4.2.3 economic performance Flashcards
short run growth
percentage increase in a country’s real gdp, messured anually, caused by increase AD
long run growth
increase in the productive capacity of the economy, it is the trend growth caused by increased LRAS
potential output
what an economy could produce if all resources were fully employed
output gaps
difference between actual and potential output levels
negative output gap
working below the potential level of output and thus there is spare capacity
positive output gap
we are working above the potential output, could be due to labour being overworked
where do we work in the long run
YFE
stages in economic cycle
boom
recession
slump
recovery
charactersitics of a boom (6)
high economic growth
positive output gaps or full capacity
near full employment
high confidence
demand pull inflation
improved budget
characteristics of a recession (6)
negative growth
cyclical unemployment
worsened budget
spare capacity and negative output gaps
low inflation
low confidence
how can we define a recession in the uk
negative economic growth over 2 consecutive quarters
causes of cyclical instability (3)
growth financed by public debt is not sustainable as it may be difficult to repay in the future
assett price bubbles, increaeded demand due to speculation, increased price, confience spending, bubble bursts, investors loose out, fall in confidence
herding: economic agents follow each other
economic growth impact on consumers
higher real incomes
more employment
confidence
wealth effect
h/e regressive impact
inflation
shoe leather costs
economic growth impact on firms
higher profits
productivity due to investment
more confidence
more exports
h/e menu costs
lose sales depending on YeD
lose sales due to inflation (X)
economic growth impact on government
higher income tax
less spending on welfare benefits
thus better budget
h/e more consumption on demerit goods could lead to more spending on healthcare
economic growth impact on living standards
higher quality goods
environmental investment
better public services due to high tax rev
h/e more negative externalities
environemnatl degradation
unemployment
share of the labour force that is willing and able to work but without a job
measures of unemployment
claimant count- number of people claiming unemployment benefits such as job seekers allowance or universal credit
labour force survey- household survey sent to a sample of people who self categorise as employed, unemployed or economically inactive
long term unemployment
12+ months of umeployment
mass unemployment
10% or more of labour force survey is unemployed
hidden unemployment
stopped looking for jobs or working less hours than they want to eg in gig economy with zero hour contracts
seasonal unemployment
without job due to time of year eg tuition services or beach lifeguard
frictional unemployment
between jobs or seeking a better job
structural unemployment
caused by a lack of suitable skills for jobs availabe due to deindustrialisation (eg steel)
cyclical unemployment
unemployment due to lack of AD
real wage unemployment
firms unable to hire at the current wage level
excess supply of labour
voluntary unemployment
choose not to work even though their are oppurtunities available
Unemployment trap
unemployed
loose skills/erosion of skills
lack employability
human capital
intellectual and behavioural assetts that people have and enable them to contribute to economic growth
- improving human capital is critical to decreasing unemployment
5 costs of high unemployment
loss of output and productivity
fall in consumption and thus AD
fall in tax revenues, increased welfare benefits
fall in social mobility
increased inequality
policies to reduce unemployment
expansionary monetary and fiscal policies
education and training
subsidise firms
inflation
sustained rise in an economy’s general price level and a fall in the value of money
hyperinflation
phase of extremely rapid inflation nearly always a result of mass money printing
deflation
sustained period where the general price level is falling- negative inflation
disinflation
fall in the rate of inflation where prices are still rising just at a slower rate
stagflation
combination of stagnant growth and high inflation
cost push inflation
businesses respond to rising unit costs by increasing prices to protect their profit margins
shown by a fall in SRAS
causes of cost push inflation (4)
higher minimum wage leading to higher labour costs
high global commodity or energy prices
fall in exchange rate making imports expensive
increased VAT or carbon tax
why is cost push inflation harder to control
the central bank have little control over the factors that influence it
demand pull inflation
phase of accelerating inflation which arises from rapid aggregate demand growth, businesses can take advantage of high demand by increasing prices to increase profit margins
increase in aggregate demand
causes of demand pull inflation (4)
economic growth
lower interest rates
increase in money supply
fiscal stimulus
what does freidman/monetarists say about inflation
if central bank increase money supply too fast it leads to inflation because there is too much money chasing too few goods
peak inflation 22-23
11.1%
causes of 22-23 inflation
- as economy recovered from pandemic there was high demand but supply couldn’t keep up
- ukraine confliact, as russia is a major exporter of natural gas it caused a spike energy prices, increasing CoP
- lack of workers in healthcare and logistics pushed up wages which increased cost of production
inflation expectations
what consumers and firms expect to happen to prices in future
eg if people expect high inflation they’ll demand higher wages leading to cost push
if people expect high inflation they may bulk buy now leading to demand pull inflation
greedflation
price gouging
where increased aggregate demand leads to excessive increase in prices
shrinkflation
where companies keep prices same but decrease size of good/service
negatives of high inflation (9)
cannot buy as much, fall in standard of living
capital flight
high bond yields worsens government debt
regressive impact as poor people hold wealth in cash
lower real incomes
less competiive less exports
retired people on fixed income have less
pressure for gov to increase welfare benefits
wage price spiral
capital flight as a consequence of inflation
investors worry about stablility of economy
they worry inflation will lead to depreciation of currency
want to protect assets so move money out country
sell assets eg stocks or real estate
move proceeds to country with stable currency
bond yields as a consequence of inflation
if inflation is high gov have to increase bond yields to entice investors- investors want to be compensated for the risk of inflation eroding the investment value
the increased yield rates mean gov have to pay back more
adding to national debt
wage price spiral
inflation
fall in real incomes
workers bid for higher wages
higher labour costs
higher prices
inflation
benefits of high inflation (4)
workers who belong to trade unions and have strong wage bargaining power can offset the impact of inflation on their wages
debtors see a fall in real value of debt
if prices are rising faster than costs businesses gain more profit
higher nominal wages, higher tax revenues, better budget
policies to control inflation
contractionary fiscal
contractionary monetary
supply side policies
labour market reforms to increase supply of labour
reasons inflation is hard to control
gloabl factors such as exchange rate and trade imapcting import prices
supply side shocks such as global conflicts
malign deflation
fall in AD
eg recession or large negative output gap
benign deflation
rise in SRAS
eg technological advancements
consequences of deflation (6)
due to fall in P, businesses need to reduce costs so will cut wages or redundancies
higher real value of debt
deflationary spiral
asset price deflation (bonds/ equities/ houses)
cyclical unemployment
negative wealth effect
benefits of deflation (3)
falling prices may increase real incomes for poorer families
businesses must offer value for money, allocative efficiency
fall in asset prices makes it easier for first time buyers
policies to avoid deflation
lower interest rates or QE
expansionary fical
devalue exchange rate
How changes in other economies can affect inflation in the
UK
geopolitical tensions or natural disasters can drive up oil prices
globalisation
inflation in key trading partners
what does the phillips curve show
in the short run you cannot achieve both low unemployment and low inflation
