Chapter 11 - Economic performance Flashcards
Whats long run growth
The long run expansion of an economy’s productive potential
Whats short run growth
The percentage annual increase in a country’s real GDP
What factors affect long run growth in a country
The quantity of factor resources
Improving technology
Quality of resources
Characteristics of economic recession
Declining aggregate demand for UK output
Contracting employment / rising unemployment
Sharp fall in business confidence & profits
Decrease in fixed capital investment spending
Reduced inflationary pressure
Falling demand for imports
Increased government borrowing
Lower interest rates from central bank
Characteristics of economic boom
Strong and rising level of AD
Often driven by fast growth of consumption
Rising employment and real wages
High demand for imported goods & services
Government tax revenues will be rising quickly
Company profits and investment increase
Increased utilisation rate of existing resources
Danger of demand-pull and cost-push inflation if the economy overheats
Examples of Short Term Increases in AD
Higher consumer spending
Increased capital investment
Domestic investment
Inward investment from overseas
What are Sources of Economic Growth
Changes in AD
Rise in government spending on goods and services or a fall in government taxes
Increased exports sold to overseas countries
A reduction in import spending
Sources of Economic Growth
Changes in AS
Higher productivity (factor efficiency)
Increased supply of factor inputs
Technological advances
How do you increase supply of factor inputs
Expansion of employable labour supply
Increase in the stock of capital inputs
Exploitation of new finds of natural resources
Benefits from economic growth
new jobs in the economy
Higher real incomes – higher living standards
More tax revenues for the government
Higher profits
Rising wealth
Increased funds available for infrastructure
Risks from economic growth
Risk of demand-pull inflation
rising inequality
environmental damage / costs
Over-exploitation of scarce finite resources
Opportunity cost of increased capital investment
Social problems
Environmental benefits of economic growth
As per capita incomes rise
Higher real incomes associated with lower fertility rates
Increased demand for environmental quality
environmental impact of economic growth
fast growth may create negative externalities
Risks of from economic growth
Depletion of non-renewable resources
Environmental impact
Increased pollution / waste / congestion
Concern about sustainability of growth for future generations (Intergenerational equity)
What are 3 Growth and the Environment approaches
The free market approach
The social efficiency approach
The conservationist approach
What is tend growth
the long-term rate of growth of real GDP
Supply-side factors
investment, education and training and technological change
What is unemployment
People able, available and willing to find work and actively seeking work – but not employed
What is the claimant count measure
The number of people claiming the Jobseekers’ Allowance
Structural unemployment
Arises from the mismatch of skills and job opportunities as the pattern of labour demand in the economy changes
Frictional unemployment
Transitional unemployment due to people moving between jobs: Includes people experiencing short spells of unemployment
Cynical unemployment
There is a cyclical relationship between demand, output, employment and unemployment
Seasonal unemployment
Regular seasonal changes in employment / labour demand
Real wage unemployment
Created when real wages are maintained above their market clearing level leading to an excess supply of labour at the prevailing wage rate
Natural rate of unemployment
The rate of unemployment when the labour market is in equilibrium and comprises frictional + structural unemployment.
Voluntary unemployment
when people choose to remain unemployed rather than take jobs available.
Regional unemployment
where structural unemployment affect a whole region e.g. South Yorkshire or South Wales after closure of mines.
Technological unemployment
special case of structural employment arising from labour saving technology
occurs when developments in technology and working practices cause some workers to lose their jobs.
Disguised unemployment
when people do not have productive full-time employment, but are not counted in the official unemployment statistic
Negative consequences of unemployment to the business
Fall in demand for goods and services
Fall in demand for businesses further down the supply chain
negative multiplier effects
Positive consequences of unemployment to the business
Bigger pool of surplus labour is available
Less pressure to pay higher wages
Less risk of industrial / strike action
Effects of unemployment for the Government (Fiscal Policy)
Increased spending on unemployment benefits
Fall in revenue from income tax
Fall in profits – reduction in revenue from corporation tax
May lead to rise in government borrowing (i.e. a budget deficit)
Effects of unemployment for the economy as a whole
Lost output (real GDP) from people being out of work long-term unemployed may leave the labour force permanently – fall in potential GDP Increase in the inequality
What are the 5 types of unemployment
Cyclical Frictional Seasonal Structural Real-Wage
Demand side Policies to Reduce Unemployment
Lower interest rates (a monetary policy stimulus)
A lower exchange rate (helps exporters)
Lower direct taxes (fiscal stimulus to spending power)
Government spending on major capital projects (e.g. improving the transport infrastructure)
Employment subsidies
Incentives to encourage flows of foreign investment in the UK
Supply-side policies to reduce Unemployment
Increased spending on education & training including an emphasis on “lifetime-learning”)
Improved flows of information on job vacancies
Changes to tax and benefits to improve incentives
Measures designed to make the labour market more flexible
Effects of falling unemployment to The circular flow and the multiplier
Incomes flowing into households will grow
Falling unemployment adds to demand and creates a positive multiplier effect on incomes, demand and output.
Effects of falling unemployment to The balance of payments
When incomes and spending are growing, there is an increase in the demand for imports. Unless this is matched by a rise in export sales, the trade balance in goods and services will worsen
Effects of falling unemployment to government spending
With more people in work paying income tax, national insurance and value added tax, the government can expect a large rise in tax revenues and a reduction in social security benefits
Effects of falling unemployment to inflationary effects
Falling unemployment can also create a rise in inflationary pressure
However this is not really a risk when the economy is coming out of recession, since aggregate supply is likely to be highly elastic because of a high level of spare capacity
What is inflation
Inflation is a sustained increase in the general price level, leading to a fall in the purchasing power of money.
What is deflation
Deflation occurs when the rate of inflation becomes negative i.e. the general price level is falling and the purchasing power of money is increasing.
WHat is hyperinflation
Is a rapid rise in prices - the value of money becomes worthless and people lose all confidence in money both as a store of value and also as a medium of exchange.
What is stagflation
slow growth and rising unemployment
Measure of inflation
measured by the annual percentage change in the level of consumer prices.
Main measures are CPI and RPI
What is the inflation target of the UK
The British Government has set an inflation target of 2% - as measured by the CPI
Demand-pull inflation
when AD and output is growing at an unsustainable rate leading to increased pressure on scarce resource
4 main causes of demand-pull inflation
- A monetary stimulus to the economy. Eg a fall in interest rates resulting in too much demand.
- A fiscal stimulus e.g. a reduction in direct or indirect taxation or higher government spending leads to higher AD.
- Depreciation of the exchange rate (This increases the price of imports and reduces the price of UK exports)
- Faster economic growth in other countries – providing a boost to UK exports.
Cost-push inflation
occurs when firms respond to rising costs, by increasing prices to protect their profit margins.
4 causes of cost-push inflation
An increase in component costs.
Rising labour costs - caused by wage increases.
Higher indirect taxes imposed by government.
A fall in the exchange rate
Inflation can be reduced by policies that do what
slow down the growth of AD or
boost the rate of growth of AS.
Monetary policy
This involves raising interest rates to reduce consumer and investment spending (so lowering AD). Remember interest rates are set by MPC
Fiscal policy
To lower AD the government may reduce its own spending on public goods/services or welfare payments. Or it can choose to raise direct (not indirect) taxes, leading to a reduction in real disposable income.
What are the 4 government policies to reduce inflation
Monetary policy
Fiscal policy
Supply-side policy
Reducing expectations
Supply-side policy
include those that seek to increase productivity, competition and innovation – all of which should lead to lower prices
Reducing expectations
The government has succeeded in recent years in convincing businesses that inflation will remain low. This increases business confidence and dissuaded Unions from making excessive pay claims.
why might output increase after an increase in the money supply
- Will initially affect those in the financial markets
- These people will buy more financial assets
- The increase in the demand for bonds will raise the price of bonds and lower the rate of interest
- A fall in the interest rate generates an increase in investment
What are the UK Government attempting to ensure that our economy has
Stable, Low Inflation
Steady & Sustainable Economic Growth
Low Unemployment / High Employment
Rising Living Standards
What was the economic concept developed by A. W. Phillips
Inflation and unemployment have a stable and inverse relationship
Positive output gap
when actual output is more than full-capacity output.
Negative output gap
when actual output is less than what an economy could produce at full capacity
