Chapter 25/26/27 Flashcards
Economic growth, inflation, unemployment
What is macroeconomics?
Study of large economic systems such as those of a whole country or area of the world.Wh
What are the macroeconomic objectives?
Redistribution of income, reducing unemployment, controlling inflation, economic growth, protecting the environment
What is economic growth?
and what positive impacts can it have?
Increasing the level of output by a nation, as economies grow, national income rises. As the economy produces more, more labor is needed and unemployment falls.
How do we measure economic growth?
Gross Domestic Prodcut (GDP) - market value of all the goods/services produced in a period of time.
What are the 7 limitations of GDP?
Inflation, Population changes, statistical errors, value of home produced goods, hidden economy, other factors (distribution of income), external costs
How do we make GDP fair in terms of inflation?
By using ‘real GDP’ (GDP- Inflation)
How do we make GDP fair in terms of population changes?
GDP per capita
Describe the economic cycle?
How much economic activity changes over a period of time, including boom, downturn, recession, and recovery
What happens at the boom?
GDP highest, Inflation highest, Unemployment lowest
What happens at downturn?
GDP decreasing, Inflation decreasing, unemployment increasing
What happens at recession?
GDP lowest, Inflation lowest, Unemployment highest
What happens during recovery?
GDP increasing, Inflation increasing, unemployment decreasing
What are the 6 impacts of economic growth?
Employment rises, standards of livings rise, poverty falls, productive potential rises, inflation may increase too quickly and interest rates will have to rise (overheats), environmental damage
Define inflation.
The rate at which the general price of goods increases, over a period of time.
Define deflation.
The rate at which the general prices of goods are decreasing and aggregate demand is falling.
What is aggregate demand?
Total demand in the economy including consumption, investment, gov expenditure and net exports.
What are CPI and RPI?
Methods of measuring inflation
CPI- Consumer Price Index, measure in the change of prices in a period of time (not including housing)
RPI- Retail Price Index, measure in the change of prices in a period of time (including housing).
What are the two types of inflation?
Demand pull and cost push
Why does demand-pull inflation occur, give specific reasons.
Inflation caused by too much demand compared to supply, either because of lower taxes/lower interest rates, higher gov spending, increasing demand for exports.
Why does cost-push inflation occur?
Inflation caused by rising business costs, either from increased taxes or increased wages. Businesses want to protect their profit margins.
What kind of relationship do interest rates and inflation have?
Inversely proportional- If interest rates fall, inflation increases. There is more disposable income to spend so purchasing power increases.
What does inflation impact?
Prices, wages, exports, unemployment, menu costs, shoe leather costs, uncertainty, business/consumer confidence.
How does inflation impact prices and wages?
Prices: As prices rise, the purchasing power of money decreases.
Wages: May need to increase when prices rise, otherwise standards of living fall. (Trade unions).
How are exports and unemployment affected by inflation?
Exports: Inflation increase in one country may cause their firms difficulty selling overseas
Unemployment: Will decrease because inflation means too much demand, more labor needed.
What are shoe leather costs?
Costs to firms and consumers when looking for new suppliers.
What are menu costs?
Costs to firms when prices keep changing e.g. printing new menus
Why does uncertainty occur when there’s inflation?
It makes it difficult to invest into long term projects because of
What happens to consumer and business confidence as inflation occurs?
Consumers may be less willing to borrow large amounts of money because of uncertainty. Businesses may be less willing to invest/grow because the future is uncertain.
What is hyperinflation?
Very high levels of inflation, when the economy grows too quickly and overheats.
Define unemployment.
When those seeking to find work are unable to find it
What is disinflation?
When prices are rising but at a slower rate than before.
What is the formula for labor force participation rate?
Labor force/Total working age population
What is the formula for unemployment rate?
No. in labor force not working/Total labor force
Who is included in the labor force?
People who are either employed or actively looking for work. It includes employed and unwillingly unemployed people.
Name the different types of unemployment.
Cyclical/demand deficient
Seasonal
Voluntary
Structural
Frictional
What kind of changes in the structure of the economy cause structural unemployment?
Sectorial: Industry decline
Technological: Machines taking over jobs
Regional: Some regions face lower employment
What is cyclical/demand deficit unemployment?
Caused by falling due recession/downturn.
What is seasonal unemployment?
Workers that are only required for certain times in the year
What is structural unemployment?
Changes in the structure of the economy
What is voluntary unemployment?
People who choose not to work
What is frictional unemployment?
When workers are unemployed for a short time as they move jobs.
What 8 things does unemployment impact?
Poverty, society, gov spending, output, use of scarce resources, business + consumer confidence and tax rev.
Why does unemployment affect output and use of scarce resources?
Output is lower since productive potential is not being met.
A waste of limited resources.
Why does unemployment affect poverty and society?
If people aren’t working, they aren’t earning money so they can’t afford basic needs. They rely on govs.
Govs feel this burden and spend more on welfare, which means less for developing society.
Why does unemployment affect tax revenue and gov spending?
If people are unemployed, they will not pay taxes so govs feel this burden.
Gov spending has to be focused on financial aid rather than education.
How does unemployment affect business and consumer confidence?
Unemployment means people have less confidence to spend their money as they like because of the uncertain future.
Consumers are less willing to buy so business profits fall, this prevents growth plans.
