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AQA A-Level Economics > 2.3 Economic performance > Flashcards

2.3 Economic performance Flashcards

1
Q

Economic cycle

A

upswing and downswing in aggregate economic activity (over 4 to 12 years)

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2
Q

Actual output

A

level of real output produced in the economy in a particular year

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3
Q

Trend growth rate

A

the rate at which output can grow, on a sustained basis, without putting upward or downward pressure on inflation. It reflects the annual average percentage increase in the productive capacity of the economy

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4
Q

Output gap

A

show the level of actual real output in the economy either higher or lower than the trend output level

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5
Q

Positive output gap

A

the level of actual real output in the economy is greater than the trend output level

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6
Q

Negative output gap

A

the level of actual real output in the economy is lower than the trend output level

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7
Q

Causes of changes in the phases of the economic cycle (8)

A
  • fluctuations in AD
  • supply-side factors
  • speculative bubbles
  • political business cycle theory (as an election approaches, a party may engineer a boom)
  • external shocks
  • changes in inventories + stocks
  • multiplier/accelerator interaction
  • climatic cycles
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8
Q

Unemployment

A

occurs when people are actively searching for employment but are unable to find it

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9
Q

Labour force

A

the number of people who are either in work or actively seeking work

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10
Q

Involuntary unemployment

A

when worked are willing to work at current market wage rates but there are no jobs available (AKA real wage unemployment)

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11
Q

Cyclical unemployment

A

caused by the lack of AD in the economy and occurs during a recession or depression

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12
Q

Voluntary unemployment

A

occurs when workers choose to remain unemployed and refuse job offers at current wage rates

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13
Q

Frictional unemployment

A

unemployment that is usually short term and occurs when a worker switched between jobs

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14
Q

Structural unemployment

A

long term unemployment occurring because some industries have shut down, automation has replaced workers, or firms are demanding skills which workers do not possess

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15
Q

Sticky wages

A
  • the rate of workers’ pay has a slow response to changes in the performance of the economy.
  • When unemployment rises, the wages of those who remain employed tend to stay the same or grow at a slower rate than before rather than falling with the decrease in demand for labour.
  • It is observed that they can move up easily but move down with difficulty.
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16
Q

Seasonal unemployment

A

arising from different times of the year, caused by factors such as the weather or regular religious festivals

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17
Q

Geographical immobility of labour

A

when workers are unwilling or unable to move from one area to another in search or work (a cause of frictional unemployment)

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18
Q

Occupational immobility of labour

A

when workers are unwilling or unable to move from one type of job to another because different skills are needed (a cause of frictional unemployment)

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19
Q

Natural rate of unemployment (NRU)

A

the rate of unemployment when the aggregate labour market is in equilibrium and all unemployment is voluntary. The level of unemployment can be sustained without changes in the inflation rate

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20
Q

Claimant count

A

the method of measuring unemployment according to those people who are claiming unemployment related benefits (job-seekers allowance)

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21
Q

Labour force survey

A

a quarterly sample survey of households in the UK. The survey seeks information about respondents’ personal circumstances and their labour market status during a period of 1-4 weeks

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22
Q

Hysteresis

A
  • A rise in unemployment caused by a recession may cause the natural rate of unemployment to increase.
  • This is because when workers are unemployed for a time period, they become deskilled and demotivated and are less able to get new jobs - this is known as ‘hysteresis’.
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23
Q

Inflation

A

a persistent or continuing rise in the average price level

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24
Q

Deflation

A

a persistent or continuing fall in the average price level

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25
Q

Disinflation

A

when the rate of inflation is falling over time, but still positive

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26
Q

Basket of goods

A

a representative sample of goods and services in an economy

27
Q

Consumer price index (CPI)

A

the official measure used to calculate consumer price inflation in the UK. It is calculated using the change in average prices of a basket of 700 goods and services

28
Q

Inflation rate target

A

the target rate of inflation set by the government for the Bank of England

29
Q

Demand-pull inflation

A

a rising price level caused by increases in aggregate demand

30
Q

Cost-push inflation

A

a rising price level caused by increased costs of production

31
Q

Causes of cost-push inflation (2)

A
  • wage-cost inflation
  • import-cost inflation
32
Q

wage-cost inflation

A

cost-push inflation caused by increases in wages and salaries

33
Q

Import-cost inflation

A

cost-push inflation caused by increases in the cost of imports such as energy, food, raw materials, and manufactured goods

34
Q

Wage-price spiral

A
  • As inflation rises, people start to expect higher inflation.
  • This leads to them asking for higher nominal wage rises to keep pace with the rising cost of goods in shops.
  • Firms may grant this to begin with, but then as their costs are also rising, they may have to pass this on to consumers with higher prices. So they demand higher wages again.
35
Q

SPICED acronym

A

Strong Pound Imports Cheaper Exports Dearer

36
Q

Quantity theory of money

A

a theory that states inflation is caused by increases in the money supply

37
Q

Monetarists

A

economists who argue that inflation is caused by prior increases in the money supply

38
Q

Money supply

A

the stock of money in the economy at a particular point in time

39
Q

Velocity of circulation of money

A

how fast money passes from one holder to the next

40
Q

Fischer equation of exchange

A

money supply x velocity of circulation of money = price level x quantity of real output

41
Q

Assumptions made in Fischer equation (3)

A
  • money is not saved
  • economy is at full employment
  • velocity of transactions in independent of other variables
42
Q

Disadvantages of inflation (5)

A
  • distributional effects
  • distortion to normal economic behaviour
  • breakdown in the functions of money
  • reduced international competitiveness
  • shoe leather and menu costs
43
Q

Describe ‘good’ deflation

A
  • improvement in economy’s supply side reduces costs of production
  • SRAS and LRAS shift rightwards
  • price level falls
  • output and employment rise
44
Q

Describe ‘bad’ deflation

A
  • result of a lack of AD
  • indicative of recessionary conditions
45
Q

Consequences of ‘bad’ deflation (3)

A
  • consumers put off purchases as they anticipate prices to fall further
  • fall in confidence of producers in their ability to sell goods in the future so they’re reluctant to invest
  • recession may be lengthened or deepened
46
Q

Balance of payments

A
  • This is a record of all financial transactions made between consumers, firms and the government from one country with other countries.
  • It states how much is spent on imports, and what the value of exports is.
47
Q

Components of the balance of payments (3)

A
  • The current account
  • The capital account
  • The official financing account.
48
Q

current account on the balance of payments

A
  • the balance of trade in goods and services.
  • calculated by subtracting the value of outflows (from imports) from the inflows (from exports)
49
Q

Current account surplus

A
  • inflows > outflows
  • net inflow of money into the circular flow of income
50
Q

Current account deficit

A
  • inflows < outflows
  • net outflow of money out of the circular flow of income
51
Q

Parts of the balance of payments on the current account (4)

A
  • trade in goods
  • trade in services
  • investment income
  • transfers
52
Q

Factors influencing the UK’s current account balance (6)

A
  • By selling more exports to foreign countries, the UK will have a greater inflow of money into the circular flow of income. This will increase AD and improve the rate of economic growth.
  • In the UK, during periods of economic decline or recessions, the current account deficit falls. This is because consumer spending falls.
  • During periods of economic growth, when consumers have higher incomes and they can afford to consume more, there is a larger deficit on the current account.
  • If imported raw materials are expensive, there could be cost-push inflation in the UK, since firms face higher production costs.
  • When the pound appreciates, imports become relatively cheaper and exports become more expensive.
  • If the UK becomes more productive, the UK will be more internationally competitive. This causes exports to increase relative to imports.
53
Q

Describe how economies are interconnected through international trade

A
  • In theory, the sum of all countries’ trade balances should be zero, since what one country exports will be imported by another country.
  • If the UK’s main export market faces an economic downturn then demand for UK goods and services will fall, since consumers are less able to afford imports.
  • International trade has meant countries have become interdependent. Therefore, the economic conditions in one country affect another country, since the quantity they export or import will change.
54
Q

Possible conflicts between macroeconomic policy objectives (4)

A
  • economic growth vs satisfactory balance of payments
  • economic growth vs government budget deficit
  • economic growth vs the environment
  • unemployment vs inflation
55
Q

economic growth vs satisfactory balance of payments

A
  • During periods of economic growth, consumers have high levels of spending.
  • In the UK, consumers have a high marginal propensity to import, so there is likely to be more spending on imports. This leads to a worsening of the current account deficit.
  • However, export-led growth, such as that of China and Germany, means a country can run a current account surplus and have high levels of economic growth.
56
Q

Economic growth vs the government budget deficit:

A
  • Reducing a budget deficit requires less expenditure and more tax revenue.
  • This would lead to a fall in AD, however, and as a result there will be less economic growth.
57
Q

Economic growth vs the environment

A
  • High rates of economic growth are likely to result in high levels of negative externalities, such as pollution and the usage of non-renewable resources.
  • This is because of more manufacturing, which is associated with higher levels of carbon dioxide emissions.
58
Q

Unemployment vs inflation

A
  • In the short run, there is a trade-off between the level of unemployment and the inflation rate.
  • This is illustrated with a Phillips curve.
  • As economic growth increases, unemployment falls due to more jobs being created.
  • However, this causes wages to increase, which can lead to more consumer spending and an increase in the average price level.
59
Q

Describe the short-run phillips curve

A
  • The short-run Phillips curve represents the trade-off between unemployment and inflation.
  • In the short run, the Phillips curve is roughly L-shaped, which shows how as unemployment increases, inflation decreases.
60
Q

Explanations for the short-run phillips curve (2)

A
  • demand-pull: At full employment AD increases so there is excess demand in thee economy. The only way to clear the goods market is for firms to raise prices
  • cost-push: falling unemployment means that trade union power increases, enabling unions to use their growing monopoly power over the supply of labour to push for higher wages
61
Q

Describe the long-run phillips curve

A
  • The long run Phillips curve is L-shaped. It is also known as the vertical long-run Phillips curve
  • It is at the natural rate of unemployment, and there is no trade-off between unemployment and inflation.
  • The two variables are unrelated.
62
Q

Implications of the phillips curve on economic policy

A
  • If the government tries to lower unemployment in the short run, there could be inflationary pressures. In the short run, the economy suffers from demand-deficient unemployment. This might encourage the use of demand-side policies to tackle unemployment.
  • In the long run, changes in the unemployment rate do not affect the inflation rate. Therefore, policies can be more flexible. Since there is no demand-deficient unemployment in the long run, supply-side policies are more likely to be used.
63
Q

Long-run self-adjustment

A

the process through which an economy will return to full employment output without government intervention

AQA A-Level Economics (14 decks)

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