Chapter 27-economic Issues Flashcards
define gross domestic product (GDP)
the total value of the output of goods and services in a country in one year
define inflation
is the increase in the average price level of goods and services over time
define unemployment
when people who are able and willing to work cannot find a job
define economic growth
when a county’s GDP increases-more goods and services produced compared to the previous year
Define balance of payments (BoP)
records the difference between a country’s exports and imports
define real income
is the value of income and it falls when prices rise faster than money income
define exports and imports
Exports-goods and services sold from one country to another
Imports-goods and services bought in by one country from other countries
What do supply-side policies try to achieve?
They try to increase competitiveness of industries in an economy against those from other countries. They make the economy more efficient
Define Exchange rate
The price of one currency in terms of another for e.g £1.0:$1.5
Define fiscal policy
Any change by the government in tax rates or public sector spending
Define direct tax
Paid directly from incomes for e.g income tax and profits tax
Define indirect tax
Added to the price of goods and taxpayers pay the tax as they purchase the goods for example VAT (value added tax)
Define disposable income
Level of income a taxpayer has after paying income tax
Define import tariff and import quota
Import tariff-tax on an imported product
Import quota-physical limit on the quantity of a product that can be imported
Define monetary policy
Change in interest rates by the government or central bank
What are the 4 government economic objectives and explain them
Low inflation-low prices of goods and services so that people will buy more money in the economy as rapid inflation may lead to:
-A fall in the value of money falls in real incomes.
-wage price spiral
-fall in international competitiveness as prices will be high
-businesses may not want to expand and create jobs
-living standards will fall
Low inflation rates will act as an incentive for firms to produce and encourage them to expand
Low unemployment-A high number of people work so that they don’t rely on government funds
The country’s output will be lower if unemployed people don’t produce goods and services
Low unemployment involves an opportunity cost as the government has to pay greater unemployment benefits, which could be used to improve education and increase the living standards
Economic Growth-may cause employment to rise, increasing living standards and reducing poverty
A fall in GDP can lead to:
-unemployment
-fall in average living standards as poverty rises
-Less investments
Maintain Balance of payments-Governments will aim for an equal balance of payments: exports equal imports
Higher imports than exports lead to a budget deficit
Higher exports than imports lead to a budget surplus
Problems of budget deficit:
-government can run out of foreign currency reserves and will have to borrow
-the exchange rate depreciates-the price of our currency falls as compared to the other currency
What are the 3 main categories of supply side policies?
-Encouraging competition and business investment:through privatization/deregulations-aim to use profit to improve business efficiency
-improve training and education:improve the skills of the country’s workers
-Incentive-related policies-through reduced tax rates and increased subsidies
Monetary policy
What are the effects of increasing and lowering interest rates
Lowering interest rates (increasing overall demand in the economy):
-more customer spending than borrowing
-more risk of inflation
-less incentive for firms to invest/expand
-depreciation of the exchange rate will make for cheaper imports
Raising interest rates (decreasing overall demand):
-less consumer spending than borrowing
-less risk of inflation
-increases incentives for firms to invest/expand
-appreciation of the exchange rate will make for costlier imports
what are the main stages of the business cycle and explain them?
-Growth-this is when GDP is rising, unemployment is generally falling and the country is enjoying higher living standards. Most businesses will do well at this time
-Boom-caused by too much spending. Prices start to rise quickly And there is a shortage of skilled workers. Business costs will be rising and businesses will become uncertain about the future
-Recession-when there is period of falling GDP. Often caused by too little spending. Most businesses will experience falling demand and profits. Workers may lose their jobs.
-Slump-a serious and long-drawn-out recession. Unemployment reaches very high levels and prices may fall. Many business fail to survive this period
how can businesses respond to the following changes in economic policies and what are the problems that come along with that decision:
1-Increase income tax
2-Increase tariffs on imports
3-increase interest rates
4-increase government spending
1-lower prices on existing products to increase demand
Problem-less profits made on each item sold
1-Produce ‘cheaper’ products to allow for lower prices
Problem-brand image can be damaged by using cheaper alternatives
2-focus more on the Domestic market as locally produced goods now seem cheaper
Problem-still be more profitable to export
2-switch from buying imported materials and components to locally produced ones
Problem-foreign materials and components might be off higher quality
3-Sell assets for cash to reduce existing loans
Problem-assets might be needed for future expansion
3-develop cheaper products that consumers will be better able to afford
Problem-depends on the product but could consumers start to think that quality and brand image are lower
3-reduce investments so future growth will be less
Problem-other companies nigh still grow so market share will be lost
4-switch marketing strategy to gain more public sector contracts e.g building or equipping schools and hospitals
Problem-may be great competition if other businesses take some action
