chapter 25 - macroeconomic aims of gov Flashcards
what are the macroeconomic aims of gov?
economic growth balance of payments stable prices low unemployment/ full employment redistribution of income
definition of:
economic growth
annual increase in the level of national output (GDP)
definition of:
gross domestic product
amount of goods and services produced in the economy over a period of time
explain economic growth
increase output - economic growth positive - increase in quantity and quality of f.o.p shifts ppc outward
what happens if gdp decreases?
- unemployment increases - decrease in living standard
- fall in profit and revenue for firms - low investments
- lower tax revenue
definition of:
unemployment
people who are willing and able to work and actively seeking for employment but unable to find jobs
how does high employment benefit?
high employment - higher disposable come - higher consumption - higher output (GDP) - increase in living standards
what happens if low employment?
- decrease in national output
- gov gives welfare payment (unemployment benefits) - increase public expenditure while income taxes decrease - causes budget deficit
definition of:
inflation
increase in the average level of price of goods and services
how is inflation measured?
using consumer price index
what happens in price increase too quickly?
- firm cost of production increase - labours demand for higher wages
- reduce purchasing power
- export becomes expensive
- cause hardship for poor
definition of:
balance of payment
financial record of the country’s transaction with the rest of the world for a given time period
what is it called when export > import
surplus
what is it called when import > export
deficit
what happens if there’s a deficit?
- economy will run out of foreign currency and import will reduce
- value of our currency will fall against other foreign currency which makes import more expensive to buy
what happens if surplus?
our value of currency increases against other foreign currency which makes exports more expensive
definition of:
redistribution of income
aims to achieve equality in the distribution of income
how does gov redistribute income?
- gov impose higher tax on the rich and use the tax to fund welfare schemes for the poor
- gov provide subsidies
what are the conflicts between macroeconomic aims of gov?
- full employment vs stable price
- full employment vs balance of payment
- economic growth vs stable price
- economic growth vs balance of payment
explain the conflict between full employment vs stable price
full employment - have more disposable income - increase spending ability - demand increase and consumption increase - cause inflationary pressure
definition of:
demand-pull inflation
when demand increase faster than supply
definition of:
cost-pull inflation
full employment makes it harder for firms to attract skilled labours so need to offer high wages - cost of production increases - selling price increase
explain the conflict between full employment vs balance of payment
- more disposable income - higher consumption - spending on imports increase
- full employment causes inflation - high inflation means export becomes less competitive
explain the conflict between economic growth vs stable price
reduction in interest rates stimulate economic growth - people with existing loans have more disposable income - firms increase investment as borrowing is cheaper - higher consumption leads to demand-pull inflation
explain the conflict between economic growth vs balance of payment
- higher consumption expenditure causes deficit in country’s balance of payment - higher consumption on imports
- higher consumption means inflation - inflation makes exports less competitive
