4.2.3 Flashcards
1
Q
What is economic growth
A
- An increase in real GDP
2
Q
Difference between actual and potential growth
A
- actual growth is when real GDP actually increases while potential growth is when there is an increase in the productive potential
- Actual growth is when theres an increase in AS but there hasn’t been any increase in actual GDP due to AD being low - there has been potential growth but not actual growth.
3
Q
How is short run growth shown on a PPF diagram
A
- A movement from a point inside the PPF to to a point on the PPF where all resources are being used efficiently
- this is ACTUAL GROWTH
4
Q
How is long run growth shown on a PPF diagram
A
- a shit outwards of the PPF curve from PPF1 to PPF2 to shape the economy’s productive potential has increased
- this is POTENTIAL GROWTH
5
Q
What is the bottle neck on Keynesian LRAS
A
When the economy is nearly producing at its maximum potential output
6
Q
What is GDP
A
The total value of all goods and services produces in a economy in a year
7
Q
How we measure GDP
A
- Output method
- Income method
- Expenditure method
8
Q
How is economic growth measured
A
By a %change in real GDP
9
Q
How do you convert Nominal GDP to real GDP
A
Nominal GDP % change - inflation %
10
Q
What is a recession
A
Two consecutive quarters of negative real GDP
11
Q
How to convert Nominal GDP to Real GDP considering the impact of population growth
A
Nominal GDP - Rate of inflation - Change in population
12
Q
How can falls in cost of production cause short- run economic growth
A
Lower costs means firms are willing to increase output (SRAS shifting right)
13
Q
What is short run economic growth
A
Increase in real output (real GDP) mainly caused by increase in AD
14
Q
What is long run economic growth
A
Increase in the Economy’s productive capacity of the economy (outward shift in LRAS)
15
Q
Determinants of long run growth
A
- increase in labour force
- Improvement in labour productivity
- Education
- New technology
16
Q
What is the economic cycle
A
Short run fluctuations in economic activity - changes in actual GDP
17
Q
What are the four phases of an economic cycle
A
- boom
- recession
-recovery
-downturn
18
Q
What happens in a boom
A
- short run economic growth
- high Consumer confidence
- high business confidence - investment
- U/P is low
- theres a CAD
- inflation rises
19
Q
What happens in a recession
A
- economic growth is negative
- consumer spending is likely to fall - falling incomes rising U/P
- business confidence is low - investment is low
- Budget deficit high because higher spending on U/P benefits
- Current account balance might be surplus due to low demand for exports
20
Q
What happens in downturn
A
- consumers reduce consumption
- business confidence will fall - falling investment
21
Q
Demand side factors that cause changes in the economic cycle
A
- Consumer and business confidence
- Changes in wealth factors (house prices)
- Exchange rate factors
- Govt policy - changes in fiscal policy (govt spending)
- Demand side shocks
-Accelerator and multiplier
22
Q
Supply side factors that cause changes in economic cycle
A
- changes in cost of production
- supply side shocks (increase in price of oil/energy)
23
Q
What is meant by an output gap
A
Difference between the actual output and potential output
24
Q
Positive output gap
A
Real GDP > Potential GDP
25
Negative output gap
Real GDP < Potential GDP
- unemployment & slowdown in economic growth
26
What do Classical economists believe about output gap
- Markets clear in the long run so there is full employment.
- In the short run there are output gaps
27
Benefits of economic growth
- higher standard of living
- Increased employment
- LR growth to control inflation
- higher investment
- competitive market place leading to innovation and consumer choice
28
Costs of economic growth
- Inflation - trade off
- Inequality -higher incomes aren’t shared equally
- leads to negative externalities (air pollution)
29
Impact of economic growth on individuals
- increased income levels for many. However, they many not be evenly distributed, as higher income earners will see a disproportionately larger increase in their incomes.
30
Impact of economic growth on the economy
- several macroeconomic policies can be achieved.
- employment rates may rise
- better standard of living
- increased investment in education, healthcare & infrastructure
- HOWEVER, economic growth may lead to inflation
31
Policies to promote economic growth
- Monetary (bank & exchange rate)
- Supply side (labour market ,financial,industrial measures)
- Fiscal policy (govt spending, taxation,borrowing)
32
What is cyclical instability
Excessive volatility in the economic cycle
33
Example of demand side shock
- the banking crisis of 2008 which significantly affected both business and consumer confidence
- unexpected large change in exchange rates or interest rates
34
Example of supply side shocks that led to sudden changes in economic cycle
- COVID and Brexit impacted the supply side, leading to stagflation in the UK with high inflation and economic recession
35
Asset price bubbles
When asset prices (houses, commodities) rise rapidly beyond normal demand and supply conditions
- Demand may rise be due to ppl buy assets hoping to sell latter for profit
When conditions generate it leads to a fall in prices and waves of selling as ppl attempt to sell before prices collapse and then the bubble ‘bursts’ white rapidly falling prices
- causes cyclical instability
36
How does animal spirit cause cyclical instability
- described by KEYNES
Collective expectations of businesses and consumers.
How investment and consumption are determined by their confidence
If confidence is low, the economy may remain in recession
- animal spirits influence phase of the economic cycle
37
Herding
When ppl imitate other people’s behaviour which can create speculative bubbles - imitating ppl buying property or shares which has an influence on the level of spending in an economy and he phase of the economic cycle
38
How do speculative bubbles cause cyclical instability
- they create an environment where ppl anticipate price increase and excessive buying may occur. The burst of the bubble can lead to a halt in spending.
- EG: after the burst of the UK housing bubble in 2008, consumer spending was low as consumer and business confidence decreased, marking the transition to a recession
39
Difference between employment and unemployment
- Employment - ppl who have a job (in return for wages)
- Unemployment - those w/o a job that have been actively seeking work.
40
What is the working age population
16-64
41
How is unemployment measured
- The claimant count
- Labour force survey
42
How to calculate employment rate
Number employed/ working population X 100
43
How to calculate unemployment rate
Number unemployed/ economically active X 100
44
The causes of unemployment
- Structural employment
- Frictional unemployment - leaving a job and looking or another.
- Cyclical unemployment - lack of demand for goods/services
45
Cyclical unemployment
Where spending falls below full employment
- Not enough demand in economy so firms produces less and they reduce their derived demand for labour (fire workers) creating demand deficient U/P
- Shown in 2008 recession where consumers stop spending and saved, this reduced the demand for goods/services so firms production fell and they no longer needed worker
46
Explain cyclical U/P on diagram
- Shown on Keynesian LRAS diagram
- When AD shifts to the left pushing equilibrium away from Yfe creating unemployment
47
Frictional unemployment
Temporarily unemployed while searching for a new job
48
Structural unemployment
- Long term changes in labour market so certain industries are declining.
- Caused by occupational & geographical immobility
- Advances in technology can cause structural U/P
49
Example of structural U/P in the UK
- 1980s when the UK economy changes structure.
Moving away from manual labour jobs like mining in the North towards services like accounting and IT based in London.
Miners from the North were left unemployed
- 1800, new technology - seed drill meant fewer farmers were needed to plant seeds, shifting jobs away from unskilled farming towards skilled factory working and farmers were left unemployed
50
Seasonal unemployment
when people are unemployed due to seasonal changes
EG: a dress up elf only needed during Christmas OR a tourist guide only needed during summer
51
Involuntary unemployment
- involuntary u/p is when workers are willing to work at current wage rates but there are no jobs
52
Voluntary unemployment
when workers choose to remain unemployed and reduce job offers at current market wages
53
What is structural u/p determined by
supply side factors
54
What is cyclical unemployment determined by
demand side
55
What is frictional u/p determined by
supply side
56
Consequences of unemployment
- Poverty for those U/P
- Lowe tax rev for govt due to fewer ppl working & decrease in spending
- increased govt spending
- less pressure of rising wages (lowers cost-push inflation)
57
how to minimise U/P
use both AD & AS policies
58
Real wage unemployment
- when wages are set higher than the equilibrium price
- the higher wages creates excess supply of labour so theres real wage u/p
- CLASSICAL UNEMPLOYMENT
59
How does the NMW affect unemployment
- When govt sets NMW above the equilibrium, firms can’t pay workers less that that, so they’re stuck there with real wage unemployment
- Or if trade unions (NUT) go on strike for higher wages pushing NMW above equilibrium
60
The natural rate of unemployment
When the Labour market is at equilibrium
- theres still frictional or some structural employment
61
Effects of U/P on govt
- increased spending on benefits
- less tax revenue
- increased spending on retraining
62
Effects of U/P on firms
- loss of sales revenue
- loss of output
- change in skill level in economy
63
Policies to reduce cyclical unemployment
- expansionary monetary policy: increase bank rate
- expansionary fiscal policy : increase spending
64
Policies to reduce frictional unemployment
- incentivises ppl to find work quicker (lower benefits, income tax, MW)
65
Inflation
continuous increase in the general price level
66
causes of inflation
- Demand-pull
- Cost-push
67
Demand pull inflation
Excessive high levels of AD
- high levels of spending means firms increase output, as we get closer to the capacity level of the economy, the higher spending will lead to firms increasing their prices.
Eventually economy is operating on LRAS, more inverses in AD leads t inflation.
-REDUCING THIS MEANs DECREASING LEVEL OF AD
68
Cost push inflation
Inflation that occurs due to rise in costs of production. SRAS decreases
- If cost of production rises, this will reduce business profit margins, increasing inflation
69
Example of cost push inflation
In Ukraine, when the cost of crops and energy increased, firms had to increase prices other they’d go bankrupt
70
Examples of why cost push inflation might occur
- Changes in commodity prices ( raw materials more expensive if oil prices rise)
- Labour becomes more expensive
- Expectations of inflation
71
What is the Uks inflation target
2%
72
Effects of inflation on consumers
- Those on low and fixed incomes are hit hardest by inflation. Due to regressive effect
- If consumers have loans, the value of repayment will be lower
73
Effects of inflation on firms
- high inflation means higher interest rates so firms invest and borrow less money
- workers demand higher wages, increase firms cost of production.
- less price competition.
74
Effects of inflation on workers
- Real incomes fall with inflation so less disposal income
75
What happens to the value of money when theres inflation
When prices increase, things get more expensive so £ is worth less and the value goes down
76
What is the quantity theory of money
- influenced by Milton Friedman
An increase in the money supply can lead to inflation, while a decrease can result in deflation
77
Why was the momey supply abandoned
Abandoned in the late 1980s as govts found it difficult to control (and define) the money supply
78
What is fishers equation of exchange
MV=PQ
- M is money supply
- V is velocity
- P is general price level
- Q is quantity
79
What the the fishers equation mean
- That increasing the money supply causes inflation.
- When the money supply increases consumers have more money to spend, so AD shifts right, positive output gap occurs, which is inflationary
80
consequences of inflation on consumers
- decrease in purchasing power
- decrease in value of savings
- fall in income for those on fixed incomes
- more harmful to low income households
81
Consequences of inflation on govt
- erodes internal competitiveness as exports are more expensive
- economic growth may be slow due to fall in exports
- trade offs : tackling inflation may increase U/P
82
Consequences of inflation on workers
- demand higher wages
83
Consequences of inflation of firms
- uncertainty and delay investment
- force firms to change the prices (more expensive)
84
Expectations of inflation And change in price level
If inflation is expected to rise by 10% workers will probably claim for their wages to rise by at least 10% to ensure real incomes do not fall
- as higher wages costs are likely to lead to higher selling prices by firms
- This is why govt sets inflation targets
85
When did the UK experience inflation
1970s and 1980s suffered from regular periods of high inflation
86
Deflation
When there is a sustained decrease in the general price level
87
Deflationary spiral
When consumers save money to buy things later so consumption decreases, which causes price levels to fall, and when consumers notice they save more for prices to drop further. This causes real GDP to decrease
88
Deflationary spiral example
In USA, when the stock market crashed animal spirits were low and investors had no confidence
- Consumers were waiting for prices to fall further and no one was buying anything so firms had to fire workers which led to an unemployment rate of 25% and real GDP dropped to 25%
89
What level does inflation fall to to become deflation
0%
90
Benign deflation
A fall in price level due to increases in AS (fall in costs) but also leads to higher level of real GDP (economic growth)
- doesn’t have negative effects so good inflation
91
Example of benign deflation
In Uk, in 2015 oil prices decreased, this decreased firms costs so they could produce more, increasing SRAS and decreased price level
92
Malignant deflation
A fall in prices due to a fall in AD so reduction in real GDP
- fall in consumer and business confidence , may lead to deflationary spiral
93
What happens to the value of money when theres deflation
Goods are cheaper so £ is worth more and the value goes up
94
Why would people holding debt face rising costs
deflation increases the real value of money and debt so people with debt will face rising costs
