Economic performance Flashcards
Trend rate growth
the average rate of economic growth over periods of booms and slumps
Economic growth
is a increase in the productive potential in the economy
economic growth on a ppf
movement from inside the ppf from point a to point B on the curve
Boom
when the economy is growing quickly shown by a increase in AD and fall in unemployment
recession
when theres negative economic growth for two consecutive quaters
Negative output gap
the difference between actual output and trend output when actual output is below trend output
downward pressure on inflation, high unemployment, low AD
positive output gap
the difference between actual output and trend output when actual output is above trend output
it creates upward pressure on inflation and low unemployment
AD and AS curve for positive and negative output gap
positive output gap is shown to the right of the LRAS curve
negative output gap is shown to the left of the LRAS curve
three benefits of economic growth
increase demand for labour leading to fall in unemployment and higher income
increase tax revenues due to higher incomes
greater profits for firms as consumers have higher incomes to spend more
three costs of economic growth
economic growth can create cost and demand push inflation due to an increase in demand
negative externalities created for industry expansion
could increase budget deficit as higher incomes could lead to more demand for imports
Short run economic growth
this is created by a rise in AD shifting to the right causing national output to shift.
A rise in SRAS could also cause short run growth when it shifts to the right
Long run economic growth
caused by supply side factors increasing the productive potential of the economy
supply side factors could increase in quantity and quality of factors of production could be innovation in technology, increase in education and increase in population
this causes LRAS to shift to the right 6
Unemployment on a PPF
if theres unemployment then the economy wont be operating at full capacity so it will be shown on a point within the PPF
if theres full employment the economy will be at full capacity and it will be shown on a point within the PPF
Under employment
is when someone has a job but its a job which doesnt utilise a persons skills experience and availability
Cyclical unemployment
this is demand deficient unemployment when AD falls employment will fall too
Seasonal unemployment
when demand for labour isnt the same all year round
Structural unemployment
this when its caused by a decline in a certain industry or occupation due to consumer preferences or technological advances
Occupational immobility
this when workers dont have the skills required to do a certain job
Geographical immobility
this when workers cant leave a certian region which has high unemployment to another region which has jobs
frictional Unemployment
is unemployment caused by leaving one job and starting another. The time lag caused for looking for a new job can be caused by
a slump as there could be a shortage of jobs, lack of information as they wont know the jobs available, benefits as its a disincentive to get another job
Real wage unemployment
cause by wages being pushed above the equilibrium level of employment
Real wage unemployment graph
introducing a NMW above the equilibrium wage rate causes supply of labour to increase from Qe to Qs causing demand to fall from Qe to Qd causing unemployment between Qs and Qd due to excess supply
Costs and consequences of unemployment
reduces firms profit due to lower incomes
less income tax and indirect tax due to a decrease in spending
skills and training could be outdated reducing employability
cost push Inflation
cost push inflation is inflation caused by the rising costs of inputs to production
cost push inflation graph and its causes
rising costs of inputs force producers to pass high costs in the form of high prices this causes AS to shift from AS 1 to the left causes of this could the rise in cost of raw materials, also a rise in indirect taxes
demand pull inflation
inflation caused by excess growth in aggregate demand compared to supply
Demand pull inflation graph and its causes
it shifts aggregate demand to the right from AD to AD1 increasing price this could be caused by higher consumer spending, high demand for exports , money supply growing faster than output
Fishers equation of exchange
Money suppply* velocity of money= price level * aggregate transactions both sides of the equation are equal so an increase money supply will cause an increase in price level
costs and consequences of inflation
will cause standard of living to fall
decrease competitiveness as exports will be more expensive imports will become cheaper
inflations discourages saving as the value of your savings could fall
deflation
when inflation falls below 0% this means the economy is doing badly as theres falling agregate demand and increase unemployment
Inflation rate for Government and how do they intervene
The Government considers low and stable inflation of 2% per year and anything over that is excessive the Government might use monetary, fiscal and supply side policies to keep it low
Trade off
how important on certain objectives have an affect on others
how changes in aggregate demand could conflict other objectives
it could increase output decreasing unemployment due to derived demand
a shift in AD could increase price level meaning a decrease competitive decreasing exports worsening balance of payments
conflict between inflation and unemployment
when unemployment is is decreased demand for workers increase this means an increase in wages causing higher prices leading to cost push inflation
conflict economic growth and environmental protection
increased production lead to air and water pollution also increase in waste, ecosystems damaged due to increased production
economic growth and inflation
a rapid growing economy can increase prices due to demand causing inflation, low inflation can restrict economic growth
inflation and equilibrium of balance of payments
low inflation is maintained by high interest rates increasing the value of exports decreasingits demand worsening budget deficit
economic growth and reduction in wealth inequality
economic growth can increase inequality as not everyone benefits equally
increasing tax and welfare payments can damage economic growth
Phillips curve
if the government wants to reduce unemployment it has to increase agreggate demand increasing inflation
unemployment rate equation
number of unemployed people/total unemployment + total employment
Long run Phillips curve
no trade off between inflation and unemployment, based on the expected rate, the line is vertical
