Economic Environment Flashcards
GDP 6
calculated by adding together the
total value of all goods and services produced domestically during a calendar year.
- When the level of GDP falls compared with the previous quarter, the economy is said to
be contracting. - After two successive quarters of declining GDP, it is said to be in a ‘technical recession’
(there is no universally agreed definition of a recession). - When GDP rises compared with the previous quarter, the economy is expanding.
adjusted for inf;ation
production, income expenditure
Public sector net cash requirement
the extent to which the public sector needs to borrow from other sectors of the economy and from overseas to finance the difference between expenditure
and receipts
How does recession and expansion affect PSNR
tax revenues will be weak and spending on unemployment
will rise so that the PSNCR is likely to grow.
tax revenues will rise and spending on unemployment will
fall as more people find jobs, reducing the PSNCR.
Producer prices
indices (PPI)
‘factory gate prices’ and studied as an early indicator
of inflationary trend
Purchasing
managers’ index
health of the
manufacturing sector.
The index is a diffusion index, with scores above 50 representing
expansion and those below 50 suggesting contraction. The
leading, coincident, lagging
stock market
GDP, industrial production, retail sales
unemployment
balance of payments 3
record of the country’s trade transactions with
the rest of the world, measured in terms of receipts and payments.
- A receipt represents sterling flowing into the country, or
- A payment represents sterling flowing out of the country,
current account?
imports and exports of goods and services;
capital and financial account?
CA foreign investments in the UK and UK
investment abroad, as well as loans.
FA change of ownership of financial assets and
liabilities between a country’s residents and non-residents.
What are the 4 parts of current account? and explain
Trade in goods
Trade in services
investment income
* the earnings on investments held by Britons overseas (which credit the balance of
payments); and
* the earnings on investments held by foreigners in Britain (which debit the balance of
payments).
transfer payments
Items such as overseas aid and contributions to international organisations.
How is current account deficit met
must be financed by overseas lenders
Explain capital account deficit and relationship with current account (3)
- The UK has a capital account surplus if overseas investors invest more money in the UK than UK investors invest overseas.
Any deficit on the current account balance must be made up by the capital account in the overall balance of payments through net investment into the country or loans from abroad.
If there is a net deficit on the combined current and capital accounts, the official reserves of foreign currencies owned by the Bank of England
What are BOE reserves and what role do they play in balance of payments
If there is a net deficit on the combined current and capital accounts, the official reserves of
foreign currencies owned by the Bank of England will have to be used to finance it.
- foreign currencies;
- gold;
- International Monetary Fund (IMF) special drawing rights (SDRs); and
- the UK’s reserves tranche position at the IMF.
what is real exchange rate and what do rise and falls do (4)
have been adjusted to incorporate the
differences in their rates of inflation.
he real exchange rate measures the
price of domestically produced goods relative to the price of foreign goods,#
rises: domestic goods become more expensive relative to foreign goods, adversely
affecting domestic production; or
falls: domestic goods become relatively cheaper and demand for them increases.
explain difference between fixed and floating
set by government
supply and demand
How does balance of payments affect exchange rates
If there is a surplus on the current account, i.e. a country exports more goods and services than it imports – strengthens
a current account deficit implies the need to sell the local currency to acquire
foreign goods. This would lead to a change in the demand for that currency, which would
cause a change in the exchange rate, with the currency weakening in value.
2 downsides of strong currency
- A higher currency value will make exports more expensive, weakening the country’s
competitive position and potentially reducing exporters’ profits. - Manufacturers find that their products will become too expensive to compete with those of
other countries in both export and home markets, so domestic manufacturers will suffer
4 effects if rising exchange rates
exports more expensive, reduces demand
import cheaper, demand increases
Aggregate demand falls, lower growth
inflation falls - cheaper prices imported goods, lower agg demand, less demand pull inflation
5 effects of falling exchange rates
more competitive exports, increases demand
more expensive imports reduces demand
higher agg demand and so growth
rising inflation
improve current account on BOP
How can IR affect ER
US bonds higher yield than UK.
Buy dollars and sell pounds
biggest impact on ER now
capital not trade flows
ER effect on domestic shares
UK firms that benefit from a rise in the value of the pound are those that rely on a
substantial level of imports; for example, raw materials or components.
- Those that benefit from a fall in the pound are those that export to other countries.
How does gov affect demand through fiscal policy
- In a recession or times of low economic activity, the government may increase its
spending and/or cut taxation to stimulate demand. - In a boom, the government may reduce spending and/or increase taxation to
dampen demand.
Give 4 impacts of budget deficits
Rising IR which reduces economic growth
Interest rate on gov debt becomes high element of public spending
Private sector investment reduced to meet public sector demand
Higher taxes or public spending cuts to pay back
what is current account definition (exam Q) 4
Import minus
exports in
goods, services and
overseas income generating assets
Capital account def exam q (3)
Movement of all money and assets in and out of country
Narrow money M0
– notes and coins in circulation; plus
– banks’ operational deposits with the Bank of England.
an indicator of consumer spending and
retail sales:
– Growth in M0 indicates that consumer spending is buoyant.
– A contraction in M0 suggests that consumers are behaving more cautiously.
M4 broad money
– notes and coins in circulation; plus
– all instant access and time deposit accounts of UK residents with UK banks and
building societies.
– An increase in the demand for loans will be reflected in a faster growth in M4.
– Rapid growth in money circulating in the economy is often interpreted as a build-up
of inflationary pressures.
explain step by step how money supply causes inflation (3)
quantity of money increased without increase in goods and services
the value of each unit of money will fall.
an excess of consumer demand over the supply of goods, which will force up the general level of prices
what is volicity
GDP:stock of money
The faster the velocity of circulation, the greater the
impact of a given stock of money on prices
How do repos affect IR (2)
BOE lend - inject money - lower rates
BOE borrow - reduces money - higher rates
causes of inflation 5
demand pull - prices rise
cost push - cost of materials
imported inflation - fall in £ compared to importing materials from
wage increases
lack of supply eg war
what causes deflation
supply of goods rises faster than the supply of money, the
purchasing power of money increases and the general price level of goods falls.
deflation cycle 5
Consumers reluctant to buy expensive items, as cheaper in the future.
Borrowers are committed to making loan
repayments more of their purchasing power, while asset purchased with the loan is declining in nominal price.
- manufacturers will reduce output as it is difficult for
them to recover the cost of producing those goods. This will lead to a reduction in profits. - reduced output and profits will lead to
businesses cutting their workforce, creating unemployment. - This will lead to further reductions in sales so that production has to be further reduced.
CPI, CPIH and RPi
prices of consumer goods
and services bought by consumers within the UK - benefits inc SP
includes owner occupiers’
housing costs (OOH) along with council tax so diff weighting
RPI - DB and IL gilts
electoral cycle?
generate boom before election then cool down once new gov in
3 effects of globalisation
- Investors can take advantage by investing in foreign markets
- It puts at a disadvantage low-skilled, labour-intensive industries in the developed world that compete with developing countries.
- UK financial services companies have outsourced call-centre operations to India, administrative work and software development.
5 impacts of politics
uncertainty
trade policy
tax/spending polices
war
terrorism
