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A Level Economics > 3.1: UK macroeconomy > Flashcards

3.1: UK macroeconomy Flashcards

1
Q

Economic growth

A

Increase in GDP on an annual or quaterly basis

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2
Q

Gross domestic product (GDP)

A

Total value of goods or services produced by a country

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3
Q

GDP per Capita

A

GDP / population

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4
Q

Purchasing power parity (PPP)

A

Additional exchange rate adjustment that equalises the price of internationally traded goods across countries

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5
Q

Arbitrage

A

Buying goods at a cheaper exchange rate in one country and selling them for profit in another

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6
Q

National income

A

Total value of goods and services produced in an economy in a given period of time (same as GDP) -> higher GDP = higher incomes = higher standard of living. Used to see if people are generally becoming richer

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7
Q

Limitions of GDP

A

Doesn’t include unpaid work, gifts or black markets
Can’t measure quality of goods/services
Can’t show externalities
Some countries have poor data collection so can’t show GDP accurately
Can’t show sustainability
Can’t show national happiness
Can’t show what GDP is spent on

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8
Q

Real GDP

A

GDP adjusted for inflation

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9
Q

Nominal GDP

A

GDP at current prices

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10
Q

Inflation

A

An increase in the general price level over a period of time

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11
Q

What is used to measure inflation?

A

Consumer price index (CPI), Retail price index (RPI)

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12
Q

How is inflation calculated?

A

Calculated by changes in price of the basket of goods (each item is weighted according to the % of household income is spent on them)

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13
Q

What happens if there is high and unexpected inflation?

A

Goods and services become unaffordable as the purchasing power of income falls

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14
Q

Index numbers

A

A way of expressing economic data i.e. what countries did best after 2008 financial crisis or compare average price of housing
New value / base value x 100 = index

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15
Q

Disinflation

A

Inflation falls but remains positive

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16
Q

Deflation

A

Price level is going down

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17
Q

Causes of inflation

A

Growth in money supply - money pushed into economy -> purchasing power decreases -> price rises
Currency depreciation -> price of imports rise
Cost-push (rise in production cost)
Demand-pull (rise in demand)

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18
Q

Consequences of inflation on consumers

A

Real incomes fall -> purchasing power falls -> standard of living falls
Inequality rises (skilled workers wages may increase with inflation)
Cash loses value quickly
Prices rise

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19
Q

Impact of inflation on savers

A

Real interest rate (nominal interest rate minus inflation) falls as inflation rises

20
Q

Impact of inflation on borrowers

A

Gain as real interest rates fall
Indebtedness falls as value of debt falls

21
Q

Consequences of inflation on firms

A

Volatile prices reduce investment due to risk
Fall in international competitiveness (exports less competitive)

22
Q

What happens if inflation is expected to rise?

A

People spend to avoid higher prices -> demand rises -> price rises -> wages expected to rise -> higher costs -> higher prices

23
Q

Unemployment

A

Amount of people willing and able to work but can’t find a job

24
Q

Measures of unemployment

A

Claimant count - amount of people receiving job seekers allowance
International Labour Organisation measure - actively seeking work for past four weeks and ready to start in two weeks. Collected by labour force survey

25
Q

Underemployed

A

Working part-time but would like more hours

26
Q

Frictional unemployment

A

When people are moving between jobs

27
Q

Structural unemployment

A

Mismatch between skills workers have and skills firms are looking for

27
Q

Cyclical unemployment

A

Caused by economy moving from expansion to recession . Is short term

27
Q

Seasonal unemployment

A

Due to seasons of the year

27
Q

Real-wage unemployment

A

Real wages too high in a market and above market clearing wage - caused by: high trade union power, high national min wage, slow to adjust wages

27
Q

Employment rate

A

% of population at working age who are employed

28
Q

What causes a rise in employment rate

A

Economic growth (vice versa for rise in unemployment)
Inflation due to rise in demand for imports

29
Q

Inactivity rate

A

% of population of a working age who are not actively seeking employment. If this rises:
- Govt expenditure rises
- Govt revenue falls

29
Q

Supply-side factors causing unemployment

A

Refers to supply of labour by workers. Those affecting employment/unemployment could be:
- Labour market flexibility i.e. trade union strength
- Skills of workers
- Geographic mobility of workers
- Occupational mobility of workers

30
Q

Demand-side factors affecting unemployment

A

Refers to demand for labour. Those affecting employment/unemployment could be:
- Health of firms i.e. profit, demand for goods
- Confidence of firms
- Strength of economy
- Government intervention to encourage hiring
- Level of labour market costs/regulations for hiring

31
Q

Balance of payments

A

Record of all transactions of a country does with the rest of the world. Made up of three accounts: current, capital and financial

32
Q

Financial account

A

Net foreign ownership of domestic assets
Hot money flows

33
Q

Capital account

A

Sale/transfer of patents copyrights, franchises, leases and other transferable contracts and goodwill
Transfers of ownership of fixed assets

34
Q

Current account

A

Trade in goods/services (X-M)
Net primary income - net factor income from abroad (i.e. remittances, profits, interest on dividends)
Net secondary income - net unilateral transfers (i.e. foreign aid)

35
Q

What does the balance of payments had to add up to?

A

0 but errors and omissions in calculating what comes in and goes out of an economy. So “balancing item” or “net errors and omissions” added to make it 0.

36
Q

What makes up the current account?

A

Unilateral transfers - payments sent by govt or individuals abroad in which no good or service is received
Income receipts and payments - includes money received from foreign investments
Services trade balance - exports and imports of services
Merchandise trade balance - exports and imports of goods

37
Q

Causes of a current account deficit

A

Low productivity
Inflation higher domestically than abroad -> reduces international competitiveness
Strong exchange rate -> reduces price of imports + increasing price of exports
Non-price factors i.e. quality of goods/services
Supply-side constraints -> cause goods imported from abroad

38
Q

The current account deficit is a concern

A

If due to low exports
If a high % of GDP and getting worse

39
Q

The current account deficit is not a concern

A

If due to capital imports -> productivity good in future
If due to purchase of current goods -> improves standard of living in short term
If due to foreign direct investment (FDI) from past -> profits being repatriated today, meaning investments was profitable

40
Q

The effects of a current account deficit

A

Needs to be financed by a financial account surplus - will become a problem if foreign investors stop wanting to purchase assets in that country
If a country has a free floating currency, the currency will depeciate -> may partially affect the competitiveness of exports. Will also cause import prices to rise -> higher prices -> cost-push inflation

41
Q

What does a current account surplus mean?

A

A country is exporting lots of goods. GDP = C + I + G (X-M). Exports > imports -> GDP may be rising -> signals economic growth

42
Q

What does a current account deficit mean?

A

May mean economic growth slowing and unemployment rising
Could also mean importing more primary goods (food and raw materials) -> labour force working in productive economic areas like intellectual property -> may reflect change in structure of an economy and its labour force
May also show high imports. If labour and input costs are cheaper overseas, this may reduce inflationary pressure i.e. cheaper to produce in china than UK

A Level Economics (15 decks)

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