3.2.3 Economic performance Flashcards
What are the 4 main objectives of macroeconomic policy?
(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
What are some other objectives the government have?
(1) balance the budget
(2) protect the environment
(3) Greater income equality
What is the difference between SR and LR growth?
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
How is SR and LR economic growth shown on a PPF diagram?
SR - inside the curve to on the curve
LR - outward shift of the PPF curve
It is between capital goods and consumer goods
What are the benefits of economic growth?
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. Higher tax revenue for the government and amount paid for unemployment benefits reduce - public services can be improved
What are the costs of economic growth?
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.
Finite resources may be used up in the creation of economic growth which may constrain growth in the future and threaten future living standards.
What are some benefits of a recession?
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
What is the difference between positive and negative output gap?
Positive: Real GDP is above the productive potential of the economy
Negative: Real GDP is below the economy’s productive potential
What are some examples of demand side and supply side shocks?
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
Why do the government aim for full employment?
It maximizes production and raises standards of living in a country.
How is unemployment shown on a diagram?
Represented as a point within a PPF curve
Define under employment
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
What are the different types of unemployment?
(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
What are the costs of unemployment?
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
What is the difference between cost push and and demand pull inflation?
Cost push: caused by the rising cost of inputs to production - higher cost for consumers as higher prices which causes AS to shift left
Demand pull: Excessive growth in AD compared to supply - shifts AD to the right which allows sellers to raise prices