4.2.1 Flashcards
What is economics?
As a social science economics studies how economic agents (households, firms and governments) make choices about allocating resources and to satisfy infinite needs and wants.
What is the fundamental economic problem
The idea that there are an unlimited amount of needs and wants which can only be met by the answering of the three economic questions: What to produce, How to produce and For whom to produce.
What is an economy
An economy is the network of economic agents which produces and consumes and economic activity is how different economic agents interact with each other.
What is the role of economic agents in an economy
HOUSEHOLDS:
Consume goods and services through the provision of demand.
FIRMS:
Production- The process which converts inputs into outputs
supply- these goods to households and governments
Consume labour
GOVERNMENT:
Sets laws
Set taxes and decide how to spend public money
provide public services.
What different economic systems have developed to address the fundamental economic problem?
Command economy: where the govt makes the three key economic decision to then dictate onto the economy with no role for firms and markets to decide how to allocate resources.
Free market economy:
The means of production are privately owned by capitalists and the key economic decisions are made by a completely free market.
What is meant by the structure of an economy
The balance of employment, input and output drawn from different sectors:
Primary- Extraction of raw and natural materials. Coal, fish, agriculture.
Secondary- The manufacturing sector.
Tertiary- The service sector
Quaternary- The sector dedicated to technology, r&d and finance
How does the structure of an economy change over time?
A pre-industrial economy will have significant primary industries, lower secondary and lowest tertiary. An industrial economy occurs when the share of secondary is greater than primary and the economy shifts to producing goods rather than selling them. Finally a post industrial economy has a higher market for tertiary goods than primary and secondary ones. also a quaternary sector emerges.
Key facts about the UK Economy
- Highly developed country
- Market oriented economy
- deindustrialised and service based economy
- Financial services are partially economically relevant
- Very open and globalised economy
- Regions of prosperity and deprivation and the north is most deprived.
Macroeconmic performance
How well an economy meets its macroeconomic objectives
4 Main macroeconomic objectives
- Strong, stable, balanced growth
- Full employment
- Price Stability (In target inflation)
- Satisfactory balance of payments
What is a macroeconomic indicator
A statistic that tells is something about the macroeconomic performance of an economy.
Macroeconomic indicator for Growth
% change in real GDP
Macroeconomic indicator for Price stability
% change in CPI
Macroeconomic indicator for Full Employment
LFS (Share of Economically active people who are seeking work but are unable to find a job)
What is the difference between lead and lag indicators
Lead is future. For example business confidence surveys.
Lag is data about the past. Economic Growth, U/P, Trade.
Macroeconomic indicator for Good balance of payments
Balance of trade
Economic shocks. Def and example
Unexpected events which have a bit impact on the economy.
Brexit, Ukraine war, GFS, Covid
Other Macroeconomic Objectives
- Reducing borrowing
- Reducing economic inequality
- Dealing with economic shocks like brexit or covid
- Improving productivity
- Improving public services
- Environmental objectives
Productivity and Labour Productivity
The Rate of Output. Labour Productivity is the rate of productivity per person over a time period.
Define improving Govt Finances
Means the difference between tax rev and govt spending
Indicators for other macro objectives
Improving govt finances: Size of deficit
Reducing inequality: Gini- Coefficient
Dealing with other economic shocks: Overall impact on macroeconomic objectives
Improving productivity: Output per person per time period
Improving pubic services: Quality of output and access to services
Environmental objectives: Net Zero emissions, Sea level rise, GTR
Change of economic priorities over time
WW2-1970’s: Big state rebuilding economy. Common approach to reach full employment. Long postwar boom until 1960’s.
1980: Thatcher era, Free market and trickledown economics
1990’s onwards: Controlling inflation. inflation targeting
Macroeconomic Conflicts
When it is not possible to achieve two objectives at the same time
What are index numbers
Way of simplifying data. Compare relative but not absolute changes. A year is chosen as the base year. Assesses percentage changes compared with the base value.
What Data is presented in Index number form?
CPI
RPI
GDP Index
FTSE
Index of House Prices
Index of wages and earnings
Index of production
Index number EQ
Index Number in Year 2= 178.5 X 102 / 173.4 = 105
Why are index numbers used to compare relative data
Used to compare numbers and statistics which are not easy to compare in raw form.
CPI
The official measure used to calculate the rate of consumer price inflation in the UK. It measures the change in the average cost of living. Does not include the housing cost but other factors are considered.
RPI
Retail Price Index. Simiar to CPI but also includes House prices so can be signigicately higher.
How is CPI constructed
Basket of 750 goods and services based on family expenditure. Goods are weighted to reflect their importance to consumers. OMS tracks the prices of basket monthly.
Data can be used to work out the average increases in price over last 12 months
How do you calculate the rate of inflation
The percentage change in CPI between 2 points.
Is the CPI a good measure of inflation?
Yes:
Same method is used annually and by each country which produces comparable data.
No:
Is the basket a typical basket with typical weighting.
What is anther main measure of national income?
GDP- Total value of goods and services produced within an economy in a given period of time. Most common measure of national Income.
GNI- the total value of goods and services purchased within the boundaries of an economy within a period of time.
Indexation
A technique to adjust payments by means of a price index. Firms ten to use RPQ as this rate is usually higher than CPI.
What is national income data used for?
This macroeconomic data informs the health and state of the economy and how it is preforming in comparison to other economies.
What is GDP-PPP
A comparison of NI data and is the measure most economists prefer. China is the Largest economy by this standard.
What are the weaknesses of using ER to compare national income data?
Exchange rates fluctuate over time and may become over or under valued. A country may appear richer when their exchange rate has strengthened.
What is meant by PPP
Measure the value of a currency in terms of the goods and services it will buy in different countries. The same basket could cost 30% more in another country.
Animal Spirits
A term representing the fear, pessimism, and confidence of economic agents which impacts the wider economy
The fiscal budget
The annual difference between tax and get spending
Fiscal deficit and surplus
The govt has more money than it spends in a surplus and spends more money in a surplus than it spends
Macroeconomic conflict
When it is not possible to achieve two macro goals at the same time and instead achieving one sacrifices achiving the other in the short run but in the long run all can be achieved. In the short run reaching low employment through investing may lead to inflation
Low flation
Below target but still positive inflation
Deflation
Negative inflation which sees money become worth more
Hyper inflation
Excessive inflation- over 50%
Disinflation
when inflation is falling but still positive
Full employment
Low steady on target unemployment around 2%
