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
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
2
Q
What is the labour force?
A
The employed + the unemployed = the economically active
3
Q
Give some indicators of economic performance
A
Economic growth Unemployment Inflation Balance of payments Distribution of income Economic stability
4
Q
Who are the economically inactive?
A
People of working age who are neither employed nor unemployed
5
Q
Define inflation
A
A sustained rise in the price level
6
Q
What is the balance of payments?
A
A record of money flows coming in and out of a country
7
Q
Give an example of how the government would redistribute income
A
Taxing the richest households, and providing state benefits for the poorest
8
Q
What is economic stability measured in?
A
Fluctuations in output, employment and inflation
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
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
11
Q
What is the inflation rate?
A
The percentage increase in the price level over a period of time
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
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
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
15
Q
How is sustainable growth achieved in regards to AS and AD?
A
When they are equal
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
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
18
Q
What is full employment?
A
A situation where those wanting and able to work can find employment at the going wage rate
19
Q
Why may full employment not be equal to 100% employment?
A
People in between jobs
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
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
22
Q
What is a current accounts deficit?
A
Where more money is leaving the country than entering it
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
24
What is hyperinflation?
Inflation rate above 50%
25
What is nominal GDP?
Output measured in current prices, not adjusted for inflation
26
How is economic growth measured?
Annual percentage changes in real GDP
27
What is labour productivity?
Output per worker per hour
28
How could production and productivity move in opposite directions?
If less skilled workers have to be recruited to increase production, overall productivity will fall
29
What difficulties lie in interpreting changes in real GDP?
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.
30
What are the consequences of the informal economy?
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
31
Define informal economy
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
32
Define economy of scale
The advantage of producing on large scale, in the form of lower long run average costs
33
What needs to be considered when deciding the impact of changes in GDP on people's lives
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
34
Give two reasons as to why people do not get happier as they get richer
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
35
What is the unemployment rate?
The percentage of the labour force who are out of work
36
What two measures of unemployment are there?
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
37
What are the disadvantage of using the labour force survey to measure employment?
It's expensive, and may be subject to sampling errors
38
Give advantages to using labour force survey to measure employment
It's widely used by most countries, so allows for comparison. It includes far more of those who are unemployed than claimant count
39
Give disadvantages to claimant count as a measure of unemployment
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
40
Give advantages to claimant count as a measure of unemployment
Cheap and quick to compile
41
What is the main measure of inflation?
Consumer price index
42
What is the consumer price index?
A measure of changes in the price of a representative basket of consumer goods and services
43
How is consumer prices index calculated?
A base year is selected, then a weighted basket of goods is measured in terms of price changes, reviewed yearly
44
What is the retail prices index?
A measure of inflation used for adjusting pensions and other benefits, frequently used in wage negotiations
45
How do the CPI and RPI differ?
CPI excludes housing costs, road tax and tv licences, yet includes uni accom fees, foreign students uni fees which are not included in RPI
46
Give disadvantages of CPI and RPI
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
What are the main elements in the balance of payments?
Current account, capital and financial account, and net errors and omissions
48
What does the current account include?
Trade in goods, trade in services, income and transfers
49
What does the income component of the current account include? What does an income surplus imply?
Mainly investment income. Means that residents earn more in terms of profit on their investment abroad, than foreigners do in the uk
50
What do the capital and financial accounts show?
The movement of direct investment, eg for factories etc
51
What is the purpose of the net errors and omissions component of the balance of payments
To correct for errors, making sure that the balance of payments does indeed balance
52
Ŵhat are the causes of economic growth in long term?
Increases in quality and quantity of resources
53
How can an economy with spare capacity grow in the short term?
By increasing aggregate demand
54
Give two types of economic growth, and a cause for each one
Export lead growth - A decline in the value of our currency
| Consumption lead growth - a reduction in income tax
55
What are the main causes of an increase in the quality of an economy's resources?
Advances in technology
| Improvements in Education and training
56
What is cyclical unemployment? What is it also known as?
Unemployment arising from a lack of demand. Demand deficient unemployment
57
How is demand deficient unemployment shown graphically?
By the AD curve being on the horizontal stage of the AS curve
58
What is structural unemployment?
Unemployment caused by the decline of certain industries and occupations due to changes in demand and supply
59
Give some causes of unemployment
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
What is frictional unemployment
Short term unemployment occurring when workers are in between jobs
61
What are the two types of inflation?
Demand pull
| Cost push
62
What is demand pull inflation?
Increases in the price level caused by increases in aggregate demand
63
What is cost push inflation?
Increases in the price level caused by increases in the costs of production
64
How is cost push inflation shown diagrammatically?
By the AS curve shifting to the left
65
What are the two main reasons a deficit on the current account of the balance of payments arises
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
What are the main causes of a deficit on the trade of goods and services?
Changes in income at home and abroad
Changes in the exchange rate
Structural problems
67
How would a rise in domestic income result in a deficit in the trade of goods and services
Causes more products to be bought, of which many are likely to be imports
68
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?
Income and exchange rate are likely to change in the future, whereas structural problems may not
69
How may a net outflow of investment income occur?
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
What could cause a surplus of current account?
Strengthening of economy, changes in exchange rate, weakening of economy
71
How can a recession lead to a current account surplus?
Domestic inhabitants may not be buying much, so firms will switch their market to the export market
72
Give 6 consequences of unemployment
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Lost output
Lost tax revenue
Government spending on unemployment benefits
Pressure on other forms of gov spending
Costs to unemployed
Hysteresis
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73
How would lost tax revenue, as an impact of unemployment, affect the economy?
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
Describe the pressures unemployment has on other forms of government spending.
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
Describe the costs to the unemployed as a result of unemployment
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
What is hysteresis?
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
What is the cost of unemployment to other economies?
Unemployment in a countries trading partners will reduce demand for exports, and hence the countries AD, which may cause unemployment itself.
78
Describe a few benefits of unemployment
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
Overall, what does the significance of the consequences of unemployment depend upon?
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
Describe how the level of unemployment influences the significance of consequences
The more unemployment there is, the more costs there are. More spending on benefits, less tax revenue etc.
81
Give 9 consequences of inflation
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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
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82
What are menu costs?
The costs of changing prices due to inflation. This is reduced as technology has risen
83
What are shoeleather costs? Explain them
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
What are administrative costs?
Firms spending more time adjusting accounts, negotiating wages, calculating price changes
85
What is inflationary noise?
The distortion of price signals caused by inflation. People are unsure whether price rises are the result of inflation, or scarcity etc.
86
How does inflation cause random redistribution of income?
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
What is fiscal drag?
People's income being dragged into the next tax band, as a result of tax bands not being adjusted with inflation
88
Explain uncertainty as a consequence of inflation
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
How can inflation cause inflation
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
Explain the benefits of inflation
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
How can deflation be beneficial?
If it arises from supply side, eg lower costs passed on, then individuals benefit
92
How can deflation be harmful
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
What does the significance of inflation depend upon?
The rate of inflation, it's cause, whether it's fluctuating, whether it was anticipated, and it's rate relative to other countries
94
What type of inflation is more harmful? Why?
Cost push, as it is often accompanied by falling GDP and unemployment
95
How does fluctuating inflation influence the significance
It causes inflationary noise and means firms, households and government can't plan ahead
96
How does whether the inflation was anticipated impact it's significance?
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
How does the inflation rate relative to other countries influence it's significance
If a country has a higher inflation rate than it's main trading partners, the current account is likely to deteriorate
98
How does inflation effect people differently?
Different people have different spending habits, experiences different prices across the country
99
What are the consequences of a deficit on the current account of the balance of payments
Deficit is likely to reduce exchange rate, and increase debt
100
What are the consequences of a current account surplus?
Higher AD and hence banks have more money, increased bank lending, rise in exchange rate
101
What does the significance of a current account deficit depend upon?
It's size, duration, cause, and what is happening to the capital and financial account
102
How does the activity of financial and capital account affect the significance of a current account deficit?
If a large deficit can be combatted by lots of FDI, the impacts on exchange rate will be none
103
How may economic growth reduce the quality of some peoples lives
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
What is the main benefit of economic growth?
A rise in peoples material standard of living
105
How does economic growth reduce poverty?
Reduces unemployment, and the tax revenue can be spent on correctional methods
106
Define exchange rate
The price of one currency in terms of another
107
How is the exchange rate determined in uk?
Market forces of demand and supply
108
How do changing incomes abroad influence the exchange rate?
They increase the demand for pounds and hence exchange rate rises
109
How do rising incomes at home influence the exchange rate?
They increase the supply of pounds to the import market
110
How does speculation influence exchange rate?
Speculators create demand and supply for currencies
111
How are the exchange rate and interest rate related?
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
Why may a reduction in interest rate not translate to a lower exchange rate?
It may signal good prospects of economic growth in the UK, and hence demand for pounds increases
113
How does a fall in the exchange rate influence export and import prices
Decrease in imports, increase in exports. This is because it would reduce the cost of the good in terms of foreign currency
114
Why may an exporter not reduce the price of its products even if the exchange rate falls?
If the good has price Inelastic demand
115
How would a lower exchange rate increase AD?
By boosting exports and reducing imports
116
How may a lower exchange rate put upward pressure on inflation?
Price of imported goods rise, which may be translated to consumers.
