Ch 27 - Economic Issues (Aims)

Question 1

What is economic growth

Answer 1

Economic growth refers to an increase in the gross domestic product (GDP)over a period of time.

Question 2

What is GDP
full form

Answer 2

Gross Domestic Product: Total output of goods and services in an economy over a period of time

Question 3

Define negative economic growth

Answer 3

Sustained decrease in the total GDP of an economy.

Question 4

Name the stages of the trade cycle diagram (4)

Answer 4

Growth
Boom
Recession
Slump

Question 5

What is the growth stage (trade cycle)

how are businesses at this time usually

Answer 5

GDP is rising, unemployment is generally falling and the country is enjoying higher living standards.

Most businesses will do well at this
time.

Question 6

What is the boom stage (trade cycle)

affect on business

Answer 6

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.

Question 7

What is recession (trade cycle)

affect on businesses

Answer 7

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.

Question 8

What is slump (trade cycle)

affect on businesses

Answer 8

A serious and long-drawn-out recession. Unemployment reaches very high levels and prices may fall

Many businesses will fail to survive this period

Question 9

4 macroeconomic objectives of govt

Answer 9

» low inflation
» low unemployment
» economic growth
» balance of payments between imports and exports.

Question 10

Define inflation

Answer 10

Overall increase in price levels related to declining value of a currency

Question 11

Define unemployment

Answer 11

People who are willing and able to work but are unable to find a job.

Question 12

Define Balance of Payments

Answer 12

Records the difference between a country’s exports and imports

Question 13

What are the consequences of inflation

Answer 13

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.

Question 14

Why is there lower purchasing power in periods of inflation

Answer 14

the higher the price levels rise, the lesser number of goods and services you can buy with the same amount of money

Question 15

What is real income

Answer 15

measure of purchasing power of money

Question 16

Problems of unemployment

Answer 16

» 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.

Question 17

Repercussions if there is negative economic growth

Answer 17

» 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.

Question 18

What are exports

Answer 18

goods and services sold from one
country to other countries.

Question 19

What are imports

Answer 19

goods and services bought in by
one country from other countries.

Question 20

What happens if imports > exports

What happens if exports > imports

Answer 20

BoP deficit

BoP surplus

Question 21

Why is a BoP deficit bad

Answer 21

» The country could ‘run out’ of foreign currencies and it may have to borrow from abroad.

» Exchange rate deprecation (ch 29 deck)