Bridging Unit

Question 1

Who owns resources in a free market?

Answer 1

Private individuals and firms make the economic decisions meaning everything is owned and operated by them. No government intervention.

Question 2

How does a free market incentivise different economic actors?

Answer 2

Profit motive- the market provides a profit motive which encourages individuals and firms to either increase or decrease price to maximise scarce resources to make profit.

Question 3

How are prices set in a free market?

Answer 3

Prices are set by the laws of demand and supply. The market forces this as if there is high/excess demand for a good or service, prices will be increased to maximise profit and vice versa. This will keep happening as firms try to get near to a market equilibrium to maximise profit and use of scarce resources.

Question 4

Examples of free markets?

Answer 4

New Zealand, Hong Kong, Singapore have free market economies as there is limited government intervention and the majority of the private sector owning the resources with the government allowing the private sector make the economic decisions.

Question 5

Advantages of free markets

Answer 5

• An efficient allocation of scarce resources - factor resources tend to be where highest profit is expected.
• Competitive prices for consumers as suppliers look to increase then protect market share.
• Economic freedom
• Competition through trade in goods helps reduce domestic monopoly power and increases choices
• Avoid bureaucracy often involved in government intervention.
• Profit motive- provides incentive to cut costs, make effective use of scarce resources and encourages economies to scale and lower prices for consumers.

Question 6

Disadvantages of free markets

Answer 6

• Lack of public goods like street lighting and national defence (non rivalry and excludability goods).
• Business monopolies often develop. Owners are in a position to set higher prices and exploit consumers, workers and consumer welfare.
• Lower social welfare- under provision of merit goods like health and education.
• Free market can lead to a rise in scale of income and wealth inequality.
• They may fail to address negative externalities from production and consumption - unsustainable growth.
• Deregulated financial markets often prone to bouts of instability - fall out that affects millions not directly involved.
• No social security for the unemployed/ on low income.

Question 7

What is bureaucracy?

Answer 7

A system of government in which most of the important decisions are taken by state officials rather than by elected representatives.

Question 8

Equality in a free market

Answer 8

A free market likely to lead to income and wealth inequality.

Question 9

What is a monopoly supplier and power?

Answer 9

A monopoly supplier such a regional water utility has significant market power and can therefore set prices above the level we expect to see in a competitive market.

Question 10

Who owns resources in a command economy?

Answer 10

The government/state own the resources in a command economy. They own most industries producing goods and services and how to distribute goods and services within the economy.

Question 11

How does a command economy incentivise different economic actors?

Answer 11

The government give little incentive to be efficient and profitable as their motive is to maximise social welfare.

Question 12

How are prices set in a command economy?

Answer 12

The government sets prices or give consumers rations directly with production and pricing decisions by the state. With the government owning firms, they have less incentive to be efficient.

Question 13

Equality in a command economy

Answer 13

There is more equality with a more equal distribution of resources and wealth.

Question 14

Examples of a command economy

Answer 14

The Soviet Union, China until the 1970’s and Cuba re examples of command economies with the government owning the resources and production industries.

Question 15

Advantages of a command economy

Answer 15

• Supporters would argue it’s a good thing for the government to overcome market failure, inequality and maximise social welfare.
• Can prevent abuse of monopoly power, mass unemployment.
• Allows everyone access to basic necessities which benefit society.

Question 16

Disadvantages of a command economy

Answer 16

• Goods that weren’t used were produced due to government agencies having poor information on what to produce through centralisation (decisions being made by people who have no access to what’s happening).
• Unable to respond to consumer demand/preference.
• Inefficient firms are protected, making it harder for resources to move to dynamic and efficient firms.
• A command economy creates a very powerful government which limits individual rights to pursue economic objectives- this leads to the government able to extend power in other areas of people’s lives.
• Bureaucratic with decisions held up by planning and committees.
• Price controls lead to shortages and surpluses.

Question 17

Who owns resources in a mixed economy?

Answer 17

Part of the economy is owned by private individuals and another part of resources is owned by the government. With private individuals able to run enterprises to make profit but the government can intervene in some areas of the economy such as providing public services and the regulation of private businesses.

Question 18

In what areas of a mixed economy does the government intervene in?

Answer 18

The government can intervene in some areas of the economy such as providing public services and the regulation of private businesses.

Question 19

How does a mixed economy incentisive different economic actors?

Answer 19

Entrepreneurs have the freedom to make profit so there is a profit motive like a market economy which through cutting or increasing prices will increase profit depending on the original demand or supply. However, the government intervenes by taxing businesses to reduce inequality and monopoly power.

Question 20

How are prices set in a mixed economy?

Answer 20

On the whole, prices are set by the market forces of supply and demand but some prices are set by the government. Firms can be efficient and change prices for profit but again the government can intervene.

Question 21

Equality in a mixed economy

Answer 21

In terms of equality, taxes are implemented to help with the threat of inequality.

Question 22

Examples of mixed economies?

Answer 22

Sweden (52% of GDP spent by the government), France (52.8% of GDP spent by the government), and the UK (47.8% of GDP spent by the government) are examples of mixed economies with nearly an equal split between GDP spent by the government and the private sector.

Question 23

Advantages of mixed economies

Answer 23

• Incentives to be efficient- most firms can be managed by private sector leading to more profit and innovation.
• Limits government interference.
• Reduces market failure , government can regulate abuse of monopoly power, subsidy to help underconsumed goods in a free market like public goods and taxation.
• A degree of equality- provides safety net for the poor, but also enables reward for hard work and entrepreneurship.
• Macroeconomic stability- expansionary fiscal policy in times of recession.

Question 24

Disadvantages of mixed economies

Answer 24

• Government intervention can be difficult to know how much government should intervene can lead to the government borrowing with lack of intervention.
• Equality- socialists criticise mixed economies for allowing too much market forces, leading to inequality and inefficient allocation of scarce resources.
• Government failure- free market economists criticise mixed economies for too much government intervention with poor managers of the economy, invariably being influenced by political and short term factors.

Question 25

What is a barter economy?

Answer 25

an economy which has no money, where people have to swap goods. E.g. if you wanted a particular good or service, you would have to give the producer another good or service to exchange. It requires two people to have goods they are willing to swap (limitation).

Question 26

What is fiat money?

Answer 26

(Notes (paper currency) and coins) has no intrinsic value. This money can’t be traded in if it’s worthless through hyperinflation or a financial crisis. This makes it easier to carry out transactions as we don’t have to worry about the right good and service to swap so we can use fiat money to then buy whatever we want.

Question 27

Why is fiat better than a barter economy?

Answer 27

People can use fiat money for anything so more transactions can be made as fiat money is for everyone.

Question 28

What is the money supply?

Answer 28

The total amount of money circulating in the economy.

Question 29

What are the types of money in the money supply?

Answer 29

i) Notes and Coins- most liquid form of money found in M0 to M4 in the money supply.
ii) Deposits- that individuals and firms have in the Bank of England - very liquid
iii) Near money- Non cash assets - for example, a certificate of deposit (where you deposit your money in a bank for a fixed period of time). After this time, money can be taken out with interest rates. Highly liquid but not as liquid as notes and coins and deposits found in M4 of the money supply.

Question 30

What is Near Money?

Answer 30

Non cash assets - for example, a certificate of deposit (where you deposit your money in a bank for a fixed period of time). After this time, money can be taken out with interest rates. Highly liquid but not as liquid as notes and coins and deposits found in M4 of the money supply.

Question 31

What is in M1 in the money supply?

Answer 31

Very liquid money like notes and coins.

Question 32

What is found in M4 in the money supply?

Answer 32

Less liquid money like near money and bonds.

Question 33

What is the National Accounts?

Answer 33

They provide an intergrated description of all economic activity within the economic territory of he UK, including activity involving both domestic units (individuals and institutions resident in the UK) and external units (those resident in other countries).

Question 34

What is the coverage of the core account of the national accounts?

Answer 34

• Production
• Consumption
• Generation
• Distribution
• Redistribution of income
• Capital investment
• The financing on the above

Question 35

What key data do the accounts include?

Answer 35

GDP

Question 36

Who uses the national accounts?

Answer 36

Policy makers and analysts and they feed into discussions of the monetary policy committee of the Bank of England when setting interest rates as well as forecasting economic growth and public sector depth.

The European Central Bank also use the national accounts to help make economic decisions and make policies.

Question 37

What are the 3 sectors of the economy?

Answer 37

Financial cooperations sector, the government sector, and the household sector. These units are the individual households or legal entities, such as, companies, that participate in the economy.

Question 38

What is Gross Domestic Product (GDP)?

Answer 38

GDP is a measure of the size and wealth of a country’s economy over a period of time (usually one quarter of a year). It is also used to compare the size of different economies. It measures economic activity in an area and is seen as one of the, “summary indicators”, of the economic activity and references to the “growth of the economy” are quoting GDP in the last quarter.

Question 39

What are the 3 UK approaches in estimating GDP?

Answer 39

i) GDP measures the sum of the value added created through the production of goods and services within the economy (our production or output as an economy) ; this approach provides the first estimate of GDP and can be used to show how much different industries (e.g. agriculture) contribute within the economy.
ii) GDP from the expenditure approach - measures the total expenditure on all finished goods and services produced within the economy.
iii) GDP from the income approach- measures the total income generated by the production of goods and services within the economy; the figures provided breakdown this income into, for example, income earned by companies (cooperations), employees and the self employed.

Question 40

Limitations of GDP

Answer 40

• Some things have a lot of value but are not captured in GDP because no money changes hand, like caring for an elderly relative.
• GDP also doesn’t tell us anything about how evenly income is split across the population. Growth could mean everyone becoming better off or just the richest segments getting richer. In practice it usually lies somewhere between the two.
• It helps to bear in mind changes in the size of the population. If UK GDP rose by 2% next year, but population grew by 4%, the average income per person would have actually fallen.
• There are things that actually rise GDP without making the country better off. War is one example (a lot of money is spent, so GDP goes up). Or if a large chunk of the Amazon rainforest was cut down in a week, then you’d get a sharp rise in GDP from the sales of timber but at a huge environmental cost.

Question 41

What is Inflation?

Answer 41

A sustained increase in the cost of living or general price level leading to a fall in the general purchasing power of money.

Question 42

Who manages UK inflation?

Answer 42

The Bank of England is the independent UK body which are in charge in maintaining low and stable inflation levels. The Bank’s monetary committee set official interest rates every month to meet a target for low inflation.

Question 43

Current UK inflation rate

Answer 43

1.8% per year

Question 44

UK inflation rate in the 1970’s

Answer 44

25% per year

Question 45

What is the government’s inflation target?

Answer 45

The Bank of England’s monetary committee set a monetary policy to the government’s target of keeping inflation at 2% to achieve low and stable inflation which is good for the UK economy.

Question 46

Why are high levels of inflation bad for the economy?

Answer 46

High levels of inflation are seen as undesirable for the economy as it leaves money being worthless. This into leads individuals and firms’ purchasing power decreasing and thinking twice about investing. It’s negative for businesses as demand for their exports will be lower as they are more expensive and there will more competition for imports. Also for individuals there could be fiscal which means a meaningless rise in income as it could match the inflation and they could be moved into a higher tax band so they wouldn’t be made better off with the government not always updating their tax bands based on inflation. Also, saving’s value erode away, which is damaging for the savers.

Question 47

Why might some level on inflation be good for the economy?

Answer 47

• It can help reduce unemployment in a recession as businesses can keep hold of staff or give them a pay rise, less than the rate of recession ad the businesses are made better off.
• Inflation incentisives production for firms as annual, stable inflation allows businesses to raise prices, they will then increase profitability with demand not changing. This will then lead to these firms producing more.
• Low and stable inflation leads to consumers buying now and healthy consumption habits, which is good for the economy as it leads to growth, sustained increased production for firms with stable demand, helping the economy functioning healthily.

Question 48

What is unemployment?

Answer 48

The people able, available and willing to work at the going wage but cannot find a job despite an active search for a job.

Question 49

What 2 things must someone be to be counted as unemployed?

Answer 49

• Without a job, have actively sought work in the last 4 weeks and are able to start work in 2 weeks.
• Out of work, have found a job and waiting to start in the next 2 weeks.

Question 50

What is unemployment rate?

Answer 50

The proportion of the economically active population (those in work plus those seeking work) who are unemployed.

Question 51

What is the claimant count?

Answer 51

(Seasonally adjusted) the number of people on the Jobs Seekers Allowance. The claimant account only includes those eligible for benefits and is therefore a less reliable measure of employment.

Question 52

How unemployment measured in the UK?

Answer 52

It is based on the Labour Force Survey which asks 40,000 households each month whether they are employed, unemployed or economically inactive.

Question 53

Problems with the accuracy of unemployment data

Answer 53

• The Labour Force Survey is intended to be representative of the entire population of the UK, but there is always scope for sample error (but sample size is high).
• Measured unemployment excludes the economically inactive- for often complex reasons for people not searching for work.
• Unemployed is not the same as underemployed (i.e people working part time but who would prefer a full time job).
• In all countries, there is disguised “hidden” unemployment with many people working in informal labour markets.

Question 54

Who are the underemployed?

Answer 54

People working part time but who would prefer a full time job.

Question 55

Benefits of unemployment?

Answer 55

• Firms benefit from a greater choice of workers- more productive, profitable workers available.
• Workers have time to search for the best job- leading to productive, happy workers.

Question 56

Costs of unemployment?

Answer 56

• Lost output- waste of a resource losing out on production and economic growth
• Deterioration of government finances- through benefits, lower tax revenue, and investing in areas with unemployment (social issues)
• Hysteresis- when workers lose motivation and skills and drop out of the labour force
• Social costs- crimes, riots, divorces, depression leading to increased policing and healthcare
• Reduced trade with other countries and individuals
• Loss of income
• Loss of status, self worth

Question 57

What is hysteresis?

Answer 57

When workers lose motivation and skills and drop out of the labour force.

Question 58

What is Budget Deficit?

Answer 58

The amount the government has to borrow per year needed when the government’s spending exceeds tax revenue in a fiscal year.

Question 59

What is National Debt?

Answer 59

The accumulation of budget deficits. The total stock of debt that government owes the private sector and other purchasers of UK gilts.

Question 60

What is a fiscal year?

Answer 60

The financial year in the UK (April-April) for budget purposes, financial reporting by businesses and financial reports.

Question 61

Value judgements definition

Answer 61

A subjective statement of opinion rather than a fact that can be tested by looking at the available evidence.

Question 62

Specialisation definition

Answer 62

It takes place when a business or firm concentrate on a specific, narrow range of goods. It happens at all levels of the economy.

Question 63

Division of labour definition

Answer 63

An economic concept which states that dividing the production process into different stages enables workers to focus on specific tasks, to raise output per person.

Question 64

The short run definition

Answer 64

Where one factor of production (e.g capital) is fixed. This is a time period of fewer than 4-6 weeks.

Question 65

The long run definition

Answer 65

Where all factors of production of a firm are variable (e.g a firm can build a bigger factory). A time period greater than 4-6 weeks / 1 year.

Question 66

Utility definition

Answer 66

Refers to benefits (satisfaction or happiness) consumers derive from a good and it can be measured based on individuals choices between alternatives and preferences revealed in their willingness to pay.

Question 67

Economic growth definition

Answer 67

Means an increase in real GDP - which means an increase in the value of national output/ national expenditure.

Question 68

Consumer price index definition

Answer 68

A measure that examines the weighted average of prices of a basket of consumer goods/ services.

Question 69

Consumption definition

Answer 69

The spending by households on goods and services.

Question 70

National output definition

Answer 70

The quantity of goods or services produced in a given time period by a firm, industry or country

Question 71

Aggregate demand definition

Answer 71

Used to measure how much is being spent/ total real planned expenditure by all consumers, businesses, the government, people and firms overseas in a given time period.

Question 72

Aggregate demand Equation

Answer 72

Aggregate demand = consumer spending + investment spending + international spending + government spending + (exports - imports)

Question 73

Aggregate supply definition

Answer 73

Measures the volume of goods and services produced each year. It represents the ability of an economy to deliver goods and services to meet demand.

Question 74

Real values

Answer 74

Values adjusted for inflation and show prices/wages at constant prices.

Question 75

Normal values

Answer 75

The current monetary values

Question 76

Exchange rates definition

Answer 76

The rate at which one country’s currency can be exchanged for other currencies in the foreign exchange (Fx) market.

Question 77

Current account definition

Answer 77

The sum of the balance of goods and services , net income from abroad and net current transfers.

Question 78

Base rate definition

Answer 78

The rate of interest set by the Bank of England, being in effect the lowest rate that lenders will make interest at.

Question 79

Recession definition

Answer 79

A recession is a period of negative economic growth for two consecutive quarters. This means there is a fall in National Output and National Income. Inevitably a recession will involve higher unemployment and an increase in government borrowing.