2.3 Flashcards
AD formula
AD=C + I + G + (X-M)
Causes of short run economic growth.
AD IS THE IMPACT
Lower interest rates= cost of borrowing is less lower interest rate = weaker £= imports are expensive = exports seem cheaper to other countries
Income tax/ Corporation tax decreases= Consumers have more disposable income= Increases Consumption and Investment
Government spending= Benefits national minimum wage=
Higher consumer/ businesses confidence.
causes of long run economic growth
QUANTITY AND QUALITY OF FOP (productive capacity of an economy increases)
- Economies of scale e.g. managerial, technical, purchasing
- Increase in competition
- Investment in technology
- Subsidies- may not use efficiently (wage, holiday)
- infrastructure improvements- transport links (airports) which reduce costs and shifts LRAS to the right.
- increase in labour productivity
- increase in workforce (immigration)
- new resource discovery.
benefits of economic growth
- Higher disposable incomes
- Higher consumer contidence
- Higher employment
= better standard of living - Higher profits firms = more innovative = become more
environmentally innovative - Tax revenue for government
Even though tax rate would decrease to cause economic growth initially, in the event that firms grow during this period and employ more people, gov would receive more tax’s revenue as more people would be paying it.
costs of economic growth
- Higher inflation
- Income inequality- if we have capital-led economic growth
- Positive economic growth can be progressive
- Environmental costs = higher supply/demand pollution will increase
- Current account deficit- Econ growth = incomes are rising (disposable)- people will import more
two types of inflation
demand pull (good) closer to full employment AD shifts right
cost push ( bad) further from full employment SRAS shifts left.
demand pull causes
-Decrease in interest rate = Borrowing becomes cheaper = encourages spending = consumption increases
= firms will borrow more = investment
increases = AD increases
= Weaker exchange rate (WIDEC)
Weak imports dear exports cheap
-AD increases (X-M)- Current account Surplus
Consumer/business confidence
Government spending (benefits)
- Corporation tax decrease- Income tax decrease
= Disposable income = AD increases
cost push inflation causes
- Cost of production increase
- Business taxes e.g. VAT, corporation tax increases
- Wages increase = cost push inflation
- Raw materials /commodity prices
increase = cost of production = sras
shifts left = cost push inflation - Weak exchange rate
= imports are more expensive = raw
material prices will be high
benefits of inflation
+Increase in wages/salaries = better standard of living
+ Firms are encouraged to increase output
Firms are profit maximisers = incentivised by the higher prices and the higher demand = output
more = economic growth (demand pull)
+ Improvement in government finances
fiscal drag will lead to an increase in tax revenue for governments. = this could be further spent
on education / NHS (will improve standards of living)
fiscal drag
Wages/salaries increase in line with inflation = workers get dragged into another tax
bracket and theretore pay more tax = less
disposable income = lower standards of living
costs of inflation
- Lower purchasing power = lead to lower
investment - Erosion of savings (pensioners,
unemployed) = decrease standards of
living - Lower export competitiveness
-Wage/consumer price spirals
= AD increases (inflation)- workers demand a higher wage = consumption increases, we get a knock on effect of hyper inflation
- Menu costs = inflation changes = firms
need to change and amend their
menus’websites = cost of production
could pass that on to consumers in
the form of higher prices = Inflation
deflation definition
average price level in an economy falls
inflation definition
rise in general price level over a certain period
disinflation
a decrease in the rate of inflation
2 policies which help fix inflation
Fiscal policy
Monetary policy
what is Monetary policy
Increasing interest rates
= Consumers will save more as they are
incentivised by the higher interest rate = Savings
increase, consumption decreases = AD shifts left.
= Firms saving more rather than investing. AD will shift left
= Stronger exchange rate (SPICED)
- Imports cheaper, exports expensive = AD left
- current account deficit (negatively affects gov objective of current account surplus)
fiscal policy
Decrease gov spending
Increase tax
increase income tax people will have less disposable income and AD will shift to the left
Decrease corporation/VAT tax
reduce cost push inflation
Decrease NMW
cost push (firms can pay people less)
Workers they get paid less = Demand pull inflation decreases
what causes demand and supply side deflation
higher interest rates and delayed spending due to low consumer confidence - demand
cost of production- aupply
demand side deflation
bad deflation as there’s negative economic growth as AD shifts left to AD1 which is further away from full employment.
supply side deflation
good deflation as SRAS shifts right to SRAS1 which moves close to full employment
Comes with higher growth
Unemployment can decrease (wages could also decrease
Falling prices for consumers = betters their standard of living
(positively regressive)
Falling input prices for firms
Two ways to measure unemployment
Labour force survey- Survey that gets passed onto 60,000 households in the UK.
Claimant count- Measures the amount of people claiming benefits. (Job seekers allowance).
unemployment rate equation
Unemployed/Economically active x100
issues with the labour force survey
- Hidden unemployed (cash-in-hand jobs)
- Sample size is too small
- Inactive groups
- Underemployed (people with skills that are in employment that are not being utilised.)
- High cost to the government
-incorrect data
issues with the claimant count
- Not everyone will claim
Could be subject to fraud - people that do cash-in-hand jobs can claim benefits and still be working - Difficult to compare with other countries
types of unemployment and definition
seasonal- unemployment due to weather conditions
frictional- workers are in between jobs
structural- immobility of labour due to a long term change in the structure of an industry. (occupational and geographical)
cyclical- unemployment caused by a shortage in demand
real wage unemployment
classical unemployment- when wages are forced above equilibrium in a labour market creating excess supply of labour (excess supply diagram)
The government increase NMW this incentivises workers to supply their labour. therefore we see a increase from a to qt.
However, the higher wage is a higher cost of production to firms, and therefore they would contract their demand for labour from g to 92
Therefore we cod up with Excess supply of labour
how to reduce cyclical unemployment
Central bank can decrease interest rates = Lower rates and encourage borrowing and therefore encourage spending.
This will increase AD and therefore reduce cyclical unemployment
Reduce income tax, corporation tax
people have a disposable income= likely to spend more= ad increases
how to reduce real wage unemployment
reduce NMw
reduce the strength of trade unions
- Impacts workers who are on NMW (regressive policy)=
Standards of living decrease =
poverty will increase
income inequality
way to reduce structural unemployment
Government invest in education and training = Occupational immobility of labour
Subsides for firms Firms can use this to invest in training courses However. subsidy can be used inefficiently
Government spending in infrastructure (scographical mmobilty labour Hs2
Grants on housing near LONDON (scozraphical immobility)
general ways to reduce unemployment
subsidies can be given by recruitment agencies
better resources at job centres
reduce benefits (incentivise people to work)
what do positive and negative output gaps do to inflation and unemployment levels
a positive output gap generates upward pressure on inflation which causes less unemployment
a negative output gap generates high chances of deflation and an increase in unemployment
macroeconomic objectives
Inflation (2%)
Full employment (95%)
Economic growth (2.5%)
Balance of trade/payments
clashes between macroeconomic objectives
employment increase = balance of trade deficit
what does the current account consist of
trade in goods, services, primary and secondary income
factors that influence a country’s current account
productivity, inflation, exchange rate and other countries economic activity
deficit and surplus on current account
A trade deficit means that the country is importing more goods and services than it is exporting; a trade surplus means the opposite
what are demand side shocks
shocks that affect rate of growth of demand in uk and other countries
what are supply side shocks
shocks affecting costs and prices in different countries
difference between positive and negative output gaps
positive output gap occurs when real GDP is above the productive potential of the economy, and a negative output gap occurs when real GDP is below the economy’s productive potential.
what is an economic shock
anything that unpredictably affects the market in a large manner
how are demand side shocks caused
-boom in housing market
- rise or fall in exchange rate
- consumer boom abroad which effects our exports
-interest rates
how are supply side shocks caused
-changes in oil prices
- changes in metal
-natural disasters
-increase in technology
