Ch 27 - Economic Issues (Aims) Flashcards
What is economic growth
Economic growth refers to an increase in the gross domestic product (GDP)over a period of time.
What is GDP
full form
Gross Domestic Product: Total output of goods and services in an economy over a period of time
Define negative economic growth
Sustained decrease in the total GDP of an economy.
Name the stages of the trade cycle diagram (4)
Growth
Boom
Recession
Slump
What is the growth stage (trade cycle)
how are businesses at this time usually
GDP is rising, unemployment is generally falling and the country is enjoying higher living standards.
Most businesses will do well at this
time.
What is the boom stage (trade cycle)
affect on business
This is caused by too much pending. Prices start to rise (inflation) quickly
and there are shortages of skilled workers. Business costs will be rising.
Businesses will become uncertain about the future.
What is recession (trade cycle)
affect on businesses
Often caused by too little spending. This is a period when GDP actually falls. Most businesses will experience falling demand since there is a fall in real income (as a result of the inflation). Workers may lose their jobs (for businesses to cut costs)
Business profits and output may fall.
What is slump (trade cycle)
affect on businesses
A serious and long-drawn-out recession. Unemployment reaches very high levels and prices may fall
Many businesses will fail to survive this period
4 macroeconomic objectives of govt
» low inflation
» low unemployment
» economic growth
» balance of payments between imports and exports.
Define inflation
Overall increase in price levels related to declining value of a currency
Define unemployment
People who are willing and able to work but are unable to find a job.
Define Balance of Payments
Records the difference between a country’s exports and imports
What are the consequences of inflation
Lower purchasing power of money, real income falls
Exports are less internationally competitive (bad for export businesses)
Imports are more competitive (bad for local businesses)
Inflation causing inflation - employees want a raise to deal with higher costs. This increases the cost of the business which in turn will again increase price. Viscous cycle.
Why is there lower purchasing power in periods of inflation
the higher the price levels rise, the lesser number of goods and services you can buy with the same amount of money
What is real income
measure of purchasing power of money
Problems of unemployment
» Unemployed people do not produce any goods or services. The total level of output in the country will be lower than it could be.
» Opportunity cost: The government pays unemployment benefit to those without jobs. A high level of unemployment will cost the government a great deal of money. This cannot be spent on other things such as schools and hospitals.
Repercussions if there is negative economic growth
» As output is falling, fewer workers are needed and unemployment will occur.
» The average standard of living of the population – the number of goods and services they can afford to buy in one year – will decline. In effect, most people will become poorer.
» Business owners will not expand their business as people will have less money to spend on the products they make.
What are exports
goods and services sold from one
country to other countries.
What are imports
goods and services bought in by
one country from other countries.
What happens if imports > exports
What happens if exports > imports
BoP deficit
BoP surplus
Why is a BoP deficit bad
» The country could ‘run out’ of foreign currencies and it may have to borrow from abroad.
» Exchange rate deprecation (ch 29 deck)
