Economic performance Flashcards
Long run economic growth
Growth based on increasing the potential output of the economy
Cons of econ growth
-Enviromental externalaties due to increased output
- can be unsustainable
- wealth and income inequality
- inflation if short run growth rises to quickly
- possible increases in inequality
benefits of econ growth
- rising income leads to better living standards
- better job prospects
- less unemployment
- goods and services are more affordable
- more tax revenue
- higher international competitvness
- lower absoloute poverty
recession
two or more consecutive quarters of negative real gdp growth
positive output gap
when the actual level of rgdp is greater than the potential underlying level of real gdp
negative output gap
when the actual level of real gdp is less than the potenital underlying level of real gdp
unemployment
the number of people who are activley seeking a job but currently without a job
Seasonal Unemployment
Unemployment due to seasons of the year
Cyclical unemployment
Unemployment due to changes in the business cycle normally due to insufficent aggregate demand within the economy
structual unemployment
Unemployment caused by a mismatch between the skills that labour can offer and skills that are required by employers
Frictional unemploymnet
Unemployment due to people moving between jobs
Supply side
Supply of labour by workers
Demand side
Demand for labour from firms
Consequences of unemployment
-gdp will fall
- less government revenue
- reduced living standards and higher inequality
- crime
Disinflation
A decrease in the rate of increases of prices , inflation falls but remains positive
Deflation
Persistant decrease in the general price level
Inflation
Persistant increase in the general price level
Measures of inflation
CPI - measuring the change in the value of a basket of goods and services
RPI
Cost-push inflation
Due to a rise in the cost of production. Causes the SRAS to shift up , reducing the profit margins of the firms
Causes for cost push inflation
-NMW increasing
-Trade union wage increasing
-external supply side shocks
- rise in indirect taxes
- rise in cooperation tax
- falling productivity
Impact of currency depreciation
- Exchange rate depretiation causes proce of imports to rise in domestic currecy terms
- after the UK left the EU in 2016 the price of imports rose and inflation increases
Demand pull inflation
Increase in AD outstripping AS
Reasons for demand pull inflation
- Exchange rate depreciation/price of exports in foreign countries is cheaper hence demand for exports rises
-rising confidence - excessive borrowing
- global ecnomoy experiancing faster growth in incomes
Gov causes of demand pull inflation
- Loose fiscal policy / income tax coul dbe cut too much or gov spending can increase too quick
- loose monetary policy - interest rates could be cut too much
Factors which would cause LRAS
- increase in labour supply
- improvements in labour productivity
- capital investment
- new technology to improve productivity
- education
- government policy
Causes of long run economic growth
Sustainable economic growth
economic growth that does not compromise the economy’s ability to grow in the future
Economic cycle
the repeated pattern of fluctuations in short-run economic growth and how it differs from the trend growth of an economy
Boom
A period of above average short-run economic growth
- Consumer confidence is high
- Business confidence is high
- unemployment is low / may find it hard to find skilled labout
- Government normally move towards of further into a budget surplus
- more defecit in the current account
- inflations rises
Downturn
Period where short run economic growth falls from above average to below average
- Cosnumers reduce consumption
- business confidence will fall
- unemployment start to increase but not neccesarily a lot as fims may keep labour if the downturn is shortlived
- tax revenue may begin to fall
- spending on imports is likely to fall
- current account is more likely to move towards a smaller defecit or into a surplus
Recession
Two sucessive quaters where there is negative economic growth
- falling incomes
- rising unemployment
- less consumption
- budget defecit is likely to be high
Recovery
when economic growth starts to increase after a recession
Voluntary unemployment
Where people are unwilling to accept a job at the going wage rate even though jobs are available.
Involuntary unemployment
where people are unable to find employment at the current market wage rate
Real wage unemployment
unemployment that exists when the real wage is not allowed to fall below the equilibrium price.
Consequences of inflation
- uncompetitive exports
- menu costs
- search costs
- Fiscal drags ( if real incomes are left unchanged there will be a rise in nominal income due to inflation therefore may ‘drag’ people into higher tax bands)
- Uncertainty (businesses will find it harder to budget for expenditure therefore GDP will not rise as quickly then if inflation was under control)
- deflationary policies
Fiscal drag
taxpayers pulled into a higher tax band despite incomes not rising in real terms
Bening deflation
A fall in the price level due to increases in aggregate supply. This is usually due to decreases in the cost of production.
Malign deflation
a fall in the price level due to a fall in aggregate demand
Consequences of deflation
- Delays in consumption ( if deflation exists consumers are more likely to delay purchasing goods until prices are cheaper , more likely with luxury or high value items)
- Rising real value of debt
- Wage rigidity ( some wages are often ‘sticky’ , workers/trade unions may will resist cuts in money wages. Sticky wages may also lead to real wage unemployment because wages are too high for the labour market to ‘clear’
- good deflation may lead to bad deflation ( if benign deflation is occuring due to increases in AS people may delay purchases therefore reducing consumption and reducing AD causing malign deflation to occur)
Commodity
A homogenous product that is used a basic input into production e.g oil , copper , minerals
Money illusion
where workers in the sr confuse nominal wages and real wagesada
adaptive expectation
where workers take time to adjust their expectations of the inflation rate to match the actual inflation rate
