3.2.3 Economic Performance Flashcards
Define economic growth
Increase in potential level of real output the economy can produce over a period of time
*steady growth in productive capacity of economy
Demand side causes of economic growth?
In the short term, economic growth is caused by an increase in a component AD — causes higher level of GDP
i. e (AD elements)
- C: Tesco £2.5bn profits
- I: Amazon warehouses
- G: HS2
- X: financial services
- M: manufacturer goods
What are some causes of SHORT RUN growth AD?
- Lower interest rates (more spending)
- Increased wages (more spending on luxury goods)
- Increased Gov spending (boosts economy temporarily)
- Cheaper currency £ (more tourism)
- Consumer confidence (more likely to spend on wants)
- Lower income tax (more money in your pocket)
- Rising house prices (people borrowing more loans)
What are some causes of LONG RUN growth AD?
- Increased capital (investment in new factories)
- Increase in working population (via immigration etc)
- Increase in labour productivity (better education, technology etc)
- Discovering new raw materials
- Technological improvements to improve productivity (internet etc)
Define aggregate demand
Measurement of total amount of demand for all finished goods and services produced in an economy
Advantages and disadvantages of economic growth?
Advantages:
- wealth
- reduced poverty
- increased life expectancy
- better education — skilled workforce
- decreased infant mortality
Disadvantages:
- pollution
- overpopulation
- exploitation of workers — TNC’s
- congestion
- inequality
Describe the process of the economic cycle
Combination of recessions (downswings) and recoveries (upswings) sustained by an economy over time.
Fluctuations occur in 2 ways:
- seasonal
- cyclical
Define recession
2 or more quarters of decline in GDP + economic growth — government increases spending to stimulate economy
Define recovery
Period of economic expansion, typically after a recession
More tax imposed — consumer earn and spend more
Define depression
Severe recession lasting 2 or more years
Indicators of recessions and booms (contextual examples)
Recession:
- builders delay construction of new homes
- number of shifts at leading car plants are cut
- growing number of homeless people
- increasing hours of overtime are worked
Booms:
- rising lipstick sales
- rise in business class ticket purchases
- share prices of leading industrial companies are rebounding
- rising demand for steel products
Define output gap
Difference between actual level of National output and estimated potential level is expressed as percentage of level of potential output
Define negative output gap
Downward pressure on inflation
Define positive output gap
Upward pressure on inflation
2 methods of measuring unemployment?
- Labour force survey:
Survey of unemployment in UK - Claimant count:
Measure of number of people claiming unemployment benefits
Define unemployment
Someone who is out of work but is willing and able to work
Formula for rate of unemployment (%)?
Unemployed
——————— X 100
Labour force
What is the impact of unemployment on the economy
High unemployment:
- social costs / welfare payments / inefficient use of labour but lower wage costs and abundant supply
Low unemployment:
- higher revenue / lower welfare costs / economic growth but wage costs spiral upwards due to lack of supply
5 causes of unemployment?
- Recession
Falling GDP, firms produce less, less demand for workers, redundancies - Structural factors
Manufacturing jobs been lost due to economy becoming more service based - Geographical unemployment
Higher in areas I.e north uk due to manufacturing jobs being more common - Frictional unemployment
Takes time to find job after being unemployed - Youth unemployment
Lacking of skills or right motivation
Define cyclical unemployment
Exists when individuals lose their jobs as a result of a downturn in aggregate demand
— most likely when there is an output gap
Define frictional unemployment
Short-term unemployment including voluntary and involuntary unemployment
— time taken to find new employment
Define inflexible labour markets
Rigid employment patterns that limit scope for flexibility such as job shares / flexitime that might otherwise entice labour
Define structural unemployment
Long-term unemployment which is damaging to economies
— due to shifts in economy
What are the consequences of unemployment?
👎loss of income
👎decrease in QOL
👎increased crime rates
👍firms save costs
👍spend more time with family and children
What is demand pull?
Demand pull inflation occurs when AD is growing at an unsustainable rate leading to increased pressure on scarce resources and a positive output gap
Likely when there is full employment of resources and SRAS is inelastic
How do changes globally affect (un)employment in the UK?
- Offshoring:
UK jobs lost - Demand increasing in poorer countries:
Creates jobs in UK in areas of specialism I.e finance - War:
Created jobs; either military, supplying arms etc - Economic shocks:
Tends to be job losses but depends where / what sector - Recessions and booms:
Good economic news elsewhere tends to lead to an increase in AD in the UK and therefore increase employment - Population increases:
Should raise AD so creates jobs
Define cost-push inflation
Occurs when firms respond to rising costs by increasing prices to protect their profit margins
Advantages and disadvantages of deflation?
Advantages:
- ‘good’ deflation — due to big increase in productivity, lower costs — firms can then pay real wage increases
Disadvantages:
- ‘bad’ deflation — falling prices caused by weak demand, then firms will see a decline in profitability, cut wages etc
- consumers delay purchases
- rise in real value of debt
- higher real interest rates
Define import-cost inflation
Rising price level caused by an increase in cost of imported energy, food, raw materials and manufactured goods
How do changes in world commodity prices affect domestic inflation?
- Labour becomes more expensive
- Expectations of inflation: employees may ask for pay rise in advance
- Indirect taxes which increase cost of goods
- Depreciation in exchange rate
- Monopolies exploit consumers with high population
What is the quantity theory of money?
Oldest theory of inflation is caused by persistent increase in supply of money
What is the equation of exchange? (Plus formula)
Stock of money, in economy multiplied by the velocity of circulation of money equals
Price level X Q of Real Output
What is the balance of payments?
Records all of the many financial transactions that are made between consumers, businesses and UK government with people globally
Comprised of:
- current account
- capital account
- official financing acxojnt
Define currenct account deficit
Occurs when currency outflows in the current account exceed currency inflows
Exports < Imports
Define current account
Balance of trade in goods and services
Comprised of:
- trade in goods
- trade in services
- primary income
- secondary income
Define current account surplus
Occurs when currency inflows in current account exceeds currency outflows
Exports > Imports
Define Balance of trade in Goods
Part of current account which measures payments for exports and imports of goods
Difference between total value of exports and total value or imports
AKA ‘balance of visible trade’
What factors influence a country’s current account balance?
- in UK, during a recession the current account balance falls as inflation rises (consumer spending falls)
- during economic growth, there are higher incomes + consuming is more affordable — larger deficit on the current account
- UK becomes more productive = becomes more financially competitive — exports rise relative to imports
What is the interconnectedness of economies through international trade like?
In theory, the sum of all countries’ trade balances should be 0, since what one country exports will be imported by another country.
If the EU faces recession, then their demand for UK goods and services will fall, since EU consumers are less able to afford imports.
International trade means countries have become interdependent
Difference between short run and long run growth
Short run:
Increase in ONE component of AD.
I.e can occur if people have a change to their disposable income due to lowered taxation etc, increases AD
Long run:
An increase in ALL or ANY of the components of AD which causes an increase in AS at it can cause a g change in the potential growth of the economy — allows for future growth
- SHORT RUN IS ACTUAL GROWTH, LONG RUN IS POTENTIAL GROWTH *
What are some causes of SHORT RUN growth AS?
SPITE
- subsidies for businesses
- productivity
- input prices
- taxes on businesses
- expectations about inflation
What are some causes on LONG run growth of AS
- Available land and raw materials
- Quantity and productivity of labour
- Quantity and productivity of capital
- Technological improvements which affect productivity and output.
- The level of entrepreneurship in the economy.
What is a demand shock?
A sudden and temporary increase / decrease in the demand for a good or a bundle of goods
What key policies help absorb economic shocks?
- floating exchange rates
- geographically and occupationally mobile / flexible Labour force
- a diversified economy (not reliant on a few sectors)
- strong fiscal position
- freedom to set / adjust monetary policy when conditions change
What is a supply-side shock?
An unexpected event which suddenly changes the supply of a product or commodity, resulting in an unforeseen change in price
Define seasonal unemployment
Seasonal variation in structure of jobs and / or labour offered
How do global changes affect (un)employment in the UK?
- offshoring: UK jobs lost
I.e call centre - demand increasing in poorer countries: creates jobs in UK in areas of specialism I.e finance
- investment overseas takes jobs away from UK, investment domestically creates jobs
- war creates jobs
I.e military, supplying arms / equipment etc - population increase should raise AD therefore create jobs
- recessions: foreign businesses may become more competitive and damage UK firms leading to job losses
- booms: increase in AD in the UK therefore increased employment
Define inflation
Sustained rise in the general price level over time
Define deflation
When inflation rates become negative
How do changes in other economies affect inflation rates in the UK economy?
When the global economy is in a good state, the UK typically imports inflation from booming economies — prices of imported food and raw materials increase
The UK then suffers from import-cost inflation
What is the importance of international trade for countries such as the UK?
- comparative advantage (specialisation in goods which have a relatively lower opportunity cost)
- make use of abundant raw materials
- greater choice for consumers
- global growth and economic development
- service sector trade
Define an output gap
A measure to gauge the functioning of an economy, using the economy’s actual GDP and its anticipated GDP. The difference between these parameters is called an output gap
What is the formula for an output gap?
OG = actual — prospective
Production Production
What does a positive output gap suggest about the economy and unemployment / inflationary pressures?
The current level of economic activity cannot be sustained for long as it is beyond the economies capacity
Will lead to a shortage in labour
Increased inflation — PL driven up
What does a negative output gap suggest about the economy and unemployment / inflationary pressures?
Indicates an economies lack of demand for goods and services — results in firms and people operating at less than their maximum efficiency
Higher unemployment
Sluggish economy — declining GDP growth rate and potential recession
PL falls as do interest rates
How could conflicting policies be resolved?
A possible way to resolve some of the problems associated with conflicting objectives is to use a policy rule, such as Tinbergen’s rule – which advocates that for every single policy objective there must be a separate policy instrument -for example, using exchange rate manipulation specifically to ease a balance of payments problem.
What is the significance of change in rates of (un)employment and inactivity on consumers, firms etc?
(Un)employment:
- Affects consumers negatively as they have less disposable income, could affect their mental health
- Affects firms positively as they have a larger pool of Labour to supply from, negatively as consumers may buy less
- affects workers as their skills aren’t fully utilised
- it negatively affects the government as it may have to spend more on welfare, and they receive less revenue
Inactivity I.e pensioners, students who don’t contribute to the economy means the productive potential of the economy could fall (smaller workforce)
Is the Claimant Count a good method of measuring unemployment?
Not every unemployed person is eligible for claiming JSA I.e unemployed people who have partners that are on high incomes.
This method generally underestimates the level of unemployment
What are the main triggers for demand pull inflation?
- depreciation in exchange rate causing imports to become more expensive whilst exports become cheaper (AD rises)
- fiscal stimulus in the form of low tax rates of more Gov spending meaning higher levels of disposable income
- lower interest rates making saving less attractive and borrowing more attractive, so C increases
- high UK growth in UK export markets means UK exports increase and AD increases
What are the main triggers for cost push inflation?
- changes in world commodity prices which may increase costs of production
- Labour becoming more expensive I.e through trade unions etc
- expectations of inflation — if consumers expect prices to rise, they may ask for higher wages to make up for this
- indirect taxes could increase the cost of goods i.e cigarettes or fuel if producers push these indirect taxes onto consumers
- depreciation in the exchange rate, causing imports to increase in price and raise costs of production
- monopolies using their dominant market position to exploit consumers with high prices
What are the effects of inflation on consumers?
- those on low incomes hit the hardest as the cost of necessities become expensive
- the purchasing power of money falls, which affects high earners the least
- if consumers have loans, the value of the repayment will be lower, because the amount owed doesn’t increase with inflation so the real value of debt decreases
What are the effects of inflation on firms?
- lower interest rates mean borrowing and investing is more attractive than saving. With high inflation, interest rates are likely to be higher, so the cost of investing will be higher
- workers may demand higher wages, increasing the cost of production for firms
- firms may be less price competitive on a global scale
- unpredictable inflation will reduce business confidence since they are unaware of what there costs will be
What are the effects of inflation on Gov?
- government will have to increase the value of state pension and welfare payments, as cost of living is increasing
What are the effects of inflation on workers?
- real incomes fall with inflation, so workers have less disposable income
- if firms face higher costs there could be more redundancies when firms try to cut costs
What are the effects of deflation?
- deflation discourages spending, as goods and services will become cheaper in the future (not worthwhile to spend now)
- lack of spending can cause economic decline and an increase in unemployment
- deflation makes the value of debt higher — consumers with high levels of debt find it harder to pay off
- consumers have less disposable income as wages are likely to fall as firms make lower profits
Define an export
Good or service sold to a foreign country, which is positive in the BOP (inflow of money)
Define an import
Good or service brought in from foreign countries, which is negative on the BOP (outflow of money)
Talk about economic growth vs the current account
- during periods of economic growth, consumers have high levels of spending
> in the UK, consumers have a high marginal propensity to import — likely to be more spending
> this leads to a worsening of the current account deficit
Export-led growth i.e China means an economy can run a current account surplus and have high levels of growth
Talk about economic growth vs the Gov budget deficit
- reducing a budget deficit requires less expenditure and more tax revenue
> leads to a fall in AD
> less economic growth
Talk about economic growth vs the environment
- high rates of economic growth are likely to result in high levels of negative externalities i.e pollution and usage of non-renewables
Talks about economic growth vs inflation
- in the short run, there is a trade off between the level of unemployment and the inflation rate: illustrated using the Philips curve
> as growth increases, unemployment falls due to more jobs. The causes wages to rise however, which can lead to more consumer spending and a rise in average PL
> extent of this trade off may be limited if supply side policies are used to reduce structural unemployment (won’t increase average wages)
