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IB Economics HL > 2.3 Macro objectives > Flashcards

2.3 Macro objectives Flashcards

1
Q

Define unemployment

A

Unemployment refers to those part of the workforce (of working age) who are actively looking for a job but are not employed.

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2
Q

Define underemployment

A

Underemployment refers to people part of the workforce (of working age) that would rather work full time or in jobs that utilise their skills and educations.

For example, a law graduate working in a supermarket.

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3
Q

Macroeconomic objectives

(8)

A

(In levels of importance)

  • high and sustainable economic growth
  • low and stable inflation
  • low unemployment
  • satisfy the balance of payments
    • low government borrowing
    • stable exchange rate
      • minimise inequality
      • protect the environment
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4
Q

Possible macroeconomic conflicts (between objectives)

A
  • Economic growth vs inflation
  • Unemployment vs inflation
  • Economic growth vs balance of payments
  • Budget deficit vs economic growth
  • Economic growth vs environmental sustainability
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5
Q

What does unemployment and underemployment both signify about the economy?

A

It is below potential output.

Underemployment shows there are skill and education resources not being utilised.

Unemployment shows there are people not being utilised.

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6
Q

Define labour force

A

Labour force (workforce) is the number of people who are employed plus the number of people of working age who are unemployed (not in work, but economically active).

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7
Q

How can unemployment be expressed?

(2)

A
  • a number, i.e. the total number of people that are economically active but not employed.
  • a percentage (more common), also known as the unemployment rate
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8
Q

Equation for unemployment rate

A

Unemployment rate =

(number of unemployed) / labour force x 100

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9
Q

Why might unemployment statistics underestimate true unemployment?

(4)

A
  • Hidden unemployment:*
  • They can count those that are economically inactive (discouraged workers) as unemployed.
  • No distinction between full-time and part-time (no distinction between unemployed or underemployed).
  • No distinction between types of employment (no distinction between unemployed or underemployed).
  • They don’t include people on retraining programs or those that have taken retirement early.
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10
Q

Why might unemployment statistics overestimate true unemployment?

(1)

A
  • They don’t include people working in the underground (informal) economy. They are registered as unemployed as underground employment is unregistered, unregulated and not reported to tax authorities.
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11
Q

What important social factors do unemployment statistics miss out?

A
  • region - regions dealing with higher unemployment than others
  • gender - women face more unemployment than men do
  • ethnicity - some ethnic groups might face more unemployment than others due to discrimination or lack of education and training
  • age - youth unemployment (those between 16-25) usually face higher unemployment for a variety of reasons (usually education, skills, experience and maturity)
  • occupation - less-skilled workers may face more unemployment than higher-skilled workers (or vice versa, although higher-skilled workers may still be employed, just underemployed)
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12
Q

What economic consequences are there from unemployment?

(7)

A
  • Loss of real GDP or output (below potential)
  • Loss of income for unemployed workers
  • Loss of tax revenue for the government
  • Increased cost of unemployment benefits to the government
  • Cost to the government to deal with social consequences
  • Increased inequality of income (poorest lose jobs, whilst richest retain them)
  • Unemployed might have difficulty finding work in the future (hysteresis)
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13
Q

What are the personal/social consequences of unemployment?

A
  • Insecurity of the individual, possible indebtedness, loss of self-esteem, psychological stress
  • increased crime and violence, drug abuse and homelessness
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14
Q

What is structural unemployment?

A

Unemployment caused by changes in demand for particular labour skills, changes in the geographical location of industries, and labour market rigidities.

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15
Q

What are labour market rigidities? (and examples)

A

Labour market rigidities are factors preventing the forces of supply and demand operating in the labour market.

They cause the product supply of firms to shift left (higher costs of production)

  • minimum wage legislation
  • labour union activities and wage bargaining with employers
  • employment protection laws
  • generous unemployment benefits
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16
Q

What is frictional unemployment?

A

Unemployment that occurs when workers are between jobs, either for looking for employment or just a wait period between ending one employment and starting another.

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17
Q

What is seasonal unemployment?

A

Unemployment that occurs when the demand for labour in certain industries changes on a seasonal basis from variations in needs.

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18
Q

What unemployment types constitute the natural rate of unemployment?

A
  • structural
  • frictional
  • seasonal
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19
Q

Define inflation

A

A sustained increase in the general price level.

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20
Q

Define deflation

A

A sustained decrease in the general price level.

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21
Q

Define disinflation

A

A decrease in the rate of inflation.

Inflation occurring at a lower rate.

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22
Q

What are the two indices used to measure inflation?

A
  • Consumer Price Index (CPI)
  • Producer Price Index (PPI)
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23
Q

What is the Consumer Price Index (CPI)?

A

An index used to measure inflation based on the cost of living for the typical household through comparing the value of a basket of goods and services in one year with the value of the same basket in a base year.

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24
Q

What are some problems with CPI?

(8)

A
  • Different rates of inflation for different income earners.
  • Different rates of inflation depending on regional or cultural factors.
  • Changes in consumption patterns due to consumer substitutions when relative prices change.
  • Changes in consumption patterns due to increasing use of discount stores and sales.
  • Changes in consumption patterns due to the introduction of new products.
  • Changes in product quality.
  • International comparisons.
  • Comparability over time.
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25
Q

What does core rate of inflation mean?

A

CPI that has been adjusted to not include volatile items such as food or energy.

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26
Q

What is the Producer Price Index (PPI)?

A

Several indices of prices received by producers of goods at various stages in the production process.

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27
Q

What are the negative consequences of inflation from redistribution effects?

A

Groups that lose out:

  • People that receive fixed incomes or wages (those receiving: fixed contract wages, pensions, rent, welfare)
  • People who receive incomes or wages that increase less rapidly than inflation.
  • Holders of cash
  • Savers
  • Lenders (creditors)
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28
Q

What are the positive consequences of inflation from redistribution effects?

A

Groups that gain:

+ Borrowers (debtors)

+ Payers of fixed incomes or wages

+ Payers of incomes or wages that increase less rapidly than the rate of inflation.

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29
Q

What are the six main consequences of inflation?

A
  • Redistribution effects
  • Uncertainty
  • Menu costs
  • Money illusion
  • International (export competitiveness)
  • Uncontrolled inflation and/or hyperinflation
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30
Q

What is the target rate of inflation?

A

Most governments prefer a low and stable rate of inflation which is normally about 2-3%.

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31
Q

What is demand-pull inflation?

A

Inflation caused by increases in aggregate demand.

(Usually bringing about an increase in the real GDP: new- classical model)

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32
Q

What is cost-push inflation?

A

Inflation caused by a decrease in short-run aggregate supply.

(Not really apparent in the Keynesian model)

33
Q

Why does deflation rarely occur in the real world?

(3)

A
  • Wages of workers do not ordinarily fall
  • Large oligopolistic firms may fear price wars
  • Firms want to avoid incurring menu costs resulting from price changes
34
Q

What are the positive consequences of deflation from redistribution effects?

A

Groups that gain:

+ People that receive fixed incomes or wages (those receiving: fixed contract wages, pensions, rent, welfare)

+ People who receive incomes or wages that increase less rapidly than inflation.

+ Holders of cash

+ Savers

+ Lenders (creditors)

35
Q

What are the negative consequences of deflation from redistribution effects?

A

Groups that lose out:

  • Borrowers (debtors)
  • Payers of fixed incomes or wages
  • Payers of incomes or wages that increase less rapidly than the rate of inflation.
36
Q

What are the six main consequences of deflation?

A
  • Redistribution effects
  • Uncertainty
  • Menu costs
  • Money illusion
  • Risk of a deflationary spiral with high and increasing cyclical unemployment
  • Risk of bankruptcies and a financial crisis
37
Q

What is a weighted price index?

A

A price index that “weights” the various goods and services according to their relative importance.

38
Q

What is the equation for the price index for a specific year?

A

PI = (Value of basket in a specific year / Value of basket in the base year) x 100

39
Q

How do you go from price indices to inflation rate?

A

To get the inflation rate from of year to another:

% = ((PIafter - PIbefore) / PIbefore ) x 100

40
Q

What is the equation for real income?

A

real income = ( nominal income / CPI ) x 100

41
Q

What is the Phillips curve?

A

A curve that shows the relationship between unemployment and inflation.

A downward sloping (1/x) relationship

42
Q

What does the Phillips curve indicate?

A

The lower the unemployment rate, the higher the inflation rate.

43
Q

How are movements along the Phillips curve linked to AD-AS?

A

Points moving up the Phillips curve (lower unemployment) can be shown as an SRAS curve with AD shifting more and more right.

44
Q

How are shifts of the Phillips curve linked to AD-AS?

A

Shifting the Phillips curve outwards would correspond to an AD curve, with SRAS shifting more and more left.

45
Q

What is the long-run Phillips curve?

A

A vertically straight line intersecting the unemployment rate at the natural rate of unemployment.

46
Q

How can you shift LRPC?

A

A decrease in the natural rate of unemployment causes LRPC to shift left (as LRAS increases)

An increase in the natural rate of unemployment causes LRPC to shift right (as LRAS decreases)

47
Q

What does the long-run Phillips curve indicate?

A

In the long run, the unemployment rate is independent of the rate of inflation, and that policy-makers do not have a choice between the two competing alternatives.

48
Q

In the current view of economics, what macro indicator is most associated with success and prosperity (especially long term)?

A

Economic growth

49
Q

How you calculate the growth rate of an economy?

A

% change in real GDP = (final GDP - initial GDP) / initial GDP x 100

[basic percentage change]

50
Q

How can you calculate the change of real GDP per capita from GDP and population changes?

A

% change GDP per capita = % change of GDP - % change in population

51
Q

How can economic growth be illustrated in PPF diagrams?

A

A move outwards: either towards full capacity, or shifting the PPF outwards (increasing potential)

52
Q

What are the three types of capital?

A
  • Physical capital: investments into physical capital like factories or infrastructure
  • Human capital: labour resources (quantity and quality)
  • Natural capital: natural resources such as land and coal
53
Q

What are the most important ways to increase long term economic growth?

A

Increases and improvement of physical capital like technology.

Improvement of labour through education and training.

Natural resources, especially with the looming climate crisis, should be avoided and dependence decreased for long term growth

54
Q

What is productivity?

A

The amount of output, for a given input.

E.g. amount of hours needed to get a job done.

55
Q

How can productivity increase?

A
  • automation of repetitive tasks
  • skilled yet flexible workforce (broad education, with branches of specialisation)
  • promoting work instead of settling for welfare
  • better healthcare/physical wellbeing of workers
  • better transport links/reduction in the need for being ina physical space
56
Q

What does equality mean?

A

The state of being equal with respect to something.

57
Q

What does equity mean?

A

The condition of being fair or just.

58
Q

Why does income inequality arise?

A

The ownership of factors of production is highly unequal, and because the prices of factors of production determined in the market vary enormously.

59
Q

How are income statistics usually presented?

A
  • the percentage share of income per quintile of the population
  • Gini coefficient
60
Q

How do you show a perfectly equal distribution of income?

A

A straight linear 1:1 relationship between population % and income share %, positive and diagonal

61
Q

How do you show a perfectly unequal distribution of income?

A

A flat line for the whole population at 0, which jumps up to 100% for the last person.

1 person has 100% of the income, the rest have nothing.

62
Q

What is the Lorenz curve and what does it look like?

A

Usually an increasing curve of % share of income vs % population

63
Q

How go you calculate the Gini coefficient?

A

Gini coefficient = area between diagonal and Lorenz curve / the area under diagonal

64
Q

What are the ranges of the Gini coefficient and what do they mean for income equality?

A

0 to 1

0 = perfect equality

1 = perfect inequality

The smaller is it, the more equal the income distribution

65
Q

What does poverty mean?

A

The inability to satisfy minimal (physiological & safety) consumption needs

66
Q

What is absolute poverty?

A

An income level below a set poverty line, which is usually the minimum a sufficient income can be.

67
Q

What are the two types of absolute poverty and what do they mean?

A
  • Extreme poverty: living on less than $1.25 per day
  • Moderate poverty: living on less than $2 per day

[both set by the World Bank]

68
Q

What is relative poverty?

A

Poverty that is relative not to minimal income to consume basics to survive, but to the incomes in that country.

A person can be considered relatively poor if their income falls below half of the nation’s median income.

69
Q

What are possible causes for poverty?

(9)

A
  • Low incomes
  • Unemployment
  • Low levels of human capital (in a household)
  • Low levels of capital or land ownership
  • Discrimination (unless illegal)
  • Geography
  • Age
  • Limited social services (merit goods)
  • Poverty (poverty trap)
70
Q

What are possible consequences of poverty?

(6)

A
  • Low living standards
  • Lack of access to health care and education
  • Higher infant, child and maternal mortality
  • Higher levels of preventable diseases
  • Social problems
  • Inability to realise one’s full potential (uninspired workforce)
71
Q

How can income equality be promoted?

(4)

A
  • Transfer payments (e.g. taxes that go to welfare)
  • Subsidised or direct provision of merit goods (e.g. free healthcare)
  • Government intervention in markets
  • Taxation
72
Q

What are transfer payments?

A

Payments made by the government to individuals specifically for the purpose of redistributing income away from certain groups and towards other groups.

73
Q

How can the government intervene in markets for the purposes of equal income distribution?

A
  • minimum wage legislation
  • price ceilings (such as food or rent)
  • price floors (such as for agriculture)
74
Q

What are the two types of tax and what do they mean?

A
  • Direct taxes: Taxes paid directly to the government tax authorities by the taxpayer
  • Indirect taxes: Taxes on goods and services which must go through the producer/merchant before reaching tax authorities
75
Q

Examples of direct taxes promoting equalised income distribution

A
  • Personal income taxes
  • Corporate income taxes
  • Wealth taxes
  • Social insurance (social security) contributions or payroll taxes
76
Q

Examples of indirect taxes promoting equalised income distribution

A
  • General expenditure taxes (sales taxes) e.g. 20% VAT
  • Excise taxes e.g. taxes on specific goods such as petrol or alcohol (can be tied with demerit goods)
  • Customs duties (tariffs)
77
Q

What the three types of tax systems?

Examples?

A
  • Proportional tax: as income increases, the fraction of income remains constant. (Constant tax rate)
  • Progressive tax: as income increases, the fraction of income increases. (Increasing tax rate) e.g. Income tax
  • Regressive tax: as income increases, the fraction of income decreases. (Decreasing tax rate) e.g. VAT
78
Q

What is an average tax rate?

A

Tax paid divided by total income, expressed as a percentage.

79
Q

What is a marginal tax rate?

A

The tax rate paid on additional income.

E.g. the bracket system in the UK

IB Economics HL (15 decks)

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