Economic Performance

Question 1

What is the difference between short run and long run growth

Answer 1

Short run growth is the % increase in a country’s real GDP and it’s usually measured annually. It is caused by an increase in AD

Long term growth is when the productive capacity of an economy is increasing and it refers to the trend rate of growth of real national output in an economy over time. It is caused by increases in AS. The potential output of an economy is what the country could produce if all production resources was used fully

Question 2

When does an output gap occur?

Answer 2

When there is a difference between the actual level of output and the potential level of output. It is measured as a % of national output

Question 3

What is a negative output gap

Answer 3

When the actual level of output is less than the potential level of output.

This puts down with pressure on inflation, usually means there is the unemployment of resources in an economy. So labour and capital are not used to their full productive potential. This means there is a lot of spare capacity economy.

Question 4

What is a positive output gap?

Answer 4

A positive output gap occurs on the actual level of output is greater than the potential level of output.

It could be due to resources being used beyond the normal capacity, such as if labour works overtime. If productivity is growing, the output gap becomes positive.

It put upward pressure on inflation

Question 5

What is the business cycle

Answer 5

This refers to the stage of economic growth that the economy is in, the economy goes through periods of booms and busts.

Question 6

Name some characteristics of a boom

Answer 6

High rates of economic growth
Near full capacity or positive output gaps
Near full employment
Demand pull inflation
Consumers and firms have a lot of confidence, which leads to investment
Government budgets improved due to higher tax revenues and less spending on welfare payments .

Question 7

Name some characteristics of a recession

Answer 7

Negative economic growth
Lots of spare capacity and negative output gaps
Demand deficient unemployment
Low inflation rates
Government budget worsen due to more spending on welfare payments and less tax revenues
Less confidence amongst consumers and firms which leads to less spending and investment 

Question 8

How to define a recession

Answer 8

Negative economic growth over two consecutive quarters.

Question 9

Explain the business cycle

Answer 9

Real output increases when there are periods of economic growth. This is the recovery stage.

The boom is when economic growth is fast it could be inflationary or unsustainable .

During recession, the real output in the economy falls and there is negative economic growth

During recessions, the government might increase spending to try and stimulate the economy. This could involve spending on welfare payments to help people have lost their jobs.

During periods of economic growth, governments may receive more tax revenue since consumers will be spending more and earning more. They may decide to spend less since the economy does not need stimulating and few people will be claiming benefits.

Question 10

Why is it hard to accurately measure unemployment

Answer 10

Is difficult to accurately measure unemployment as some of those employed might claim unemployment related benefits, while some of the unemployed might not reveal this in a survey.

Question 11

Name the the two main ways we measure unemployment

Answer 11

The claimant court
UK labour force survey .

Question 12

How does the claimant court work?

Answer 12

This counts the number of people claiming unemployed related benefits, they have to prove they’re actively looking for work.

Question 13

Evaluation of the claimant court

Answer 13

Not every unemployment person is eligible for or bothers claiming things. Those with partners on high incomes will not be eligible for the benefit, even if they are unemployed. Although there may be instances of people claiming the benefits whilst they are employed, the method generally underestimated the level of unemployment.

Question 14

What is the international labour organisation and the uk labour force survey.

Answer 14

You have to meet a certain criteria
Been out of work for 4 weeks
Able and willing to start working within 2 weeks
Workers should be available for 1 hour week, part time unemployment is included

Question 15

The significant of changes in the rate of employment with consumers

Answer 15

If consumers are unemployed, they have less disposable income and their standard of living may fall as a result. There is also psychological consequences of losing a job which could affect the mental health of workers.

Question 16

The significant of changes in the rate of employment with firms

Answer 16

With a higher rate of unemployment, firms have a larger supply of labour to employ from. This causes wages to fall, which would help firms reduce their costs.

However, with higher rates of unemployment since consumers have less disposable income, consumer spending falls so firms may lose profits. Producers which sell inferior goods might see a rise in sales. It might cost firms to retrain workers , especially if they have been out of work for a long time.

Question 17

The significant of changes in the rate of employment with workers

Answer 17

With unemployment, there is a waste of workers resources. They could also lose their existing skills if they aren’t fully utilised

Question 18

The significant of changes in the rate of employment with the government

Answer 18

If the unemployment rate increases, the government may have to spend more on JSA which incurs an opportunity cost because the money could have been invested elsewhere.

The government would also receive less revenue from income tax, and from indirect taxes on expenditure since the unemployment have less disposable income to spend

Question 19

The significant of changes in the rate of employment with society

Answer 19

There is an opportunity cost to society, since workers could have produced goods and services if they were employed. There could be negative externalities in the form of crime and vandalism, if the unemployment rate increases

Question 20

Name the types of unemployment

Answer 20

Structural unemployment
Frictional unemployment
Seasonal unemployment
Demand deficiency (cyclical unemployment)

Question 21

What is structural unemployment

Answer 21

This occurs with a long-term decline in demand for the goods and services in an industry which results in no jobs. This is an especially true in industrial jobs.

This type of unemployment is worsened by the geographical and occupation in immobility of labour.

Question 22

What is frictional unemployment

Answer 22

This is the time between leaving a job and looking for another job. It is not particularly damaging since it is only temporary.

Question 23

What is seasonal unemployment

Answer 23

This occurs to certain points of the year usually around summer and winter.

During the summer more people will be employed in the tourist industry when demand increases.

Question 24

What is cyclical unemployment

Answer 24

This is caused by a lack of demand for goods and services and usually occurs during periods of economic decline or recession. firms are forced to close or make workers redundant because their profits are falling due to decrease consumer spending and they need to reduce their costs.

This type of unemployment could actually be caused by increases in productivity which means when each worker can produce a higher output and therefore fewer workers are needed to produce the same quantity of goods and services

Question 25

How changes in the rest of the world affect employment and unemployment.

Answer 25

Globalisation contributes to structural unemployment since production in manufacturing sectors such as clothes or motor cars move abroad to countries with low labour costs. Meaning the workers trained for these jobs will become unemployed because the industry has declined and size or has been removed from the economy

Migrants are usually of working age so the supply of labour at all wage rates tends to increase with more migration.

Question 26

What is disinflation

Answer 26

Is the falling rate of inflation, this is when the average price level is still rising but to a slower extent this means goods and services are relatively cheaper now than a year ago and purchasing money has increased.

Question 27

Name the causes of inflation

Answer 27

Demand pull
Cost push

Question 28

What is demand pull inflation

Answer 28

This is from demand side of the economy, when aggregate demand is growing unsustainably there is pressure on resources. Producers increase their prices earn more profit. It usually occurs when resources are fully employed.

Question 29

What are the main triggers for demand pull inflation

Answer 29

Depreciation in the exchange rate, which causes imports to become more expensive exports become cheaper. This causes AD to rise

Fiscal stimulus and the form of low taxes or more government spending. This means consumers have more disposable income of consumers spending increases.

Lower interest rates makes saving less attractive and borrowing more attractive consumer spending increases

High growth in UK export markets means UK export increase and aggravate demand increases .

Question 30

What is cost push inflation

Answer 30

This is from the supply side of the economy and occurs when firms face rising costs.

Question 31

When does cost push inflation occur

Answer 31

Changes in world commodity prices can affect domestic inflation, raw materials might become more expensive if oil prices rise. This increases cost of production.

Labour becomes more expensive this could be through trade unions .

Expectations of inflation, if consumers expect prices to rise they may ask for higher wages to make up for this and this could trigger more inflation .

Indirect taxes could increase the cost of cigarettes or fuel if produces choose to pass the costs onto the consumer .

Depreciation exchange rate which causes imports to become more expensive and pushes up the price of raw materials

Monopolies using their dominant market position to exploit consumers with high prices .

Question 32

How does inflation affect consumers

Answer 32

Those on low and fixed incomes are hit the hardest by inflation due to its regressive effect, such as the cost of necessities like food and water can become expensive.

If consumers have loans, the value of the repayment will be lower because the amount owed does not increase within inflation so the real value of debt decreases .

Question 33

How does inflation affect firms

Answer 33

Low interest rates means borrowing and investing is more attractive than saving profits. With high inflation interest rates are likely to be higher so the cost of investing will be higher and firms are less likely to invest.

Workers demand higher wages which could increase the cost of production for firms

Firms may be less competitive on a global scale if inflation is high

Unpredictable inflation will reduce business confidence since they are not aware of what their cost will be .

Question 34

How does inflation affect government

Answer 34

The government will have to increase the value of the state pension and welfare payments because the cost of living is increasing

Question 35

How does inflation affect workers

Answer 35

Real incomes fall with inflation so workers will have less disposable income

If firms face higher costs there could be more redundancies would firms try and cut their costs

Question 36

What are the components of the BOP

Answer 36

exports
Imports

Question 37

What is the BOP

Answer 37

How much is spent on imports and what the value of exports is

Question 38

Explain current account deficits and surpluses

Answer 38

A current account surplus means that there is a net inflow of money into the circular flow of income.

The UK has a surplus with services, but a deficit with goods

Question 39

What are the factors that influence a country’s current account balance

Answer 39

By selling more exports to foreign countries, the UK will have a greater inflow of money into the circular flow of income. This will increase aggravate demand and improve the rate of economic growth

In the UK during periods of economic decline or recession, the current account deposit falls this is because consumer spending falls

During periods of economic growth and consumers have higher incomes and they can afford to consume more. There is a larger deficit on the current account.

If imported raw materials are expensive, they could be cost push inflation in the UK since firms face higher production cost

When the pound appreciates, import we become relatively cheaper and export become more expensive

If the UK becomes more productive, the UK will be more internationally competitive this causes export to increase relative to import .

Question 40

Explain the interconnectedness of economies through international trade

Answer 40

In theory, the sum of all countries trade balances should be zero since what one country exports will be imported by another country.

If the U.K.’s main export market such as the EU faces economic downturn then demand for goods and services from the UK will fall since consumers in the EU are less able to afford imports

International traders my countries have become interdependent therefore the economic conditions in one country affect another country since the quantity they export or import will change.

Question 41

Economic growth vs current account

Answer 41

During periods of economic growth, consumers have high levels of spending. In UK consumers have a high marginal prosperity to import so there is likely to be more spending on imports. This leads to worsening on the deficit.

Question 42

Economic growth versus the government budget deficit

Answer 42

Reducing a budget deficit requires less expenditure and more tax revenue this would lead to a fallen AD and as a result there’ll be less economic growth

Question 43

Unemployment VS inflation

Answer 43

In the short run, there is a trade-off between the level of unemployment and the inflation rate.