Chapter 1- Government Objectives Flashcards
What are the two types of inflation and name what causes them.
Demand Pull: increase in AD near full output in the economy
Cost push: increase in the production costs of goods or services
What are the four types of unemployment?
Cyclical
Seasonal
Frictional
Structural
What is the difference between real and nominal GDP?
‘Nominal GDP is actual GDP without adjustments for inflation’
‘Real GDP is the physical amounts of goods and services produced in a country in a year’
Name three ways of measuring GDP
Output method: give surveys to firms about everything that they produce in a year and calculate the entire economies figure.
Income Method: use tax returns to calculate the income of everyone in an economy in a year
Expenditure method: Total the expenditure of everyone in an economy in a year.
Name three problems in measuring growth
Output: counting the same item twice (like raw materials and then in the final product)
Income: only include incomes that are earned in return for goods and services (not transfer payments)
Expenditure: include exports and exclude imports
Name four advantages of growth
Material living standards increase
Poverty levels are reduced
Can help reach full employment
Public care and health services are better quality
Name four disadvantages of growth
If it is not achieved in a sustainable manor it can have a very bad effect on the environment
People could struggle to adapt to new jobs
Increase in productivity comes at the cost of freedom and esteem
Can cause unwanted inflation
What four things cause growth?
Increase in physical capital
Increase in active labour force size
Increase in labour quality
Progress in technology
What are the problems in comparing growth figures?
Differences in population can cause differences in productive ability so GDP per capita is calculated
If income is distributed unfairly it will give an unfair average value
If there is a large informal economy then a lot of trade will be unrecorded
If cost of living is lower, they can buy more with each pound.
What is the definition of unemployment and unemployment rate?
Unemployment: the amount of the labour force out of work.
Unemployment rate: the percentage of the labour force out of work
What two ways are used to measure unemployment?
Claimant count: the amount of people who claim job seekers allowance (1.53M in U.K)
Labour Force Survey: A monthly survey is given to firms about their workforce by ILO (29.7M currently employed in U.K)
What could cause unemploment?
Rising the minimum wage
What consequences of unemployment effect the individual?
Harder to find work with no experience
Can become deskilled from certain jobs
Health figures are lower for unemployed
What are the consequences of unemployment to the community?
Higher levels of crime rate
Less money in circulation due to lack of demand
Falling house prices
More derelict land
What consequences of unemployment are for the government?
Loss in revenue as less tax and more benefit
Lowering of possible
GDP figures
Lower living standards
Benefits of unemploment?
Easier to recruit workers
Cheaper to recruit workers
Less demand pull inflation
What’s inflation
The annual percentage change in price level
What’s the difference between CPI and RPI
RPI: includes housing costs
CPI: doesn’t include mortgages, rent and council tax
What’s the Bank Of England’s target inflation rate
2%
What are the disadvantages of inflation ?
If inflation is too high it makes us less competitive than other countries
Risk of hyperinflation
Cost of changing prices due to inflation ( menu costs)
Cost in terms of extra time and effort involved in reducing money holdings (shoe leather costs )
What’s the definition for balance of payments
Record of money flows coming in and going out of the country
What’s the current account
Al exports + all imports of goods and services
What’s the visible balance :
Visible exports - visible imports
What are invisible credits
Sell service abroad
What are invisible debts
Buy services for abroad
What’s the invisible balance
Invisible credits - invisible debts
What causes a deficit
British goods become more uncompetitive. Due to the being more expensive because of inflation, high exchange rate and low productivity
What’s a disadvantage of a deficit
£falls and imports are more expensive, so inflation occurs.
Rise in unemployment
Lowers growth
Borrow money from IMF which impose conditions
What’s the disadvantage of a large surplus
Trading partners have a large deficit and put tariffs and quotas on your goods
Exchange rate increases. Harder for firms to trade in future
What are the consequences of unemployment to the individual?
Harder to find work as they have little experience
Long term unemployment can cause workers to become deskilled
Health figures are worse for unemployed
Consequences of unemployment to the government?
Loss in revenue as more is spent on benefits and health care
Lowering the possible higher GDP figure
Reduction in living standards
What are the two causes of inflation?
Demand pull: where an increase in aggregate demand occurs when the economy is operating near full output.
Cost push: Is caused by an increase in the cost of production for goods and services.
- labour cost
- weaker pound
- oil price rise
Explanation of CPI
- Family expenditure aurvey carried out on over 6000 families.
- A normal shopping basket is then calculated of 650 items.
- weights of how much income each item takes up are calculated.
- price quotations are taken 120,000
- weights are multiplied by price index to work out price level change
(Actual figure x100)/ base year figure
How does RPI differ from CPI?
Measured in the same way.
But it has:
- housing costs
- mortgage interest payments
- council tax
It doesn’t have:
- uni accommodation
- Foreign student tuition fees
- stockbrokers charges
What is RPIX and RPIY
RPIX= RPI-mortgage interest
RPIY=RPI+mortgage interest+indirect taxes
Name three consequences of high inflation
- domestic firms are uncompetitive against foreign firms
- can result in hyperinflation (over 50%)
- causes economic uncertainty for saving and investment
What are the difficulties in inflation measuring?
- improvemtns in technology means you’re not technically still buying the same good
- people stop buying expensive items so inflation overstates living cost
- changes in weights can occur due to fashion or taste changes
- CPI uses an average household, but not household is the same
What is the current U.K inflation
2.7%
Who wins in inflation?
Debtors, because their wages go up but debt stays the same, meaning they have less to pay off
Who loses in inflation?
Savers, because inflation is higher than the saving interest so the money is worth less when you withdraw it.
Define Balance of Payments
Balance of payments is the total amount of money in and out of a country in a year
What is the current account?
The current account is an account of all the imported and exported goods and services in a year
What is the current account made up of?
Visible account: An account of all imported and exported goods
Invisible account: An account of all imported and exported services
How do you calculate the visible and invisible balances?
Visible = visible exports - invisible exports
Invisible= invisible credits - invisible debits
How to calculate the current account balance?
Current Balance= visible account + invisible account
What are surpluses and deficits
of the balance of payments?
Surplus: more money in than out
Deficit: more money out than in
What are the causes of a deficit?
Low exchange rate means cheaper exports
Higher quality goods and services
If goods are produced at low cost
How should economies combat recession
Compete in foreign markets
What are the causes of a deficit?
Higher inflation than trading partners makes exports more expensive
Lack of competitiveness between firms
High exchange rate makes exports more expensive
Poor quality goods and services
Current UK bop trends
Has a visible defecit
Since 1966 it has invisible surplus
Consequences of a surplus
Currency gains in value so exports are more expensive
Causes inflation due to lots of money but not many goods
Cause another country to have a deficit meaning the may place legislation against trading with you (retaliation)
Consequences of a deficit
A country could go bankrupt as IMF only lends under strict guidelines
Currency will lower so imports are more expensive
Lots of unemployment in exports
Define exchange rate
It is the value of one currency in terms of another
How is it calculated (floating system)
It is determined by supply and demand
Increase= more demand less supply
decrease=less supply more demand
Pounds are demanded when the are exchanged for other currencies
Pounds are supplied when they are converted from other currencies
What is appreciation and depreciation of the £
Appreciation exchange rate goes up:
- cheaper imports so lower inflation
- makes exports more expensive
Depreciation exchange rate goes down:
-exports are cheaper abroad
What is economic stability?
Is an economy that displays only minor fluctuations in growth, output and has constantly low inflation
What is income redistribution?
Is transferring income to different parties if the economy
Achieved through policies
Progressive and regressive taxes?
Progressive: hit the rich harder
Regressive: hit the poor harder
Proportional: hit both parties the same
Why do the government redistribute income?
To stabilise the economy
What is fiscal drag?
If tax brackets are not adjusted with inflation, peoples income can be pushed into higher tax bands
