Chapter 6 Flashcards
GDP
Money value of goods and services produced within a country over a period of time
Why is nominal GDP misleading indicator for economic growth
Is nominal GDP may increase because Price increases but not amount of output
Real GDP
Value of national output Adjusted for inflation
Causes of recession
Fall in aggregate demand or falling aggregate supply
Consequences of recession
- Lower output, firms hire less Labor, unemployment increases, lower incomes in standard of living
- decrease government tax revenue due to low investment and high unemployment, Government spending has to increase on benefits so this will create a budget deficit so more national debt
Causes of economic growth
- in the short run aggregate demand increase
- on the long run quantity and quality of resources increase causing an outward shift in PPC so productive capacity increases
Advantages of economic growth
- improved standard of living
- employment
- tax revenue increases
- reduce poverty
Disadvantages of economic growth
- environmental consequences
- risk of inflation
- inequalities in income and wealth
- resource depletion
Employment
Use of labor as a factor of production in a productive activity for which payment is made
Why does government Aim for full employment
- Increase standard of living
- helps achieve economic growth
- increase tax revenue
- prevent Brain drain
- reduces income and wealth inequalities
What happens to patterns and levels of employment when the country becomes more developed
- more people are employed in Tertiary sector
- increased portion employed informal economy
- greater female participation
- Increased portion of people employed in private sector
- Friends become more flexible to be able to compete internationally
Disadvantages of claimant Count
Underestimates unemployment as many people are not eligible for employment benefits
Advantages of labor force survey
Can be used to make international comparisons and measures unemployment more accurately
Causes of unemployment
- frictional
- structural
- cyclical
Frictional unemployment
Time delay between leaving a job and finding another job
Structural unemployment
Long-term drop in demand for a product produced by certain industry people who face this type of unemployment usually find it difficult to find a new job as retraining is required
Cyclical unemployment
- Demand deficient unemployment
- Caused by a fall in aggregate demand which causes all produces to reduce output level causing mass unemployment and is experienced during recession
Consequences of unemployment
- unemployed suffer from health problems stress and depression
- Family suffers from fall in income and poor standards of living
- if an individual is unemployed for a long time They may lose their skill
- firms lose out due to low consumer spending investments and profits
- increased poverty and increased crime rate
- increase government spending on unemployment benefits and healthcare creating budget deficit and increased Government debt
- economy suffers from being less internationally competitive
Protectionism policy
Imposing tariffs on imports can decrease demand for imports an increase the demand for domestic goods so firms increase output and hire more labor
How to calculate CPI(consumer price index)
- choose basket of goods consumed by average household(sample)
- choose base year
- Measure prices in a number of outlets
- Weight percent of income spent on each product
- multiply weight by price to get caught and weighted price
- base index of 100
- repeatFor the current year
- WAP Current / WAP Base x 100
Causes of inflation
- demand pull(increase aggregate demand more than output level)
- cost push(increase costs of production so Producers raise price to maintain profit level)
Consequences of inflation
- decreased purchasing power so real income decreases and standard of living Decreases
- savers lose its inflation is higher than interest-rate
- lenders loose as money received is worthless
- International competitiveness decreases
- menu costs
- shoe leather costs
- fixed income earners face a decrease in real income
- decreases business confidence levels
Causes of deflation
- non-threatening deflation, higher level of output
- Harmful deflation, fall in level of aggregate demand, occurs during recession
Consequences of deflation
Caused by harmful deflation
- unemployment
- borrow as loose as they’ll pay money that is worth more
- firms lose due to low consumer spending
- Government faces lower tax revenue while government spending on welfare benefits increases creating a budget deficit so government needs to borrow
Don’t forget
The study page 45
Factors affecting consumer spending
- disposable income
- Wealth
- confidence level
- interest-rate
- Increased inflation
- age
- Size of household
Factors affecting saving
- income
- Wealth
- rate of interest
- tax on savings
- age structure
- social attitude
- range and quality of financial instructions
Factors affecting Borrowing
- income increase
- interest-rate
- confidence level
- wealth
- availability of funds
- social attitude
