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AS Macro Retake > Chapter 2 - Gov Policy Objectives And Indicators Of National Economic Performance > Flashcards

Chapter 2 - Gov Policy Objectives And Indicators Of National Economic Performance Flashcards

0
Q

Define unemployment

A

Where people are out of work, yet willing and able to work

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1
Q

Define economic growth in both short and long run

A

Short run is shown by an increase in real GDP, and in the long run is shown by an increase in the productive capacity of an economy

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2
Q

What is the labour force?

A

The employed + the unemployed = the economically active

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3
Q

Give some indicators of economic performance

A 
Economic growth
Unemployment
Inflation
Balance of payments
Distribution of income 
Economic stability
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4
Q

Who are the economically inactive?

A

People of working age who are neither employed nor unemployed

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5
Q

Define inflation

A

A sustained rise in the price level

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6
Q

What is the balance of payments?

A

A record of money flows coming in and out of a country

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7
Q

Give an example of how the government would redistribute income

A

Taxing the richest households, and providing state benefits for the poorest

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8
Q

What is economic stability measured in?

A

Fluctuations in output, employment and inflation

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9
Q

Describe the consequences of economic instability

A

The fluctuations create uncertainty, and hence make it difficult for firms, households and government to plan ahead. This has the effect of firms refusing to invest, workers discouraged from improving their skills, and government discouraged from undertaking major reforms

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10
Q

What is the effect of of an increase in the elasticity of the AS curve?

A

Aggregate supply can be closer to the full employment level, without causing inflation

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11
Q

What is the inflation rate?

A

The percentage increase in the price level over a period of time

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12
Q

How may the UK’s economic performance be improved?

A

Better transport infrastructure
Higher economic activity rate
Better education, higher productivity
More spending on R&D

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13
Q

Give the 5 objectives of economic policy

A 
Economic growth
High Employment and low unemployment
Low and stable Inflation
Economic stability
Distribution of income
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14
Q

Define sustainable economic growth

A

Economic growth that can continue over time and does not endanger future generations ability to expand productive capacity

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15
Q

How is sustainable growth achieved in regards to AS and AD?

A

When they are equal

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16
Q

What is trend growth?

A

The expected increase in potential output over time. It’s a measure of how fast the economy can grow without generating inflation

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17
Q

How do governments seek to achieve sustainable economic growth?

A

Avoid depleting natural resources, use cleaner sources of energy, avoid pollution, conserve non renewable resources

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18
Q

What is full employment?

A

A situation where those wanting and able to work can find employment at the going wage rate

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19
Q

Why may full employment not be equal to 100% employment?

A

People in between jobs

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20
Q

Why don’t governments set a target of 0% inflation?

A

A low level of inflation brings advantages, such as firms reducing costs by not adjusting workers wages to inflation, instead of making them redundant

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21
Q

Why do government rarely worry about the balance of payments being in deficit?

A

Deficit is likely to be self correcting, eg if the deficit occurs due to investment

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22
Q

What is a current accounts deficit?

A

Where more money is leaving the country than entering it

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23
Q

What is the risk, when redistributing income from the rich to the poor?

A

They don’t want to discourage enterprise among firms and work, and they don’t want to encourage living off benefits

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24
Q

What is hyperinflation?

A

Inflation rate above 50%

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25
Q

What is nominal GDP?

A

Output measured in current prices, not adjusted for inflation

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26
Q

How is economic growth measured?

A

Annual percentage changes in real GDP

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27
Q

What is labour productivity?

A

Output per worker per hour

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28
Q

How could production and productivity move in opposite directions?

A

If less skilled workers have to be recruited to increase production, overall productivity will fall

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29
Q

What difficulties lie in interpreting changes in real GDP?

A

A rise in output may be exceeded by a rise in population, meaning the average person would actually be worse off. Can be avoided by calculating real GDP per capita
The informal economy produces output yet goes unnoticed. Building works from a large part of this.

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30
Q

What are the consequences of the informal economy?

A

It distorts a range of economic data, such as employment, GDP and inflation. Tax revenue is also lower than would be if all economic activity was taxed. Also results in lower productivity, as firms in the informal economy tend to stay small so that they go unnoticed

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31
Q

Define informal economy

A

Economic activity that is not recorded or registered with the authorities, in order to avoid paying tax or complying to regulations, or because the activity is illegal

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32
Q

Define economy of scale

A

The advantage of producing on large scale, in the form of lower long run average costs

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33
Q

What needs to be considered when deciding the impact of changes in GDP on people’s lives

A

The composition of this real GDP. Eg if output is higher due to increased police force to match rising crime, people may feel worse off

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34
Q

Give two reasons as to why people do not get happier as they get richer

A

People quickly get used to their living standards, and people’s happiness is closer related to income in comparison to others, as opposed to absolute income

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35
Q

What is the unemployment rate?

A

The percentage of the labour force who are out of work

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36
Q

What two measures of unemployment are there?

A

Labour force survey - survey of households, given the ILO definition of unemployment ( out of work and been seeking work last 4 weeks, ready to start in 2)
Claimant count - measure of those claiming benefits

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37
Q

What are the disadvantage of using the labour force survey to measure employment?

A

It’s expensive, and may be subject to sampling errors

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38
Q

Give advantages to using labour force survey to measure employment

A

It’s widely used by most countries, so allows for comparison. It includes far more of those who are unemployed than claimant count

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39
Q

Give disadvantages to claimant count as a measure of unemployment

A

Some people may be claiming benefits yet not actually seeking work. Some choose not to claim benefits or are untitled yet are still unemployed. Not suitable for international comparisons

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40
Q

Give advantages to claimant count as a measure of unemployment

A

Cheap and quick to compile

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41
Q

What is the main measure of inflation?

A

Consumer price index

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42
Q

What is the consumer price index?

A

A measure of changes in the price of a representative basket of consumer goods and services

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43
Q

How is consumer prices index calculated?

A

A base year is selected, then a weighted basket of goods is measured in terms of price changes, reviewed yearly

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44
Q

What is the retail prices index?

A

A measure of inflation used for adjusting pensions and other benefits, frequently used in wage negotiations

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45
Q

How do the CPI and RPI differ?

A

CPI excludes housing costs, road tax and tv licences, yet includes uni accom fees, foreign students uni fees which are not included in RPI

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46
Q

Give disadvantages of CPI and RPI

A

They don’t assess the same goods each year, and they don’t take into account changes in quality and hence price of goods
Inflation is often overstated, as they don’t take into account that people alter what they buy during the year

47
Q

What are the main elements in the balance of payments?

A

Current account, capital and financial account, and net errors and omissions

48
Q

What does the current account include?

A

Trade in goods, trade in services, income and transfers

49
Q

What does the income component of the current account include? What does an income surplus imply?

A

Mainly investment income. Means that residents earn more in terms of profit on their investment abroad, than foreigners do in the uk

50
Q

What do the capital and financial accounts show?

A

The movement of direct investment, eg for factories etc

51
Q

What is the purpose of the net errors and omissions component of the balance of payments

A

To correct for errors, making sure that the balance of payments does indeed balance

52
Q

Ŵhat are the causes of economic growth in long term?

A

Increases in quality and quantity of resources

53
Q

How can an economy with spare capacity grow in the short term?

A

By increasing aggregate demand

54
Q

Give two types of economic growth, and a cause for each one

A

Export lead growth - A decline in the value of our currency

Consumption lead growth - a reduction in income tax

55
Q

What are the main causes of an increase in the quality of an economy’s resources?

A

Advances in technology

Improvements in Education and training

56
Q

What is cyclical unemployment? What is it also known as?

A

Unemployment arising from a lack of demand. Demand deficient unemployment

57
Q

How is demand deficient unemployment shown graphically?

A

By the AD curve being on the horizontal stage of the AS curve

58
Q

What is structural unemployment?

A

Unemployment caused by the decline of certain industries and occupations due to changes in demand and supply

59
Q

Give some causes of unemployment

A

Cyclical
Workers having a lack of skills
Structural
Workers replaced by technology - technological
International - when firms carry work out abroad or when firms and households choose to import more
Frictional

60
Q

What is frictional unemployment

A

Short term unemployment occurring when workers are in between jobs

61
Q

What are the two types of inflation?

A

Demand pull

Cost push

62
Q

What is demand pull inflation?

A

Increases in the price level caused by increases in aggregate demand

63
Q

What is cost push inflation?

A

Increases in the price level caused by increases in the costs of production

64
Q

How is cost push inflation shown diagrammatically?

A

By the AS curve shifting to the left

65
Q

What are the two main reasons a deficit on the current account of the balance of payments arises

A

The country’s inhabitants have spent more on goods and services from abroad than overseas residents have spent on the country’s products
There has been a net outflow of investment income

66
Q

What are the main causes of a deficit on the trade of goods and services?

A

Changes in income at home and abroad
Changes in the exchange rate
Structural problems

67
Q

How would a rise in domestic income result in a deficit in the trade of goods and services

A

Causes more products to be bought, of which many are likely to be imports

68
Q

Why is a deficit caused by changes in income or exchange rate likely to be less of a concern to a government than one caused by structural problems?

A

Income and exchange rate are likely to change in the future, whereas structural problems may not

69
Q

How may a net outflow of investment income occur?

A

If the investments that foreign residents have made in the country earn more than the investments by the country’s inhabitants have made abroad

70
Q

What could cause a surplus of current account?

A

Strengthening of economy, changes in exchange rate, weakening of economy

71
Q

How can a recession lead to a current account surplus?

A

Domestic inhabitants may not be buying much, so firms will switch their market to the export market

72
Q

Give 6 consequences of unemployment

A 
Lost output
Lost tax revenue
Government spending on unemployment benefits
Pressure on other forms of gov spending
Costs to unemployed
Hysteresis
73
Q

How would lost tax revenue, as an impact of unemployment, affect the economy?

A

Means less government revenue, money which now can’t be spent on education on training, health etc. If the gov want to maintain a spending level, tax rates will have to be raised, or gov will have to borrow

74
Q

Describe the pressures unemployment has on other forms of government spending.

A

More paid out in benefits, less received in tax so less money to be spent overall. Also, the unemployed are more likely to be involved in crime, have health or marital problems, all of which cost the government money

75
Q

Describe the costs to the unemployed as a result of unemployment

A

More likely to suffer marital problems and poor health, and loss of income. People also lose their sense of purpose, and the children are far more likely to suffer from poverty and be less educated

76
Q

What is hysteresis?

A

Unemployment causing unemployment, through employers being reluctant to hire someone who’s been out of work a while due to the fact that this indicates they’re a bad worker, and will have lost skills. People also lose motivation as they adjust to being unemployed, and get discouraged by the rejection

77
Q

What is the cost of unemployment to other economies?

A

Unemployment in a countries trading partners will reduce demand for exports, and hence the countries AD, which may cause unemployment itself.

78
Q

Describe a few benefits of unemployment

A

It gives some people time to search for a more rewarding job. It increases the pool of workers firms can choose from. The employed are less likely to push for wage rises etc
These cause a reduction in cost push and demand pull inflation

79
Q

Overall, what does the significance of the consequences of unemployment depend upon?

A

How much unemployment there is, how long on average people are unemployed, the benefits provided to the unemployed, the type of unemployment and the distribution of unemployment

80
Q

Describe how the level of unemployment influences the significance of consequences

A

The more unemployment there is, the more costs there are. More spending on benefits, less tax revenue etc.

81
Q

Give 9 consequences of inflation

A 
Fall in the value of money
Menu costs
Shoe leather costs
Inflationary noise
Random redistribution of income
Fiscal drag
Uncertainty
Inflation causing inflation
Loss of international competitiveness
82
Q

What are menu costs?

A

The costs of changing prices due to inflation. This is reduced as technology has risen

83
Q

What are shoeleather costs? Explain them

A

Costs in terms of the extra time and effort involved in reducing money holdings. During inflation, people can’t afford to have money lying around, not earning interest. This cost is reduced as technology has advanced

84
Q

What are administrative costs?

A

Firms spending more time adjusting accounts, negotiating wages, calculating price changes

85
Q

What is inflationary noise?

A

The distortion of price signals caused by inflation. People are unsure whether price rises are the result of inflation, or scarcity etc.

86
Q

How does inflation cause random redistribution of income?

A

It causes some people to gain and some to lose, seemingly randomly. People paying back fixed loans benefit, workers with weak bargaining power lose. Borrowers will gain and lenders will lose if inflation reduces the real interest rate.

87
Q

What is fiscal drag?

A

People’s income being dragged into the next tax band, as a result of tax bands not being adjusted with inflation

88
Q

Explain uncertainty as a consequence of inflation

A

Firms become uncertain as to what their costs will be, and their revenue. They will be reluctant to invest.
Households are unable to plan for the future

89
Q

How can inflation cause inflation

A

Inflation causes people to behave in a way that creates inflation, for example if they believe prices will rise in the future, they will try to buy now, and hence cause demand pull inflation.

90
Q

Explain the benefits of inflation

A

If low and steady, the increase in AD and rise in price may encourage firms to increase output.
Workers enjoy pay rises, even if just to adjust with inflation.
Firms can cut costs by not adjusting wages, and hence reducing unemployment

91
Q

How can deflation be beneficial?

A

If it arises from supply side, eg lower costs passed on, then individuals benefit

92
Q

How can deflation be harmful

A

If it results from fall in AD, it can cause a deflationary spiral as households reduce spending and firms cut costs, reducing AD further

93
Q

What does the significance of inflation depend upon?

A

The rate of inflation, it’s cause, whether it’s fluctuating, whether it was anticipated, and it’s rate relative to other countries

94
Q

What type of inflation is more harmful? Why?

A

Cost push, as it is often accompanied by falling GDP and unemployment

95
Q

How does fluctuating inflation influence the significance

A

It causes inflationary noise and means firms, households and government can’t plan ahead

96
Q

How does whether the inflation was anticipated impact it’s significance?

A

Unanticipated inflation causes uncertainty and a random redistribution of income. Workers won’t have asked for suitable wage adjustments etc. If inflation was forecasted, measures could be taken to prevent random redist

97
Q

How does the inflation rate relative to other countries influence it’s significance

A

If a country has a higher inflation rate than it’s main trading partners, the current account is likely to deteriorate

98
Q

How does inflation effect people differently?

A

Different people have different spending habits, experiences different prices across the country

99
Q

What are the consequences of a deficit on the current account of the balance of payments

A

Deficit is likely to reduce exchange rate, and increase debt

100
Q

What are the consequences of a current account surplus?

A

Higher AD and hence banks have more money, increased bank lending, rise in exchange rate

101
Q

What does the significance of a current account deficit depend upon?

A

It’s size, duration, cause, and what is happening to the capital and financial account

102
Q

How does the activity of financial and capital account affect the significance of a current account deficit?

A

If a large deficit can be combatted by lots of FDI, the impacts on exchange rate will be none

103
Q

How may economic growth reduce the quality of some peoples lives

A

A growing economy may cause some to have to get new jobs and change skills. More cars has lead to more accidents, congestion, breathing related illness etc

104
Q

What is the main benefit of economic growth?

A

A rise in peoples material standard of living

105
Q

How does economic growth reduce poverty?

A

Reduces unemployment, and the tax revenue can be spent on correctional methods

106
Q

Define exchange rate

A

The price of one currency in terms of another

107
Q

How is the exchange rate determined in uk?

A

Market forces of demand and supply

108
Q

How do changing incomes abroad influence the exchange rate?

A

They increase the demand for pounds and hence exchange rate rises

109
Q

How do rising incomes at home influence the exchange rate?

A

They increase the supply of pounds to the import market

110
Q

How does speculation influence exchange rate?

A

Speculators create demand and supply for currencies

111
Q

How are the exchange rate and interest rate related?

A

Reduction in interest rate causes exchange rate to fall, as it reduces the value of buying pounds in UK financial institutions and hence demand falls, causing exchange rate to flow.

112
Q

Why may a reduction in interest rate not translate to a lower exchange rate?

A

It may signal good prospects of economic growth in the UK, and hence demand for pounds increases

113
Q

How does a fall in the exchange rate influence export and import prices

A

Decrease in imports, increase in exports. This is because it would reduce the cost of the good in terms of foreign currency

114
Q

Why may an exporter not reduce the price of its products even if the exchange rate falls?

A

If the good has price Inelastic demand

115
Q

How would a lower exchange rate increase AD?

A

By boosting exports and reducing imports

116
Q

How may a lower exchange rate put upward pressure on inflation?

A

Price of imported goods rise, which may be translated to consumers.

AS Macro Retake (3 decks)

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