Economic Performance

Question 1

What is inflation?

Answer 1

“The rate of change in the average price level over time.”

Question 2

Why does inflation erode the value of money?

Answer 2

If wages remain constant, when prices rise consumers are worse off in real terms. Inflation erodes the value of money.

Question 3

What are methods to measure inflation?

Answer 3

The CPI (Consumer Price index)
The RPI (retail price index)

Question 4

Who compiles the CPI and RPI?

Answer 4

The Office of national statistics (ONS).
They use a basket of goods and services 700 items weighted based on their relative importance.

Question 5

What is demand pull inflation?

Answer 5

Caused by excessive demand in the economy for goods and services. C + I + G + (X-M)

Consumption is the largest component of AD although any stimulant will create some demand pull inflationary pressure.

Question 6

What are the causes of demand pull inflation?

Answer 6

Reduced taxation
Low interest rates
Rise in consumer spending
Improved availability of credit
A weak exchange rate
Faster growth in other countries
General increase in confidence
Certainty

Question 7

Demand pull inflation diagram analysis

Answer 7

• begin with equilibrium
• if interest rates cut, borrowing on credit become more attractive and saving less rewarding (consumption rises)
• leads to a rise in AD to AD1
  -in the short run, factor resource remain unchanged. If demand for goods rises faster than supply, prices will be pulled up to p1.

Question 8

What is cost plus inflation?

Answer 8

When firms respond to rising costs of production by increasing prices.

They try to protect profit margins, they may absorb some increases in their costs but it’s not indefinite (costs are added to the consumer)

Question 9

What are the causes of cost plus inflation

Answer 9

Wage increases - wage price spiral
High raw material costs
Higher taxes
Higher import prices
Natural disasters

Question 10

Cost push inflation diagram analysis

Answer 10

-begin with equilibrium
- if wage rates increases, so will a firms cost of production
- Sras will reduce to sras1 because firms will reduce supply faced with higher costs.
- rising costs have pushed up prices to p1

Question 11

What is deflation?

Answer 11

A decrease in the general price level
- disinflation refers to price increasing at a slower rate

Question 12

What are the causes of deflation?

Answer 12

• Occurs during period of low growth.
• Consumers delay purchasing decisions a price fall - consumption slows significantly.
• Firms will lose the confidence to invest harming AD.

Question 13

What is Benign and malign deflation?

Answer 13

Benign - when prices fall due to lower production costs for producers

Malign - when there is a significant fall in demands

Question 14

How do change in world commodity prices effect domestic inflation?

Answer 14

Many commodities bought in the UK are price elastic - a rise in the world price of commodities feed through uk inflation.

Question 15

What is the PPI?

Answer 15

The producer price index shows the rate of change of prices of producers.

Imported products like crude oil and chemicals have fallen in price for the 12 months to February 2020.

Question 16

How change in other economies can affect inflation in the UK?

Answer 16

Emerging market create a growing demand for goods and services globally - demand pull.

Thea markets increase productive capacity leading to lower cost products feeding through into lower prices.

The economic performance of the EU and US impact the demand for UK products

Question 17

What is the current account?

Answer 17

A record of a country’s transactions/tradewith the rest of the world.

Question 18

What are the 3 sections of the Balance of payments?

Answer 18

The current account (required)
(Trade in goods & services, investment income and transfers)

The Financial account
(Transactions in financial assets, investment flow’s & government transactions)
The Capital account
(Transfer of assets by individuals)

Question 19

What is a surplus?

Answer 19

When the sum of exports of goods, services, investment income and transfers is greater than imports.

Question 20

What is deficit?

Answer 20

When the sum of exports of goods, services, investment income and transfers is less than imports

Question 21

What does trade in goods measure?

Answer 21

The net exports (x-m) of visible goods.

Question 22

Why has the UK run a large deficit on the trade in goods component of the current account?

Answer 22

• increase in demand for consumer goods
• decline in the UK manufacturing sector (secondary production outsourced to low wage economies)
• lower production of primary materials
• strong currency makes imports more affordable and exports less attractive

Question 23

What does trade in services measure?

Answer 23

The net exports (x-m) of invisible items.

Question 24

Why has the UK run a large surplus on the trade-in services component of the current account?

Answer 24

• UK shifted to tertiary sector employment - provision of services
• specialisation meant the UK is more competitive and offers better services at lower costs
• London developed as a prime financial centre, become a source of wealth generation in the UK.

Question 25

When did the Uk run a deficit on it’s trade balance?

Answer 25

Since 1998 the UK has run a deficit on its trade balance.
Trade in goods is 35% as a proportion of the total trade in goods and services.
In 1985 the proportion was 75%

Question 26

What is investment income?

Answer 26

• Generated by UK-owned overseas assets.
• The profits and dividends are sent back to the UK as a credit item or investment income on the current account.
• debit items occur as foreign investments into the UK yield profits which are sent back to the country of investment origin.

Question 27

What are transfers?

Answer 27

Payments made or received usually by the government to or from other countries.
(payments for membership of the EU, Foreign Aid)

Question 28

Why is there a persistent deficit on the current account?

Answer 28

1) demand for goods increases with consumer spending. We have a high MPC imported goods in the UK, so improvements in economic growth and consumer spending feed into an increased, persistent deficit.

2) UK firms have become less competitive in the manufacturing of goods. Unable to compete with low-wage economies, globalisation has widened so has the UK’s reliance on Imported goods.

3) The exchange rate is too strong. Exports are less competitive and imports are relatively more affordable.

4) deficit shows an unbalanced economy. Primary and secondary activity is shrinking while tertiary grows significantly.

Question 29

How to redress the balance?

Answer 29

1) controlling consumer spending will reduce the demand for imports. May improve the balance of payments but may affect other aspects of the economy

2) investing in the supply side of the economy will improve the productivity of UK firms (quality and price competitiveness). Enhanced productivity gives rise to higher exports through greater output.

3) depreciation of the exchange rate, making exports price competitive. Will increase the price of imports (problematic if we cannot produce alternatives domestically)

4) improve macroeconomic conditions in the UK. Will encourage investment and domestic growth as well as reduce our reliance on imports.

Question 30

What factors influence a country current account balance?

Answer 30

Improving productivity - lowers unit costs and benefits competitivity

Inflation - reduces competitiveness by raising prices making exports less attractive

Strong exchange rate - exports are expensive, lowering demand for domestic products and imports are cheaper lowering unit costs.

Economic activity in other countries - impacts open economies such as the UK

Question 31

What is a negative output gap?

Answer 31

Occurs when actual output is below the trend rate.
It indicates low demand so there will be a reduction in inflationary pressures.
Cyclical unemployment will occur as a result of lower demand

Question 32

Negative output gap graph analysis:

Answer 32

During a recession, operating at point X firms don’t employ as many workers as they don’t need to produce as many goods as demand has fallen.

As the economy recovers, moving to a positive output gap, cyclical unemployment Will reduce.

Question 33

What is a positive output gap?

Answer 33

When actual output Is above the trend rate.
This indicates high demand, there will be an increase in inflationary pressures.
Cyclical unemployment will fall as a result of high demand.

Question 34

Positive output gap graph analysis?

Answer 34

If the economy is in a boom, operating at Y, firms must employ more workers to meet the increased demand.

Cyclical unemployment will have fallen and inflationary pressures will impact the economy.

Question 35

Why are AD/AS diagrams essential for economist?

Answer 35

They clearly demonstrate conflicts in policy objectives.
E.G
A government wishing to pursue a policy of expanding output and employment through tax cuts is faced with the prospect of higher inflation. Greater consumer spending might worsen the bop deficit on current account.

Question 36

Why is there an inherent opportunity cost in government spending?

Answer 36

-macroeconomic policy conflicts are inevitable due to the nature of the structure of the economy. Governments must prioritise objectives as it’s rare that all 4 will be achieved.

• because government finance is scarce, or must be carefully directed.

The approach to reconciling conflicts can be split between Keynesian and monetarists.

Question 37

What factors make up a Keynesian approach to reconciling conflict?

Answer 37

1) governments intervene through expansionary fiscal policy (higher spending and borrowing) in recessions.
2) there is no “crowding out”
3) the multiplier effect is significant
4) reducing unemployment is more important than controlling inflation
5)LRAS can be horizontal

Generally advocate fiscal policy

Question 38

What factors make up a monetarist approach to reconciling conflict?

Answer 38

1) The economy is inherently stable, and markets work efficiently with minimal intervention (distorts natural equilibrium)
2) government spending “crowds out” private sector investment.
3) control of the money supply is crucial in keeping inflation low
4) more important to keep inflation low than to control unemployment.
5) LRAS is very steep in nature

Generally advocate monetary policy

Question 39

How did Keynesian economics come to be?

Answer 39

John Maynard Keynes considered his theories in the 1930s and through post-war Britain and into the 1960s keneysian economic theory was favoured by the UK government.

Question 40

How did monetarist economic theory arise?

Answer 40

Supply-side shocks in the 1970s (oil and commodity prices and labour market disruption) couldn’t be reconciled by the application of Keynesian economics

Free market economics, led by Milton Friedman gained popularity. It argued, that control of the money supply was crucial to controlling inflation and minimal government intervention that encouraged more free-market supply Side flexibility was important.

Question 41

How was monetarism challenged by traditional Keynesians?

Answer 41

Towards the late 1980s, the relationship between the money supply and inflation began to break down.

The UK Recession of 2008-12 brought Keynesians back to the forefront of debate. With Interest rates at a historic low (0.5%) and stimulating little supply-side expansion, Keynesians argued for the short-run expansion of the budget deficit to stimulate the economic.

Question 42

What were the changes in monetary policy from 1999 to 2007

Answer 42

1999/2000 - interest rates were at 6% in response to high levels of AD and the potential risk to inflation.

Interest rates fell up to 2003 to stimulate AD

They fell further after a rise in 2006-7 and reached a low of 0.5% in March 2009.

Question 43

What were the changes in monetary policy from 2007 to 2013?

Answer 43

QE through the BoE has totalled £375bn in response to the recession of 2008. Due to the low interest rates, the BoE had to look for other measures to stimulate the economy as interest rates have limited or zero movement downwards.

In 2013, the Governor of the BoE announced a policy of forward guidance (designed to indicate to the government, firms and consumers what levels interest rates will be. Reduces speculation and stabilises expectations.

• the BoE indicated they wouldn’t increase the interest rates until the rate of unemployment fell below 7%

Question 44

What were the changes in fiscal policy from 2000 to 2008?

Answer 44

Early 2000s - government spending as a % of GDP increased within fiscal rules laid down by Chancellor of the day Gordon brown. Only borrowing to fund capital projects and the budget should balance through the economic cycle.

A modest budget deficit was running until 2007 but the 2008 recession placed a huge strain on government tax revenues and expenditures, reaching a peak of 7.5% of GDP.

Question 45

What are the 3 conflicts that arise through economic decision making?

Answer 45

Unemployment vs inflation -by creating unemployment demand will fall leading to lower inflation

Economic growth vs the balance of payments - a policy of growth (expansionary fiscal policy) will lead to higher employment and demand. High income will increase consumption which will be spent on exports - leading to a deterioration in the BoP.

Economic growth vs. inflation - a positive output gap will lead to increased demand and inflationary pressures.

Question 46

What were the changes in fiscal policy from 2007 to 2013?

Answer 46

The OBR was created in 2010 to provide independent analysis and greater credibility for the UK’s public finances (abandoning the previous government fiscal rules).

2012/13 - the UK public sector net debt was £1,185bn - £18,606 per person

The current government has focused on reducing the budget deficit and tightening government spending.

Question 47

What is unemployment?

Answer 47

The number of people looking for work but who can’t find a job at a point in time.

More precisely those in the labour force who are eligible and want to work (economically active) but can’t find a job.

Question 48

What’s the distinction between the level and rate of unemployment?

Answer 48

Level = the number of people who are unemployed

Rate = the number of unemployed as a % of the labour force

unemployed/labour force X 100 = rate

Question 49

What is the JSA?

Answer 49

Job seekers allowance is a benefit for people who are not in full time employment (less than 16 hrs a week) and are capable and looking for work.

Question 50

What is the claimant count?

Answer 50

The number of people claiming JSA.

Question 51

What is ILO?

Answer 51

The labour force survey is a quarterly survey of approximately 60,000 households compiled by the ONS (who study the employment circumstances of the UK population).

Question 52

How does the claimant count problematically underestimate unemployment statistics?

Answer 52

1) not all eligible candidates sign up
2) self employed workers who are temporarily unemployed tend to not claim
3) under 18s or over 60s = illegible
4) changing JSA criteria

Question 53

How does the claimant count problematically overestimate unemployment statistics?

Answer 53

1) some people claiming JSA aren’t seeking work actively
2) some have jobs in black economy and still claim benefits

Question 54

Is the the labour force survey (ILO) better than the claimant count?

Answer 54

1) Internationally recognised. 2) potential for data analysis. 3) picks up trends in sectors. 4) better guide for policy makers. 5) generally more accurate.

BUT
1) costly to compile
2)subject to sampling and extrapolation errors

Question 55

what determines the consequences of unemployment?

Answer 55

extent of the consequences depend of the rate and duration of unemployment.

the economy, businesses and unemployed will experience the consequences>

Question 56

what are the consequences of unemployment for the economy?

Answer 56

Resources are being wasted so the productive potential will decrease from y to x. There loss in consumer and capital goods on the PPF graph.

Question 57

what are the consequences of unemployment for businesses?

Answer 57

1) reduced demand for goods and services
2) reduced productivity
3) less incentive to invest
4) less morale and productivity of remaining workforce who are perhaps concerned over future job losses.

Question 58

what are the consequences of unemployment for the unemployed

Answer 58

1) Lower living standards
2) social costs
3) financial costs
4) de-skilling
5) reduced chances of finding work

Question 59

What is cyclical unemployment?

Answer 59

Linked to the economic cycle and occurs when there is a negative output gap.

It indicates that there is low demand (demand deficient unemployment)

Question 60

How can the economic cycle help us understand cyclical unemployment?

Answer 60

A recession may lead to hysteresis, people remain unemployed due to a loss of skills they missed in the workplace.

if an is economy operating in a recession (point x) firms don’t need to hire a lot of workers as they don’t need to produce as many goods as demand has fallen.

As the economy recovers and moves to a positive output gap, cyclical unemployment will reduce.

Question 61

what is meant by frictional unemployment?

Answer 61

• unemployment as workers move between jobs, mainly career moves or geographical changes.
• usually short term and exists as workers don’t have perfect, instant information about job opportunities.
• always fictional unemployment in an economy

Question 62

what is meant by seasonal unemployment?

Answer 62

• workers are unemployed at different times of the year, occurs in seasonal industries (leisure, tourism & farming)

-Can apply to retail as more workers are employed over busy periods (Christmas)

-Seasonality in employment can distort unemployment figures, hence unemployment is seasonally adjusted to smoothen the fluctuations in employment levels for accuracy.

Question 63

what is meant by structural unemployment?

Answer 63

when long term shifts in the structure of the economy impact the job market.

Structural unemployment tends to increase in line with globalisation - workers must gain and re-train skills to find work (timely and costly)

Question 64

Give an example of structural unemployment and its effects.

Answer 64

UK shift to tertiary employment away from primary & secondary due to low wage economies in eastern Europe and the far east.

High skilled workers may be unable to find work as their is limited demand for their labour as production and supply is outsourced to other countries.

Question 65

what is meant by technological unemployment?

Answer 65

When improved capital which may be more productive and efficient than labour, replaces labour as a factor of production.

Question 66

what is meant by regional unemployment?

Answer 66

• linked to structural unemployment, occurs when there is unemployment in particular towns, cities or regions.

E.G the jobs lost in Bradford and surrounding communities as a result of the decline of the textile industry

Question 67

why does regional unemployment occur?

Answer 67

because a local area has specialised in the production of a good or service that is no longer demanded or produced in cheaper economies - as a result demand drops locally.

Question 68

Evaluate the effects of demand side unemployment.

Answer 68

1) when cyclical unemployment occurs, this is represented by a shift in AD to AD1 to the left

2) may occur through seasonal or frictional factors

3) unemployment of Y1-FE has been created as consequence

4) RNO will reduce to Y1 indicating a lower rate of economic growth

5) price level reduced to P1 indicating a lower rate of inflation. A government may need to weigh up benefits of this versus the lower rate of economic growth and higher rate of unemployment.

Question 69

Evaluate the effects of supply side unemployment.

Answer 69

1) if a firm experiences an increase in costs (due to higher wages) they may decide to reduce their supply

2) in response to cyclical unemployment, they may scale back production so they aren’t left with surplus stock they cant sell or may be expensive to hold.

3) supply will shift SRAS to SRAS1 and create unemployment of Y-Y1

4) as a result RNO has fallen and there has been an increase in price level from P to P1 (indicating inflation)

Question 70

What is globalisation?

Answer 70

the process by which businesses or other organisations develop international influence or start operating on an international scale.

Question 71

How has globalisation impacted employment and unemployment in the UK?

Answer 71

• competition from low costs economies mean a decline in UK manufacturing
• 22% to 11% in the last decade (traditional industries undercut by foreign imports)>
• emerging markets (BRICS & MINT economies) allowed new market development and exports of high quality UK goods have created employment.

Question 72

What’s the difference between employment and the employment rate?

Answer 72

employment - number of people over 16 in paid work

employment rate - proportion of those between 16 and 64 paid in work.

Question 73

why is there a difference between male and female economically inactivity rates?

Answer 73

women are 7 times more likely to be economically inactive due to looking after the home or family.

(10 times more likely when comparing them as the 30s demographic)

Question 74

when making policy decisions what are the most important industries to take account of?

Answer 74

the level of demand for the sector how many workers it consists of.