2.1 Government and The Economy

Question 1

What is the difference between micro and macroeconomics?

Answer 1

Macroeconomics is the study of economy as a whole i.e. performance, structure and behaviour of the whole economy
Microeconomics is the study of individual parts of the economy i.e. how individual firms and households make decisions when allocating their resources

Question 2

What are the macroeconomic objectives of a government?

Answer 2

Low unemployment
Protection of the environment
Balance of payments
Economic growth
Controlling inflation
Redistribution of income

Question 3

What is GDP (gross domestic product)?

Answer 3

It is a measure of value of final product (goods and services) produced in a country for sale, both domestically and overseas. It is used to measure economic growth all over the world; shows national income;

Question 4

What are the limitations of GDP as a measure of growth? pg.196

Answer 4

Inflation (rising prices cancel out the growth effect, fully or partially; real GDP (money GDP - inflation) used;
Population changes (increase in population offsets the growth in GDP; GDP per capita (GDP/population) used;
Statistical errors - info. left out or entered incorrectly;
Value of home produced goods - these are not traded thus are not recorded;
Hidden economy - cash paid jobs are not recorded;
GDP and living standard
External costs - i.e. plastic is cheap because disposal prices are not included (GDP doesn’t take into account external costs)

Question 5

What is an economic (or trade/business) cycle? pg.198

Answer 5

It’s a variation of economic growth. It has 4 phases:

Boom (GDP growing fast; firms enter the market and expand; demand rises; jobs created; wages and profits rise; PRICES may also rise;

Downturn (still growing but slower; demand stops rising/begin to fall; unemployment increases and wages stop rising; firms stop rising/some quit; profits may fall; PRICES rise slower;

Recession or Depression (GDP is flat/falls; poverty; demand falls; unemployment rises; business confidence is very low; bankruptcies rise; PRICES are flat or even fall)

Recovery (GDP starts to rise; reverse of the recession/depression)

Question 6

What is the impact of economic growth? pg.199

Answer 6

Employment
Standards of living
Poverty
Productive potential

but,

Inflation
Environment