3.2.3 Economic performance

Question 1

What are the 4 main objectives of macroeconomic policy?

Answer 1

(1) Economic growth - improves standard of living

(2) Inflation - UK aim is 2%

(3) Unemployment - productive economy AD increases as you have more income

(4) Equilibrium in the balance of payments

Question 2

What are some other objectives the government have?

Answer 2

(1) balance the budget
(2) protect the environment
(3) Greater income equality

Question 3

What is the difference between SR and LR growth?

Answer 3

SR - measured by % change in real GDP (without inflation)

LR - increase in productive capacity of the economy- rate of growth of real national output in economy over time

Question 4

How is SR and LR economic growth shown on a PPF diagram?

Answer 4

SR - inside the curve to on the curve

LR - outward shift of the PPF curve

It is between capital goods and consumer goods

Question 5

What are the benefits of economic growth?

Answer 5

economic growth means firms are succeeding so employees get higher wages so the standard of living increases. There is an increased demand for labor leading to less unemployment and higher incomes. higher incomes means an increase in AD so higher profits for firms so more investments in better technology so an increase in the economy’s productive potential. Balance of payment increases as more exports are sold. Higher tax revenue for the government and amount paid for unemployment benefits reduce - public services can be improved without having to raise taxes. Gov fiscal position improves as their are greater tax revenues and less spending in benefits so gov can borrow less

Question 6

What are the costs of economic growth?

Answer 6

Creates income inequality as low skilled workers may find it harder to get higher wages. Higher wages means more responsibilities which can increase stress and reduce productivity. Economic growth can lead to demand pull inflation as demand increases faster than supply or can lead to cost push inflation as economic growth increases demand for resources pushing up their prices. However effects of inflation will be reduced if AS also increases. Deficit in the balance of payments as people with higher incomes import more and firms import more resources for production to meet high demand. Industrial expansion may bring negative externalities such as pollution which can lower standards of living. Finite resources may be used up in the creation of economic growth which may constrain growth in the future and threaten future living standards so improve sustainability.

Question 7

What are some benefits of a recession?

Answer 7

discount retailers can attract more customers - consumer confidence

It forces firms to face inefficiencies as they need to cut costs to survive a recession so this benefits the firms in the LR as efficiency is improved

Question 8

What is the difference between positive and negative output gap?

Answer 8

Positive: Real GDP is above the productive potential of the economy

Negative: Real GDP is below the economy’s productive potential

Question 9

What are some examples of demand side and supply side shocks?

Answer 9

demand: Consumer confidence is boosted e.g. house price increasing means an increase in consumer spending and trade partners in a recession reduces demand for exports

Supply: poor harvests reduces supply so an increase in price so reduces the economy’s capacity and new source of raw material reduces price so an increase in the capacity of the economy

Question 10

Why do the government aim for full employment?

Answer 10

It maximizes production and raises standards of living in a country.

Question 11

How is unemployment shown on a diagram?

Answer 11

Represented as a point within a PPF curve

Question 12

Define under employment

Answer 12

Economy is not operating at its full capacity. When someone has a job but it’s not a job that utilizes that persons skills, experience or availability to the best effect

Question 13

What are the different types of unemployment?

Answer 13

(1) Cyclical - usually in a recession when AD falls and so does employment
(2) Seasonal - Demand isn’t the same all year round e.g. tourism industries or Christmas who have peak seasons
(3) Structural - decline in a certain industry or occupation due to a change in consumer preferences or technological advances
(4) Occupational immobility - don’t have the right skill sets for jobs available
(5) Geographical / regional - can’t fford to move
(6) Frictional - time between leaving one job and starting another

Question 14

What are the costs of unemployment?

Answer 14

Lower incomes, spend less - AD decreases, reduced firms profits, less income tax revenue for governments and more money spent on benefits which is an opportunity cost. There may be higher crime rates, more health problems due to less income

Question 15

What are the causes of inflation?

Answer 15

Cost push: caused by the rising cost of inputs to production - higher cost for consumers as higher prices which causes AS to shift left
Increase in wages makes cost for firms higher as it covers a large proportion- wage price spiral
Rise in cost of imported raw materials as country currency decreases making price for the same imports higher
Rise in indirect tax which makes prices for inelastic goods higher.

Demand pull: Excessive growth in AD compared to supply - shifts AD to the right which allows sellers to raise prices
Higher consumer spending or high demand for exports as consumer confidence increases in future employment prospects or low interest rates which encourage cheap borrowing and greater spending
Bottleneck shortages when demand grows when labour and resources are being used fully so increasing output may lead to shortages so theres a positive output gap

Question 16

What are some costs of inflation?

Answer 16

standard of living falls for those on fixed incomes and will have a big impact on those with low incomes, country competitiveness decreases with a deficit in the balance of payments as exports cost more than imports, unemployment increases, less savings as the value of saving falls and it is more attractive to spend before prices rise further so shortage of funds for borrowing and investments in firms decreases. When interest rates rise to reduce inflation then this reduces investment harming future growth

Question 17

define deflation

Answer 17

when the rate of inflation falls below 0%
AD and employment decrease
Consumers may not spend thinking prices will continue to fall

Question 18

What is the conflict between the macroeconomic objectives of inflation and unemployment?

Answer 18

Reducing unemployment means an increase in inflation

Decreased unemployment means the economy begins to reach full capacity so there are few spare workers so demand for workers increase and this will lead to increased wages so extra costs are passed onto consumers through higher prices leading to cost push inflation

Low unemployment means more spending as there is job security so prices rise due to increased demand leading to demand pull inflation

Question 19

What is the conflict between the macroeconomic objectives of economic growth and wealth inequality?

Answer 19

economic growth can increase inequality e.g. high skilled workers may become more in demand while demand for low skilled workers decreases. The government can increase tax revenue to decrease inequality by increasing minimum wage and progressive taxes however higher taxes may be a disincentive to firms

Question 20

What is the natural rate of unemployment(NRU)?

Answer 20

Rate of unemployment when the labor market is in equilibrium so labor demand = labor supply.

Question 21

What does the SR Phillips curve show?

Answer 21

Inflation / unemployment trade off, as inflation falls, unemployment rises

Question 22

How is the flexibility of labor decided?

Answer 22

(1) Labor mobility - switch jobs easily, transferrable skills and willingness for workers to move to where there are jobs.

(2) wage flexibility - e.g. low wages during a recession

(3) flexibility of working arrangements - contracts, part time 0 hours makes hiring cheaper to respond to changes in the market

Question 23

What are the disadvantages of a recession?

Answer 23

Many firms close down so many lose jobs, they stop hiring new employees and unemployment increases. Gov spending increases due to unemployment leading to more borrowing causing a budget deficit. Levels of investment fall as firms reduce spending on R&D which can have consequences for the LR productive potential of the economy.

Question 24

What are the costs of deflation?

Answer 24

AD falls and unemployment increases so the economy is doing bad
People will put off spending hoping that prices will fall further which means less profit for firms and reduced economic growth