Booklet Three Flashcards
What is unemployment?
People who are actively seeking employment but are unable to find it
What type of variable is unemployment?
Unemployment is a stock variable that is influenced by the flow of worker in and out the labour market
2 ways the measure unemployment
1)claimant count
2)labour forced survey
What is the claimant count?
The number of people currently “signing on” to claim the Jobseeker’s Allowance
What is labour forced survey?
Identifying the number of people out of works, currently searching and willing to start in the next 2 weeks
What is unemployment rate?
The number of unemployed people expressed as a percentage out of the economically active population
Example of people that are economically inactive (6)
House wives
Full time students
Disable
Early retired
Prisoners
Full time home carers
What is meant by underemployment?
When they are employed but do not work as many hours as they like (e.g. if the are part time but would like to work full time)
What are the six types on unemployment?
1)frictional or ‘job search’
2)seasonal
3)structural
4)technological
5)cyclical, Keynesian or demand-deficient
6)classical or real-wages
What is often the cause of persistent unemployment?
The immobility of labour
Name the 2 types of immobility of labour
geographical immobility of labour
occupational immobility of labour
what is geographical immobility of labour?
workers cannot relocate to where the is demand for their labour
what is occupational immobility of labour?
workers cannot switch jobs because they lack transferable skills
What is frictional unemployment?
People who are between jobs either because they have just left one job but not yet found another or have just become economically active (recent graduates)
what does economically active mean?
people who are willing to work at the current wage rate (both employed and unemployed)
what does economically inactive mean?
People who are unwilling to work at the current wage rate or unable to
what is seasonal unemployment?
when workers are unemployed only at certain times of the year
what is structural unemployment?
Unemployment caused by a change in the structure of the economy which means there is no longer a demand for a certain type of laour
what is cyclical, Keynesian or demand deficient unemployment
unemployment caused by a lack of aggregate demand
what is classical or real wage unemployment?
Unemployment caused by real wages being too high
Reasons why labour may be geographically immobile(4) :
Children settled in schools
Difference in housing costs
Friends and social ties
cultural or religious ties
The cost of unemployment (9) :
1)Loss of income and lower living standards
2)stress, low self esteem and mental health problems
3)lower tax receipts for government (e.g. income tax)
4)increase in the government transfer payment (e.g. job seeker allowance
5)crime drug abuse and social problems
6)loss of skills
7)lower business and consumers confidence
8)lower demand and profit for businesses
9)negative multiplier effect
what is inflation?
A sustained increase in the general level of prices
what is deflation?
A sustained decrease in the general level of prices
what is disinflation?
A fall in the rate of inflation (prices are rising more slowly)
what is core inflation?
inflation measured without the most volatile prices (likely to change suddenly and unexpectedly) (e.g. energy and food)
what is hyperinflation?
Very high inflations, typically in excess of 100% per year
what is anticipated inflation?
Inflation that economic agents expect and factor into their decisions
what is unanticipated inflation?
Inflation that is higher than economic agents expectations
When does demand pull inflation occur?
When there is a change in the component for AD
When does cost push inflation occur?
When there is a change in the cost of production
What diagram can a cost push inflation be shown on only?
Can only be shown using a shift of SRAS not LRAS
what are the sources of demand pull inflation (4)
1)increase in income and consumers confidence
2)falling interest rates
3)increased government spending
4)increased exports
what are the sources of cost push inflation (4)
1)Rising wages
2)increase indirect taxes
3)rising energy/fuel costs
4)rising raw material prices
The wage price spiral: (4)
1)workers standard of living drops due to inflation
2)They negotiate a pay rise to be able to afford more goods and services
3)firms have to pay more for labour and so their total costs rise
4)firms raise prices to maintain profit margins which cause inflation
(the cycle continues)
What are external shocks?
An unexpected event with origins outside of a country
What are internal shocks?
An unexpected event with origins inside a country
The cost of inflation (6)
1)Menu Costs - The costs of updating things with price information (menus, websites catalogue)
2)International Competitiveness - Rising prices may mean that a country’s good become relatively more expensive (e.g. exports)
3)Wider economic costs - uncertainty over future prices to make long term decisions
4)Redistributive costs - inflation erodes the value of money and reduces real interest rates which mean savers are worse off
5)Psychological costs - inflation often makes people feel worse of even if real incomes stay the same
6)Shoe leather costs - means time spent checking changes in price
How to calculate real interest rates?
nominal interest rate - inflation rate
What are the benefits to inflation? (3)
1)Allowing some inflation means that relative prices can adjust
2)Difficulties in accurately measuring may mean that targeting zero inflation may mean that deflation is actually taking place
3)Inflation may mean that firms can overcome the problem of prices
what is benign deflation?
Benign deflation is cause by falling costs (such as a fall in the oil price) and acts as a boost to real incomes and can promote economic growth
what is malign deflation?
A fall in the general price level caused by falling aggregate demand
What are exchange rates?
The value of one currency expressed in terms of another currency
What are the three main parts of the balance of payments ?
The current account
The capital account
The financial account
What is the current account?
The current account is made up of imports or exports of goods and services
Define current account deficit?
When the currency outflow from a country’s current account exceed the currency inflows
What is a current account surplus?
When the currency inflows into a country’s current account exceed the currency’s outflows
what are the mnemonics to remember the impact of a change in the exchange rate?
SPICED
-Strengthening
-Pound
-Imports
-Cheaper
-Exports
-Dearer (more expensive)
(Net exports decrease)
WPIDEC
-Weakening
-Pound
-Imports
-Dearer (more expensive)
-Exports
-Cheaper
(Net exports increase)
Define marginal propensity to import (MPM)
The proportion of an increase in income that is spent on imports
what are the 2 main government policies for demand-management?
1)Fiscal policy
2)Monetary policy
what is the Fiscal policy?
The use of taxation and/or government spending to manage the economy
what is the monetary policy?
monetary policy means the use of interest rates and the manipulation of the money supply to mange the economy
Monetary and fiscal policies can be classified as either…
expansionary or contractionary
What is expansionary policy?
expansionary policies are designed to increase aggregate demand and cause the value of real output produced to increase
what is contractionary policies?
contractionary policies are designed to reduce aggregate demand or perhaps to reduce the size of an increase in aggregate demand
what are expansionary policies also known as?
loosening of fiscal or monetary policy
(loosening = not strict with spending)
what are contractionary policies also known as?
tightening of fiscal or monetary policy
what are pro cyclical policy?
Macroeconomics policy designed to work with in line with business cycle
(i.e. expansionary policy during a of growth or contractionary policy during a period of recession)
what are counter cyclical policy?
Macroeconomic policy designed to work against the business cycle
(i.e. expansionary policy during a recession or contractionary policy during an economic boom)
Reason for taxation: (3)
-To correct market failure (e.g. negative externalities)
-As a macroeconomic policy (decrease AD)
-Redistribute income (and wealth)
Define a tax that is progressive
A higher proportion off high income earners (income tax)
Define a tax that is proportionate
A tax that takes an equal proportion of income without considering the level of income
Define a tax that is regressive
Higher proportion of lower income earners
what are the two types of taxes?
1)indirect tax
2)Direct tax
what is a direct tax?
Direct tax are paid directly by an individual or organisation.
The tax liability cannot be passed onto someone else
What is an indirect tax?
A tax levied on goods and services (such as V.A.T)
Three argument in favour of using indirect tax over direct taxes:
1)Indirect taxes can reduce market failure
2)indirect taxes don’t disincentivise work
3)indirect taxes can be change more easily
Three argument in favour of using direct tax over indirect taxes:
1)indirect taxes are inflationary
2)Djrect taxes are more progressive while indirect tax are more regressive
3)indirect taxes may lead to a black market
What curve does direct taxes shift?
Direct taxes shift aggregate demand
What curve does indirect tax shift?
Indirect tax shift the SRAS
Name four types of direct taxes
1)National insurance
2)Income tax
3)corporation tax
4)council tax
Name two indirect tax
1)V.A.T (value added tax)
2)Business rates
What is national insurance?
Paying regular contributions to a government fund.
(This covers things such are health care and pensions)
What is income tax?
Money you pay to the government based on your income
(This helps fund public services such as schools and hospitals)
What is corporation tax?
Tax that incorporated firms (LTDs and PLCs) pay on their profits
What is V.A.T (valued added tax) ?
Tax added onto the price of goods and services
What is council tax?
A fee that people pay to their local government to help fund services (rubbish collection)
It is based on the value of property you live in and the number of people living in the household
What is business rates?
Taxes businesses pay their local government for using a commercial property (shops or offices)
What 3 letters to you need to remember that shift the LRAS?
Q - quantity of FOP
Q - quality of FOP
T - technology
what is government debt?
Government debt is a stock variable that has be accumulated over time
How much does the UK owe?
approximately £2.4tn
what is budget deficit?
Flow variable - when the government have to borrow money because government spending in a given period (usually one year) is greater than government receipt (from taxes)
What is budget surplus?
A situation where the government receives more in tax revenue than it spends
what is a balanced budget?
A situation where the government spending for a given time period equals its receipts
What are fixed interest rates (on loans)?
Interest rates on loans stay the same
What are variable interest rates (on loans)?
Interest rates that change in line with the bank rate
What are credit cards?
Credit cards allow consumers to make purchases using someone else’s money and to repay this money later
What are supply side policies?
Government policies designed to increase the rate of long run economic growth by increasing long-run aggregate supply
What are free market policies?
Policies designed to increase the economy s productive capacity by reducing government involvement
Examples of free market supply-side policies (2)
Tax cuts
Deregulations
what are interventionist supply side policies?
policies designed to increase the economy’s productive capacity through greater government intervention
Examples of interventionist supply-side policies (4)
Education and training
Infrastructure projects
Subsidies for research and development
Intervention in labour market
