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Economics Alevel > Chapter 4 > Flashcards

Chapter 4 Flashcards

1
Q

Define GDP

A

Total value of output, in terms of goods and services, produced in an economy within a specific time.

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2
Q

Define national income

A

Total incomes receive by people in a country within a specific time in terms of salaries, wages, profits and rent.

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3
Q

Define gross national income

A

GDP + net income from abroad.

**Both incomes from residents and people working abroad.

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4
Q

Measurements of national income/GDP

A

Expenditure: Value of spending, to monitor how much is spent on consumption and investment.

Output: Value of final products produced.

Income: Value of total incomes received.

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5
Q

Define nominal GDP

A

Value of output at current prices, without adjusting for inflation.

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6
Q

Define real GDP

A

Value of output at market prices, adjusted for inflation.

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7
Q

How to calculate real GDP from nominal GDP?

A

Nominal GDP/ Deflator.

Deflator= CPI/100

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8
Q

Define net national income

A

GNI - depreciation of capital goods

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9
Q

Define net domestic product

A

GDP - depreciation of capital goods

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10
Q

Define circular flow of income

A

A model which shows the movement of goods and services in an economy and its corresponding payment in terms of money.

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11
Q

Define a closed economy

A

An economy that is not involved in international trade; we only assume the economic agents are households and firms. There are no injections and withdrawals.

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12
Q

Define an open economy

A

An economy that is involved in international trade; there are multiple economic agents: households, firms, international trade and government. There are injections and withdrawals.

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13
Q

Define injections

A

Money that flows into circular flow of income in terms of investment, exporting and government spending

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14
Q

Define withdrawals

A

Money that flows out of circular flow of income in terms of taxation, saving and imports.

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15
Q

How is equilibrium reached in an open economy?

A

Injections = Withdrawals.

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16
Q

Define aggregate demand

A

Total demand of an economy

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17
Q

Components of aggregate demand

A

AD= C + I + G + (X-M)

C= Consumer Demand
I= Investment Demand
G= Government Demand
X= Exports Demand
I= Imports Demand

Increase in these components will increase AD.

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18
Q

Factors that affect consumer demand

A
  • Tax on income, low taxes will increase disposable income so people are able to spend more.
  • Interest rates, low IR so low cost of borrowing, so spend more.
  • Consumer confidence
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19
Q

Factors that affect investment demand

A
  • Corporation taxes, low corporation taxes, so low costs, so more capable of buying more machinery.
  • Interest rate, low IR, low cost of borrowing so can borrow and invest.
  • Business confidence and expectations. (Having economic certainty)
  • Derived demand
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20
Q

Factors that affect government demand

A

Government demand is autonomous, nothing affects it except its self.

Influenced by the policies it implements.

To increase government demand and spending= Expansionary fiscal policy and S.S.P

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21
Q

Why is AD downward sloping?

A

Due to its relationship with overall price level. A decrease in price levels indicates real incomes have increase, so people will spend more leading to higher AD.

(Explain each component)

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22
Q

Factors that affect export demand

A
  • Exchange rate, if the currency is depreciated, can export more.
  • Competitiveness of product. If very competitive and high quality, will export more.
  • Having excess supply
  • Low inflation rates
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23
Q

Difference between demand and aggregate demand.

A

Demand= Individual product

Aggregate demand= Whole economy

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24
Q

Advantages and Disadvantages of increase AD

A
  • Economic Growth
  • Higher employment rates
  • More exporting, improve B.O.P

x Inflation
x Pollution
x Resource depletion

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25
Define aggregate supply
Total supply of an economy
26
Explain short-run aggregate supply
An increase in output due to an increase in all variable factors of production, but fixed factors of production are kept constant, like capital and so on. **Actual economic growth
27
Factors that affect short-run aggregate supply
- Cost of production, in terms of costs of raw materials, labour costs and so on. - Government intervention, in terms of subsidies and imposing corporation taxes - Exchange rate, if currency is appreciated, firm would import cheaply. If currency is depreciated it would export cheaply.
28
Explain long-run aggregate supply
An increase in output that's achieved by increasing all factors of production, including both variable and fixed. **Potential economic growth
29
Factors that impact long-run aggregate supply
Quality and Quantity of factors of production
30
Explain the classical view of LRAS curve
- Assumes full employment of resources - Does not require policy intervention, market is self-sufficient. - Focuses on productivity and not price change - Assumes price and wages are flexible and can adjust automatically to bring back economy to full employment. - LRAS Curve is vertical.
31
Explain the Keynesian view of LRAS curve
- Not all resources are used up - Requires policy intervention, not self-sufficient - Slow - Sensitive towards price changes - LRAS curve is upward sloping, and 3 parts: 1) Flat: Economy has lots of spare capacity, and can expand production without extra costs due to unused F.O.P 2) Sloping upwards: Resources are slowly being used up, and prices start to raise. 3) Vertical: All resources are used up and government must intervene to expand production.
32
Advantages and disadvantages of increasing AS
- Economic Growth - Increased levels of employment - Export more, so achieve B.O.P - Less inflation x Resource depletion x Pollution
33
Define economic growth
An increase in value of output of an economy over two consecutive quarters. High GDP. **A decrease in rate of economic growth does not mean there's a recession, but means growth rate is being slower
34
What are the types of economic growth?
Actual economic growth and potential economic growth
35
Define actual economic growth, and how is it achieved?
Actual economic growth occurs on the short-run, where output increases in response to an increase in aggregate demand of an economy or due to an improvement in utilization of resources. **Going from inefficient to effect
36
Define potential economic growth, and how is it achieved?
Potential economic growth occurs on the long-run, where output increases due to an increase in productive capacity of production. This is due to an increase in factors of production or an improvement to them.
37
Describe the multiplier effect caused by economic growth
- An increase in output leads to... - Being able to export excess supply, and... - More sales and profits which leads to... - Higher employment which leads to... - Higher tax revenue for the government - This all increases AD.
38
Define productivity
Measurement of factor's of production efficiency.
39
Advantages of economic growth
- Increased living standards, so lower poverty levels. - Increased output, allowing country to export and improve B.O.P - Increased employment levels - Increased tax revenue for government - Businesses gain higher profits
40
Disadvantages of economic growth
- Increased pollution - Resource depletion - Inflation - Social inequality may occur
41
Importance of entrepreneurship
- Ones who combine all F.O.P and take the risk to produce a good or service in return for profits - Innovative and creative, so higher productivity levels - Can respond to changes quickly in a dynamic economy which makes them successful. x Usually seek short-term gains, so no potential economic growth x Cost of training and education x Rate of success is not guaranteed
42
Importance of capital
- Beneficial in mass production, more efficient and productive - Encourages economies of scale - Cheaper for businesses on the long-run rather than hiring labour x Higher levels of unemployment, absolute poverty x Unemployment labour, so misused resources x Not flexible x Labour would require extra training to be able to handle new robotics, so increased costs
43
Define unemployment
People who are willing to work, of working age, have the mental and physical capability to work, yet cannot find a job. Unemployment rate= Number of unemployed people/ Labourforce
44
Define working age
People from ages 16 till retirement age
45
Define labourforce
People who are willing to work, of working age and have the mental and physical capability to work.
46
Define dependent population
Those who rely on government or other people
47
How can dependency ratio increase?
- Lowering retirement age - Increasing education years - Raising welfare payment
48
How do you measure unemployment?
- IOL unemployment rate: Where you question people about their employment status using a survey - Claimant count measure: Measuring the number of people who receive unemployment benefits
49
Problems of using a survey to measure unemployment
x Not accurate, people can fill survey careless x Not everyone is truthful x Expensive to undertake in large countries x Presence of informal economies, there are unregistered workers.
50
Problems of using claimant count measure to measure unemployment
x Excludes people who are unemployed, but do not take unemployment benefits x Presence of informal economies, there are unregistered workers.
51
Types of unemployment
Cyclical Unemployment: Long term unemployment caused by economic recession. Firms shutdown, and people lose their jobs. Frictional Unemployment: A temporary period of time where people are transferring jobs. Seasonal Unemployment: Unemployment due to off-seasons, like beach jobs. Technological Unemployment: Unemployment due to being replaced by machinery, or incapable of dealing with machinery Structural unemployment: Unemployment caused when an INDUSTRY is outdated Voluntary unemployment: Someone is willingly unemployed, like housewives.
52
Define occupational mobility
Transfer from one job to another easily due to having access to high education, having high skills and qualifications
53
Geographical mobility
Moving from one occupation to another, geographically, easily due to improved infrastructure
54
How can the government unintentionally cause unemployment even though it's trying to solve poverty?
- Setting high minimum wages, firms will lay off many people. - Giving high welfare payment, people would be more likely to resign leading to poverty trap. - Lack of training - Lack of investment in infrastructure - Progressive taxation, poverty trap. - Supporting trade unions
55
Advantages and disadvantages of high unemployment
- Less people will be likely to spend, so less demand pull inflation rates. - Less people to be paid, so less cost-push inflation - Less pollution and resource depletion since firms operate less. x Economic Recession: low sales and profits for firms, low tax revenue, low exports, low AD x High unemployment benefits paid, budget deficit.
56
Define inflation
A consistent increase in price levels over two consecutive quarters
57
Define creeping inflation
Price levels are steadily increasing. *Not that harmful to economy.
58
Define hyperinflation
Extreme and irrational increase in price levels.
59
Define disinflation
Decrease in rate of inflation. **NOT SAME AS DEFLATION
60
Types of inflation
- Demand pull inflation - Cost push inflation - Imported Inflation
61
Causes of demand pull inflation
An increase in any component of aggregate demand, will lead to higher prices. AD shifts to the right.
62
Causes of cost push inflation
An increase in costs of productions, due to lower subsidies or increased taxes, will lead to firms supplying less. Scarcity will cause prices to increase. AS shifts to the left. **Leads to both inflation and economic recession.
63
Causes of imported inflation
If currency depreciates and loses value, it would be hard to import as it would be expensive,
64
Advantages and disadvantages of inflation
- People will buy sooner than later as they're afraid of prices increasing, so economy will constantly be operating. - Borrowers benefit; they borrow the money when it's high in value, but return it when it loses its value. Reduces burden of debt. x Real incomes decrease, people will be less capable of affording their needs x Economic uncertainty so demotivates investors x Shoe leather costs x Menu costs x Decrease in exports, due to high prices
65
How can inflation be measured?
Through consumer price index= T.W.A of new year/ T.W.A of base year
66
Steps of measuring CPI
- Pick a basket of items for both years - Determine % of income spent on each item - Determine average price of each item - Calculate weighted average which is both of the above multiplied together - Apply formula.
67
Define deflation
Consistent decrease in price levels over two consecutive quarters
68
Causes of deflation
- An increase in AS; there's excess supply in the market, so product is common and price decreases. - A decrease in AD, which reflects that consumers are unable to afford spending their money due to low wages. - Appreciated currency, so can import easily.
69
Advantages and disadvantages of deflation
- Real incomes have increased, people will be more capable of affording their needs - More investing and exporting - Savers benefits - Become more internationally competitive x Menu costs x People will buy later than sooner, so economy slows down x Borrowers do not benefit.

Economics Alevel (13 decks)

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