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Economics AS > 2.5 > Flashcards

2.5 Flashcards

1
Q

What can cause short run growth ?

A
  • An increase in AD, any factor which increases the components of AD
  • An increase in SRAS, any factor that lowers the cost of production
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2
Q

When can long run aggregate supply increase ?

A
  • If there is an increase in the quality and quantity of the factors of production
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3
Q

How can input be increased ?

A

If existing inputs are used more efficiently

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4
Q

How can an increase in output be expressed in terms of a production function ?

A

Output = f(land, labour, capital, technical progress, efficiency)

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5
Q

What is land defined as ?

A

Land in economics is defined as all natural resources in the land and not just the land itself

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6
Q

When is economic growth likely to occur ?

A

If there is an increase in the quantity of workers in the economy or there is an increase in the quality of labour

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7
Q

What can an increase in labour force result from ?

A

Increases in the labour force can result from changes in the birth rate, increases in participation rates and increases in immigration.

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8
Q

What effect does the birth rate have on labour ?

A

In Europe, the birth rate has been relatively low in recent decades. This has reduced the size of the current labour force from what it would otherwise have been.

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9
Q

What are participation rates ?

A

Participation rates are the proportion of the population of a certain age who are either in work or seeking work.

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10
Q

What is an easy way of increasing the labour force ?

A

Employ migrant labour

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11
Q

Why may an increase in output not necessarily increase economic welfare ?

A

One reason is that increased income may have to be shared out amongst more people, causing little or no change in income per person.

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12
Q

Why are increases in human capital essential ?

A
  • Workers need to be sufficiently educated to cope with the demands of the existing stock of capital.
  • Workers need to be flexible.
  • Workers need to be able to contribute to change.
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13
Q

Why does the stock of capital in the economy need to increase over time ?

A

The stock of capital needs to be increased over time if economic growth is to be sustained

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14
Q

How do technological processes increase economic growth ?

A
  • It cuts the average cost of production of a product.
  • It creates new products for the market. Without new products, consumers would be less likely to spend increases in their income. Without extra spending, there would be less or no economic growth.
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15
Q

What is economic efficiency defined as ?

A

Economic efficiency is defined as the way in which the factors of production are combined to produce goods and services

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16
Q

What will increased efficiency in resources lead to ?

A

It will bring about rises in output

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17
Q

In which type of economy is there the most efficiency ?

A
  • Market economies as they promote competition

- Would lead to more efficient production techniques and will drive less efficient firms out of the market

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18
Q

What does competition lead to ?

A

Competition will lead to more efficiency

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19
Q

What can cause economic growth ?

A

Government policies

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20
Q

How can government policies increase economic growth ?

A

They can promote competition and protect innovation

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21
Q

Which policies could increase competition ?

A

Privatisation, deregulation and control of monopolies

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22
Q

How does innovation have an effect on economic growth ?

A

Innovation will increase efficiency

  • Government policies which promote innovation can increase economic growth
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23
Q

What is the problem using real GDP ?

A

In the short term, GDP fluctuates around the long term trend growth path of output

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24
Q

What are the fluctuations of real GDP known as ?

A

These are known as the trade cycle , business cycle or economic cycle

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25
Q

Describe a boom/peak

A
  • National income is high
  • There is likely to be a positive output gap
  • Consumption and investment will be high
  • Tax revenues will be high for the government
  • Wages will be rising and profits increasing
  • There will also be inflationary pressures, prices in the economy will be increasing
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26
Q

Describe a downturn

A
  • Output and income fall, leading to a fall in consumption and investment
  • Tax revenues begin to fall and government expenditure on benefits begins to rise
  • Imports decline and inflationary pressure eases
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27
Q

Describe a recession/depression

A
  • At the bottom of the cycle, the economy is said to be in a recession or depression
  • In the UK, the government defines recession as where real GDP falls in at least two successive quarters
  • Economic activity is at a low in comparison with surrounding years.
  • High unemployment exists, so consumption, investment and imports will be low.
  • There will be few inflationary pressures in the economy and prices may be falling (i.e. there will be deflation).
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28
Q

Describe a recovery/expansion

A
  • National income and output begin to increase
  • Unemployment falls
  • Consumption, investment and imports begin to rise
  • Wages will rise as workers feel more confident about demanding wage increases
  • Inflationary pressures begin to mount
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29
Q

What is a demand-side shock ?

A

A shock which affects aggregate demand

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30
Q

Give some examples of demand side shocks

A
  • The central bank may sharply raise interest rates perhaps to combat rising inflation.
  • The government may sharply raise taxes or cut government spending, perhaps to combat rising inflation or balance its budget. This leads to lower aggregate demand and a recession.
  • The world economy may go into recession, hitting UK exports sharply and so sending the UK into a recession too.
  • There may be a sharp rise in the value of the pound against other currencies.
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31
Q

What is a supply-side shock ?

A

A shock which affects aggregate supply

32
Q

Give some examples of supply side shocks

A
  • A large rise in world commodity prices would lead to higher import costs. The rise in import costs will reduce aggregate supply leading to lower output and a possible recession
  • An outbreak of trade union militancy could see large wage increases which will raise the price level substantially and reduce aggregate supply leading to a recession.
33
Q

What can supply and demand side shocks cause ?

A

Both can cause recessions and booms to occur, they are the causes of the trade cycle

34
Q

What is an output gap ?

A

The difference between the actual level of real GDP and its estimated long term value at a point

35
Q

What is YE ?

A

Equilibrium output

36
Q

What is YF ?

A

Full employment

37
Q

What is a negative output gap ?

A
  • It is when an economy is producing below their potential output and factors of production are not being used.
  • There is spare capacity
38
Q

What is a positive output gap ?

A

A positive output gap occurs when actual output is more than full-capacity output

39
Q

When does a positive output gap occur ?

A
  • This happens when demand is very high

- To meet that demand, factories and workers operate far above their most efficient capacity

40
Q

What can be said about economic growth when there is a positive output gap ?

A

Economic growth is not sustainable

41
Q

How is economic growth linked with life expectancy ?

A
  • Life expectancy tends to be associated with income

- People are starting to live longer and this is due to an increase in NHS funding

42
Q

How is economic growth linked with what people eat and drink ?

A
  • Consumers are now so rich that overeating is now a major problem
  • Obesity is the main problem related to this
43
Q

How is economic growth linked with health ?

A
  • Health tends to be better
  • The quality of peoples life in old age has increased because of better health
  • Improved healthcare system in terms of quality and quantity
44
Q

How is economic growth linked to education ?

A
  • Standards of education are much higher than they were before
  • There is a better quality of education
45
Q

What is the definition of sustainable growth ?

A

Growth in the economy today which does not lead to a fall in the productive potential of the economy for future generations

46
Q

What are some environmental problems with increases in national income ?

A
  • More resource depletion

- More air pollution

47
Q

What could happen due to this increase in price ?

A
  • First, demand and therefore consumption falls - the price mechanism results in conservation.
  • Second, it becomes profitable to explore for new supplies of the resource.
  • Third, producers and consumers switch to substitute products.
48
Q

What is the Easterlin paradox ?

A

The idea that increases in GDP do not lead to increases in happiness

49
Q

What does the easterlin paradox state ?

A
  • The argument is that an increase in consumption of material goods will improve well-being when basic needs are not met, such as adequate food and shelter.
  • But once these needs are being met, then increasing the quantity of goods consumed makes no difference to wellbeing
50
Q

What could be said if the Easterlin paradox is correct ?

A

Economic growth will bring no benefits to consumers in terms of happiness in rich industrialised countries

51
Q

How does economic growth affect consumers ?

A
  • Economic growth should allow households to see rising incomes over time
  • They can then afford to buy more goods and services
52
Q

How does economic growth affect firms ?

A
  • It may provide opportunities for existing firms to increase sales as buyers have rising incomes
  • It also provides opportunities for new firms to establish themselves
53
Q

What could economic growth mean for firms (negative) ?

A
  • However, economic growth is accompanied by changes in the structure of the economy.
  • Changing technologies mean that some firms find their markets disappearing.
54
Q

How does economic growth affect the government ?

A

Rising incomes means that government tax revenues should rise

55
Q

What does economic growth affecting the government depend on ?

A
  • It depends on the parties in power
  • Right wing governments are more likely to reduce rates of tax and reduce government services than left wing governments
56
Q

How does economic growth affect the environment ?

A
  • In rich developed countries, economic growth is likely to lead to less pollution and a cleaner environment.
  • In developing countries, growth is likely to increase pollution and worsen the environment
57
Q

What does further economic growth lead to ?

A

A cleaning up of the environment in some countries

58
Q

How does economic growth affect the economy ?

A
  • Growth in GDP results in a larger economy

- It may result in more jobs being created or there may be fewer if existing workers became more productive

59
Q

How does economic growth affect current and future living standards ?

A
  • If only the richest in society receive the effect of economic growth, then it will have no impact on the majority of households.
  • However, in developing countries, everyone In society is more likely to benefit from economic growth.
60
Q

What is the relation between rising GDP and living standards ?

A

The weaker the link between rising GDP and living standard, the less economic growth will benefit households and individuals

61
Q

How could the population of a country increase their standard of living ?

A

When real GDP/GNI per capita increases over time

62
Q

What is the relation between real GDP per capita and standard of living ?

A

A higher GDP per capita may result in an increase in the standard of living of a country

63
Q

What are the two reasons that mean we can not confirm if real GDP per capita and standard of living are correlated ?

A
  • National income statistics do not accurately measure the ‘true’ value of output produced in an economy
  • Standards of living are closely related to a variety of factors that GDP and GNI are unable to account for.
64
Q

Why don’t national income statistics accurately measure the ‘true’ value of output ?

A
  • GDP and GNI do not include non-marketed output
  • GDP and GNI do not include output sold in underground (parallel) markets
  • GDP and GNI and differing price levels
65
Q

What does GDP measure ?

A

GDP measures the value of goods and services that are traded in the marketplace and that generate incomes for the factors of production

66
Q

Define non marketed output

A

Output of goods and services that are not sold in the market and do not generate any income

67
Q

Give an example of non marketed output

A

An example is someones own works such as home repairs

  • if the home repairs were carried out by hired workers, GDP would be greater by the amount of their wages.
68
Q

Why are less developed countries likely to have more non marketed output ?

A

In less developed countries households are often quite self-sufficient, with a substantial portion of production taking place for a household’s own use and consumption, and never reaching the marketplace

69
Q

When does an underground market exist ?

A

Exists whenever a buying/selling transaction is unrecorded and are therefore not included in GDP/GNI

70
Q

What is another name for underground market ?

A
  • Parallel market

- Informal market

71
Q

What can be involved in an underground market ?

A
  • It may involve the sale of legal goods and services, such as reselling a good at a higher price if there is a price ceiling
  • When a plumber does repairs in your home and does not report the income received to avoid paying taxes
  • In transactions involving illegal goods and services (such as drugs).
72
Q

How could we reach a more ‘true’ value of GDP and GNI ?

A

If the transactions in the underground market could be recorded and made official

73
Q

What does purchasing power refer to ?

A

It refers to the quantity of goods and services that can be bought with money

74
Q

What are excise duties ?

A

Excise duties are indirect taxes on the sale or use of specific products, such as alcohol, tobacco, and energy.

75
Q

Where does the revenue made from excise duties go to ?

A

The revenue from these excise duties goes entirely to the country to which they are paid

Economics AS (11 decks)

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