4.2.3 Economic Performance Flashcards
Short run growth
The percentage increase in a country’s real GDP, measured annually (increase in AS)
Long run growth
When the productive capacity of the economy increases and refers to the trend rate of growth of national output over time (increase in AS)
Positive output gap
When actual growth is greater than trend growth (boom)
Negative output gap
When actual growth is below trend growth (bust)
How can output gaps be shown using an AD AS diagram
Draw LRAS SRAS and show shifts in AD, an outward shift shows a positive output gap and an inward shift a negative output gap
Pros of economic growth for consumers
- average consumer income increases
* consumers feel more confident which leads to more consumption and better living standards
Cons of economic growth for consumers
- can cause inequality
- higher demand pull inflation
- more effort spent trying to find the best deal (shoe leather costs)
- benefits of consumption don’t last (law of finishing returns)
Pros of economic growth for government
•government budget may improve as there is higher taxes
Cons of economic growth for government
Might increase spending on healthcare if demerit goods are consumed
Costs of economic growth for firms
Menu costs as a result of inflation
Benefits of economic growth to firms
- more profit leads to more investment
- improved technology and lower costs In long run
- growth leads to economies of scale
- more competition makes them more efficient and more sales opportunities
Costs of economic growth for living standards
•could damage the environment due to increase in negative externalities
Benefits of economic growth for living standards
- could lead to greener technology
- consumer have more goods and services of a higher quality
- public services improve
Causes of cyclical instability
- unsustainable growth
- excessive growth in credit and levels of debt
- asset price bubbles- when investors panic sell stocks
- destabilising speculation
- herding- people copying economic agents
Different types of unemployment
- structural
- frictional
- seasonal
- cyclical
- real wage
- technological
Structural unemployment
Long term decline in demand for the goods in an industry, which cost jobs (coal miners)
Frictional unemployment
Time between leaving one job and looking for another
Seasonal unemployment
Jobs depending on the season (ice cream man)
Cyclical unemployment
Lack of demand for goods and services, usually in a recession
Real wage unemployment
Wages above the market equilibrium may cause unemployment because supply of labour exceeds demand
Technological unemployment
When people are replaced by machines
Consequences of unemployment
- standard of living may fall
- psychological consequences of losing a job
- firms have more people to employ so wages fall
- firms lose profit due to lowered consumption
- more unemployment benefits given out
Natural rate of unemployment
The difference between those willing to have a job at current market wage level and those willing and able to.
Non- accelerating inflation rate of inflation
Inflation doesn’t have a tendency to increase at this unemployment rate.
Inflation
The sustained rise in general price levels over time
Deflation
The sustained fall in general price levels over time
Disinflation
When inflation is still rising but at a slower rate
Demand pull inflation
When AD is growing unsustainably there is pressure on resources. Producers therefore raise prices
Triggers for demand pull inflation
- depreciation in exchange rate (X-M) increases AD
- fiscal stimulus in the form of lower taxes or more government spending
- lower interest rates
Cost push inflation
When firms face rising costs
Triggers for cost push inflation
- increase in commodity prices
- labour becomes more expensive
- indirect taxes
- depreciation in exchange rate, imports become more expensive
- monopolies exploit consumers
Effects of inflation on consumers
- those on low fixed incomes are hit hardest due to its regressive affect
- if consumers have loans the value of repayment is less
- savings are worth less
Effects of inflation on firms
- likely to be high interest rates so investment drops
- workers might demand higher wages
- firms may be less price competitive on a global scale
- unpredictable inflation will reduce business confidence
Effects of inflation on the government
•will have to increase the value of the state pension and welfare payments because the cost of living is increasing
Effects of inflation on workers
- real incomes fall so they have less disposable income
* could be redundancies as firms try to cut their costs
When has the UK experienced deflation
In April 2015 prices fell by 0.1%
Effects of deflation
- lower consumption as they wait to buy goods
- increasing unemployment
- makes value of debt greater
- wages are likely to fall since firms make lower profits
- even less consumption of the real interest rate increases (interest rates- deflation rate)
Quantity theory of money
Stated that there is inflation if the money supply increases at a faster rate than national income
MV=PQ
M= money supply V= velocity of circulation P= the price level Q= real GDP
Explain how the quantity theory of money works
- It is argued that V is constant in the short run and Q is independent on money supply
- when money supply is increased consumers spend more money which causes outward shift in AD
- this firms a positive output gap which is inflationary
- as a result more workers are employed so wages increase and so do costs, firms make up for this by putting up prices
- the real value of money falls and so there is a contraction in demand
- workers demand higher wages due to inflation which causes a leftward shift in SRAS
- output is back to equilibrium but price level is higher
What is true of a positive output gap?
- AD is increasing faster than AS
- inflationary
- actual level of output is greater than potential level of output
What is true of a negative output gap?
- AS is greater than AD
- deflationary
- actual growth is less than potential
Explain the Phillips curve (short run)
- as economic growth increases, unemployment falls
* wages increase and so does consumption leading to an increase in average price level
How can the trade off between inflation and unemployment be limited
Through supply side policies to reduce structural unemployment which won’t increase average wages
