4.2.3 Economic performance Flashcards
How can we show short-run economic growth(2 ways)
Increase in AD
Increase in SRAS
What is short run economic growth
Actual annual % change in RNO
What is Long run growth
Increase in productive capacity
How can we show an increase in Long run growth
Change in the quantity/quality of factors of production
What are the determinants of Long run economic growth
Investment in capital goods
Innovation-products and processes
Migration- Immigration is good and emigration is bad
Changes in birth rates
Increases in productivity
Export-led growth
Growth evaluation(at least 2 arguements)
Need a balance between short-run growth and long-run growth policies to avoid inflation
Focusing on the supply-side is limited if demand-side is supressed, there will be spare capacity.
Enhancement of the supply-side of the economy has significant time lags(e.g. training)
What is a positive output gap
Actual growth rate above long-run trend/potential growth rate
What is a negative output gap
Actual growth rate below long-run trend/potential growth rate
What is a boom
High rates of economic growth, high demand, low unemployment, high confidence
What is a recession
at least 2 consecutive quarters of negative growth
What is a slump
Sustained low or negative growth(temporary)
Low demand and inflation
High unemployment
Low confidence
High levels of business failure
What is a recovery
Economic growth starts to rise after a downturn
Demand increases
Unemployment falls
Inflation starts to rise
Confidence in the economy increases
Why does the economy cycle
Excessive Growth in credit and level of debt
Asset price bubbles
Destabilising speculation and animal spirits
Herding
What is excessive growth in credit and levels of debt
Growth financed by public debt(Gov borrowing) or excessive levels of credit(consumer borrowing) might not be sustainable
May be difficult to pay it back in the future and does not contribute to improvements in productivity
What are asset price bubbles
Occurs when the price of an asset is predicted to rise causing it to be traded more so prices rise beyond the intrinsic value
This bubble bursts when the price steeply and suddenly falls back to its ordinary level-causing panic selling
Results in loss of confidence and can lead to economic decline or a depression(wall street crash and dot com bubble)
What is destabilising speculation and animal spirits
Keynes- animal spirits- instincts and emotions of human behaviour which drive confidence in the economy
If firms expect a high rate of return they will invest more, if firms are uncertain about the future they will postpone investments
Expectations about society and politics therefore affect investment
What is Herding
Reacting to the behaviour of economic agents rather than the market e.g. If everyone else is doing it i should be too.
Causes instability in the market
What are exogenous shocks
Sudden changes to the demand or supply side of the economy e.g. Covid-19
What is Inventory cycle
How changes in inventory levels held by businesses may lead to exaggerated increases or decreases in output
What are the benefits of growth
Higher income levels- If we grow as an economy, firms may be able to pay their workers leading to higher income levels
Job creation- The potential growth will open up more jobs and reduce unemployment
Improved living standards- Average quality of life will lead to improved standards of living due to better infrastructure, healthcare and education
What is employment
Being in paid work- full time or part time
What is unemployment
People of a working age who are willing, able and available to work within the next but can’t get a job
What is the economically active
People aged 16-64 either in paid work or actively looking for a job but can’t(employed + unemployed)
What is the economically inactive
People aged 16-64(of a working age) who are not seeking a job
What is full employment
Everyone who is economically active and willing and able to get a job are employed
What is involuntary unemployment
Workers are willing to work at current market wage rates but there are no jobs available
What is voluntary unemployment
Workers choose to remain unemployed and refuse job offers at current market wage rates
What is the level of unemployment
The number of people who are unemployed
What is the rate of unemployment
The number of people unemployed as a % of the labour force
unemployed/Labour force x 100
What are the 2 measures of unemployment
Claimant Count and Labour force survey
What is the Claimant Count
The number of people claiming JSA and Universal Credit
What is the Labour Force Survey
Quarterly survey of approx. 25,000 households complied by the ONS
What are the problems with Claimant Count
Not everyone who is eligible signs on
Temporarily unemployed tend not to claim
Under 18s and over 60s dot count
Some people who claim JSA are not seeking work
People still wrongfully claim benefits
ACC has become discredited by the ONS
What are the positives of Labour Force Survey
Internationally recognised
Potential for analysis across countries
Picks up trends in sectors
Better guide for policy makers
Generally accepted to be more accurate
What are the issues with the Labour Force Survey
Costly to complete
Subject to sampling and extrapolation errors
Has recently seen a collapse in response rates
What is underemployment
People who can’t find a job suitable for qualifications and experience or cannot find enough hours to work
What is hidden unemployment
Workers lose their jobs and don’t actively seek a new job as the costs of seeking are not worth it OR when people choose to stay in education rather than seek employment
What is the impact of unemployment
Reduced demand for goods and services
Lower living standards
Social costs- health and crime
De-skilling of human capital
Reduced tax revenue
what are the Benefits of unemployment
Lower inflation
Pool of Labour available for growing businesses
Rise in self employment
What are the types of unemployment
Structural, cyclical, frictional, seasonal, real wage
What is structural unemployment
Long term economic shifts lead to long term unemployment(occupational and geographical immobility)
What is frictional unemployment
Workers moving in-between jobs so are temporarily unemployed and do not have perfect information on every job opportunity for them
What is cyclical unemployment
Drops in AD lead to increased unemployment
Occurs when there is a negative output gap
What is seasonal unemployment
People who are unemployed at different times of the year for example people who work in summer on a beach
What is real wage unemployment
Real wages are above equilibrium price
This causes an excess supply of labour
What types of unemployment are measured in the natural rate of unemployment
Supply-side so frictional and structural
What is the natural rate of unemployment on a Labour force graph
The gap between the labour supply and labour force
Should we focus on reducing the natural rate of unemployment in the UK
No because it is low already(around 4%) and there are more important macroeconomic objectives to complete
What is inflation
A continuous increase in the general price level over a period of time
What is deflation
A continuous fall in the general price level over time
What is disinflation
When the rate of inflation is falling, but still positive. Prices are rising more slowly then previously
What is demand pull inflation
A situation where AD exceeds AS leading to an increase in the general price level
What is cost push inflation
A situation where increased costs of production leads to firms increasing their final prices, leading to a rise in the general price level
What is retail price index
A measure of inflation including interest payments on mortgage and council tax
What is consumer price index
A measure of inflation used by the Bank of England to set inflation targets, and measure inflation across the EU
What is creeping inflation
Slow rises in prices over a number of years
What is hyper-inflation
Large increase in the general price level, when the store of value function of money fails to hold(Germany 1920’s)
What does CPI measure
Family expenditure survey carried out to judge average spending habits
Attaches weights to items based on importance in people’s spending
What are the limitations of CPI
Households experience different rates of inflation- 14% of households don’t own a car, spending patterns are different depending on number in the family- inflation hits lower income households a lot more
Doesn’t recognise improvements in quality of goods and services
Slow to respond to new products
What is CPIH
CPI+ OOH so basically inflation that also takes into account housing costs
What does RPI measure
Mortgage interest repayments and Council Tax
What has the ONS done to RPI and why
They have discredited it because mortgage repayments skew the figure and replaced it with CPIH but some firms still use it
What causes demand-pull inflation
Reduced taxation
Lower interest rates
Confidence
Income increases
Availability of credit
Fast growth in other countries
What causes cost-push inflation
Wage increases
Higher raw materials costs
Higher taxes
Higher import prices
External shocks
How do you increase the money supply
Printing more notes through the Bank of England
Reduce deposit holdings allowing them to lend more money(by law UK banks must hold a certain percentage of deposits to provide liquidity)
Use quantitative easing(buying back bonds from the market)
What is quantitative easing
Involves introducing new money into the national supply by a central bank
Money is used to buy assets(mainly bonds) from financial institutions such as insurance companies, pension funds and commercial banks
What is the fisher equation
MV=PQ
What are the costs of inflation
Reduced confidence and therefore investment
Real value of savings decreases
Income redistributed from savers to borrowers- real value of savings falls and so does the real value of debt
Consumers and businesses on fixed incomes lose out
Harms trade
Wage-price spiral
What are the benefits of inflation
Sustainable rate of inflation suggests growth
Reduced risk of deflation
Erodes the real value of debts
What are the consequences of deflation
Holding back on spending- expecting prices to fall further
Real cost of borrowing increases, therefore debts increase
Lower profit margins
Wealth decreases and hits confidence- business investment can decrease
What is malign deflation
Persistent fall in prices due to decrease in AD
