as the decline in an industry.

over time, the structure of the economy changes which can cause structural unemployment

61
Q

What are the 3 main types of structural unemployment?

A
  • sectorial unemployment (when people are laid off because the industry is declining)
  • technological unemployment (when jobs that were previously done by people are now done by machines)
  • regional unemployment (unemployment in a particular country is not likely to be te same in all regions)
62
Q

Seasonal unemployment

A

unemployment caused when seasonal workers, such as those in the holiday industry, are laid off because the season has ended

63
Q

Voluntary unemployment

A

unemployment resulting from people choosing not to work.

they may choose not to work because they are not prepared to work for the wages offered or as they do not like the idea of working in general

64
Q

Frictional unemployment

A

when workers are unemployed for a short period of time as they move from one job to another

65
Q

8 Impacts of unemployment

A
  • output
  • use of scarce resources
  • poverty
  • government spending on benefit
  • tax revenue
  • consumer confidence
  • business confidence
  • society
66
Q

Explain the impact of OUTPUT by unemployment

A

if people are unemployment, the productive potential of a country is not fully being exploited. As a result, the level of output is low so the national income and living standards will be lower. But, if employment was caused by development of new technology, output will not fall

67
Q

Explain the impact of USE OF SCARCE RESOURCES by unemployment

A

people who are out of work does not make any contribution to production. This is a waste of resourcesand so result in lower levels of national income

68
Q

Explain the impact of POVERTY by unemployment

A

in some developing countries, many people have never worked in their lives because of the few opportunities so may only support themselves at a minimum level of growing crops.

even in developed countries, most people find themselves without a job. Their income fallsbecause state benefits are generally lower than wages. In some extreme cases, unemployed lose homes as they cannot afford mortgage payments

69
Q

Explain the impact of GOVERNMENT SPENDING BENEFITS by unemployment

A

in most developed countries, when people are unemployed they are entitled to recieve some financial benefit from the state. If unemployment levels rise, the government has to allocate more money to unemployment benefit => opportunity cost

70
Q

Explain the impact of TAX REVENUE by unemployment

A

when unemployment rises, tax revenue falls because most taxes are linked to income and spending. This means the government has to spend less and so may have to cut off some public sector services. Alternatively, they may borrow more money, increasing national debt or may have to increase tax rates

71
Q

Explain the impact of CONSUMER CONFIDENCE by unemployment

A

during a time of high unemployment, consumer confidence is likely to fail. Their incomes falls because state benefits are generally lower than wages. As a result, these people loose confidence and play a less significant role in the economy. Also, people who remain employed start to worry about their own job security affecting confidence negatively. They become more cautious, which will result in lower levels of spendingand probably more unemployment

72
Q

Explain the impact of BUSINESS CONFIDENCE by unemployment

A

when firms lay off workers they have to pay them redundancy money. Also, the remaining workers may get demotivated as they may fear that they will be next to be made redundant. Sales are likely to fall for businesses when unemployment starts to rise in the economy as people have less to spend. Along with this, it may reduce the confidence of business decision makers. As a result, they are less likely to take risks and may postpone or cancel investment projects

73
Q

Explain the impact of SOCIETY by unemployment

A

sometimes unemployment can have an impact on local and wider communities

e.g. unemployment may lead to an increase in crime as people still need nessessities in life and so may need to do so to meet their material needs

74
Q

Balance of payments

A

record of all transactions relating to international trade

75
Q

Capital and financial account

A

that part of the balance of payments where flows of savings, investment and currencies are recorded

76
Q

Current account

A

part of the balance of payments where all exports and imports recorded

77
Q

Exports

A

goods and services sold overseas

78
Q

Imports

A

goods and services bought from overseas

79
Q

The current account on the balance of payments

A

goods and services are sold and bought overseas. So a country will keep a record of all transactions relating to international trade => this is called the balance of payments which is divided into 2 parts:

  1. current account
  2. capital and financial accounts
80
Q

Current balance

A

difference between total exports and total imports (visible and invisible)

this can be in DEFICIT or SURPLUS

81
Q

Current account deficit

A

when value of imports exceeds the value of exports

82
Q

Current account surplus

A

when value of exports exceeds the value of imports

83
Q

Balance of trade or visible balance

A

difference between visible exports and visible imports

84
Q

Invisible trade

A

trade in services

85
Q

Primary income

A

money received from the loan of production factors abroad

86
Q

Secondary income

A

government transfers to and from overseas agencies such as the EU

87
Q

Visible trade

A

trade in physical goods

88
Q

Beneficiary

A

someone who gets advantages from an action or change

89
Q

Exchange rate

A

price of one currency in terms of another

90
Q

Relationship between the current account and exchange rates

A

the pattern of international trade can be influenced by changes in exchange rate.

if a country’s exchange rate gets stronger (which means 1 unit of currency can buy more units of another currency), exports become more expensive and imports become cheaper. This may result in fewer exports being sold and more imports being bought => negative impact on current account

the balance of current account may also have an impact on exchange rate. e.g. if a country has a surplus on current account resulting from rising sales of goods abroad, demand for a currency will rise (foreigner will need to buy that country’s currency to pay for the goods). This increase in demand for a currency could drive up the exchange rate. Therefore, the country’s exchange rate gets stronger

91
Q

5 Reasons for deficits and surpluses

A
  • quality of domestic goods
  • quality of foreign goods
  • price of domestic goods
  • price of foreign goods
  • exchange rates between countries
92
Q

Explain why QUALITY OF DOMESTIC GOODS cause a deficit and surplus

A

if a country develops a reputation for high-quality goods, it is likely to enjoy rising sales from overseas buyers. This will drive demand for exports up and improve a current account balance. Also, if the quality for domestic goods are high, demand in the home market will rise as consumers will prefer them to imports which will also improve the current account

93
Q

Explain why QUALITY OF FOREIGN GOODS cause a deficit and surplus

A

if goods and services from overseas are superior to those produced domestically, there will be an increase in demand for these imports which will have a negative impact on the current balance. The size of the current account deficit, for example, will increase. There will also be less demand for home produced goods, which could result in lower domestic output and employment

94
Q

Explain why PRICE OF DOMESTIC GOODS cause a deficit and surplus

A

demand for goods and services are heavily influenced by price. e.g. If domestic goods were expensive, from rapid inflation, demand from overseas buyers will fall which will progressively damage its current account

95
Q

Explain why PRICE OF FOREIGN GOODS cause a deficit and surplus

A

e.g. if foreign goods are cheaper than domestic goods, there will be a rapid demand for imports which will have a negative impact on current account, reducing the size of a surplus

96
Q

Explain why EXCHANGE RATES BETWEEN COUNTRIES cause a deficit and surplus

A

since exchange rate affects the prices of both domestic and foreign goods, any change in its exchange rate impacts current account

97
Q

Persistant

A

continuing to exist or happen, especially for longer than is usual or desirable

98
Q

4 Impacts of a persistant current account deficit

A
  • leakages from the economy
  • inflation
  • low demand for exports
  • funding the deficit
99
Q

Explain why LEAKAGES FROM THE ECONOMY is an impact of a persistant current account deficit

A

a persistant current account deficit suggests that a country is becoming increasingly dependent on imports. This means that consumers are buying goods produced outside of the domestic economy. As a result, money flows out of the economy to overseas businesses. It means that output and employment levels in the domestic economy is under threat

100
Q

Explain why INFLATION is an impact of a persistant current account deficit

A

a country running a high current account deficit might be exposed to inflationary pressures. If the prices of imports go up, this will be reflected in the general price level since many imported goods will be counted when the CPI is calculated. Consequently, rising import prices will result in higher domestic inflation levels. The greater the reliance on imports, the greater the threat of inflation when import prices rise

101
Q

Explain why LOW DEMAND FOR EXPORTS is an impact of a persistant current account deficit

A

a country with a high account deficit might be struggling to sell goods and services abroad. If demand for exports are low, it might mean that the quality of goods and services is poor or the price is too high. Unless the demand for exports can be reversed, a country may suffer a progressive decline in economic growth and a rise in unemployment. A current account deficit may reflect structural weaknesses in the economy which means domestic firms may struggle because they are not competitive in certain industries

102
Q

Explain why FUNDING THE DEFICIT is an impact of a persistant current account deficit

A

if a country has a continuing current account deficit, it will need foreign currency to pay for the rising quantity of imports that are being purchased. If the foreign currency reserves of a country runs low, it may be necessary to borrow. However, persistant borrowing may cause long-term problems. Sometimes, a current account deficit can be financed by a capital account surplus

103
Q

Tailings

A

waste material left over once the useful content has been removed from an ore, can be toxic

104
Q

Explain how MINING damages the environment

A
  • open-cast mining, where materials are extracted from a giant hole in the ground => problem is that many of the minerals and other useful materials that are mined are only available in very small quantities. This means huge quantities of Earth and rock is extracted from a site just for a small fraction of valuable material.

This involves crushing rocks which may release harmful materials. During the separation process, something called tailings are produced which is a mixture of crushed rocks and liquid. It is possible for toxic and radioactive elements from tailings to leak slowly through the ground into water systems if not managed effectively. Also it may affect the countryside and destroy wildife habitat

  • another problem is that modern techniques use large quanities of water. Wastewater from these activities may find its way into waterways and threaten the supply of fresh drinking water
104
Q

5 Business activity that damages the environment

A
  • mining
  • power generation
  • chemical processing
  • agriculture
  • construction
105
Q

Explain how POWER GENERATION damages the environment

A

when making electricity, you burn fossil fuels => causing a wide range of harmful environmental impacts such as:

  • gas emissions => dangerous “greenhouse gases” like CO2, carbon monoxide and hydrocarbons which contribute to global warming. Also, the gas released into the atmosphere produce acid rain
  • release of hot water or disposal of waste, etc. This uses a large amount of steam, power plants need to use huge quantities of water and return water back to its source. The water can be dirty and warm which is damaging to the wildlife inside water systems
106
Q

Explain how CHEMICAL PROCESSING damages the environment

A

chemicals are used to make the majority of sunthetic materials which can play an important role in our everyday life.

e.g. chemical are used in products to provide protection for the crops and increase yields, prevent and cure diseases, provide isulation to reduce energy use and many more to improve the standards of living + quality of life

however, they can have a negative impact on human health and the environment when their production and use are not used responisbly

107
Q

Explain how AGRICULTURE damages the environment

A
  • use of pesticides and fertilisers. Although fertilisers increase crop yields, after heavy rainfall some always end up into rivers, lakes and the sea where it can kill aquatic life. Also, some fertilisers can starve soil of organic matter. As a result, soil cannothold sufficient water. Pesticides may also cause ill health and may influence long term effects
  • farming also contributes to global warming => deforestation + factory farming
108
Q

Explain how CONSTRUCTION damages the environment

A
  • produces waste material => difficult to dispose
  • contruction activites such as land clearing, operation of diesel engines, demolition, burning and working with toxic materials contribute to air pollution
  • construction sites generate high levels of dust which can cause health problems including: respiratory illnesses, asthma and cancer
  • water pollution => harmful chemicals and resources used for contruction can be washed into water systems

Economics (4 decks)

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