Economic Performance Flashcards
what is the definition of short run economic growth ?
where there is an increase in a country’s AD, causing an increase in the country real GDP.
what is the definition of long run economic growth ?
where there is an increase in the country’s quality and quantity of FOP, causing an increase in AS.
where does a positive output gap occur ?
where actual output is greater than potential output
where does a negative output gap occur ?
where actual output is less than potential output
what are the characteristic’s of an economic boom ?
*high rates of economic growth
*near full capacity
*near or at full employment
*demand-pull inflation
what are the characteristic’s of an economic recession ?
- negative economic growth
- lots of spare capacity
- demand-deficient unemployment
- low inflationary rates
what are the two ways of measuring unemployment ?
claimant count
labour force survey
how does the claimant count work ?
counts the number of people claiming unemployment related benefits
how does the labour force survey work ?
a sample of 100,000 people are selected at random and are asked to fill out a survey to determine whether they classify as unemployed:
- been out of work for 4 weeks/ 1 month
- able and willing to start work within 2 weeks
what is the significance of unemployment to consumers ?
- less disposable income
- standard of living may fall
what is the significance of unemployment to firms ?
- larger pools for recruitment
- wages will change
- firms costs will change
- consumer spending will change
what is the significance of unemployment to workers ?
- waste of workers resources
- could lose existing skills
what is the significance of unemployment to government ?
- more spending on JSA ( job seekers allowance)
- opportunity cost
- less revenue received from income tax
what is the significance of unemployment to society ?
- negative externalities in the form of crime and strain on healthcare due to a fall in standard of living and crime
what are the 4 types of unemployment ?
- structural
- frictional
- seasonal
- cyclical
what is structural unemployment ?
a long term decline in demand for goods and services in an industry costs jobs
what is frictional unemployment ?
the time between leaving a job and finding and securing a new job
what is seasonal unemployment ?
occurs during retain points in the year
what is cyclical unemployment ?
economic decline e.g. recession, lack of demand
what causes short run growth ?
Changes to any of the components of aggregate demand (AD)
what causes short run supply-side growth (SRAS) ?
A fall in the costs of production, a decrease in taxes, or an increase in the level of subsidies
what causes long-run economic growth ?
increase in the quality and quantity of production in the economy
what does trend rate growth refer to ?
long-term rate at which the economy expands over time
what are the benefits of economic growth ?
- increased employment & higher incomes
- higher GDP can lead to improved standards of living (better healthcare, education etc)
- investments in infrastructure, improves overall economic efficiency
- increased competition and innovation
what are the costs of economic growth ?
- leads to negative externalities (air pollution, plastic waste etc)
- depletion of natural resources
- unequal distribution of wealth, income inequality
- inflation
what does the economic cycle refer to ?
the changes in real GDP that occur in the economy overtime
what is the long-term trend rate of growth ?
it represents the sustainable rate of growth that an economy can achieve overtime
where are positive and negative output gaps on the economic cycle ?
the area between the trend rate growth line and the peak or trough
(humps)
what is a positive output gap ?
a growth of real GDP, that is above the trend
what is a negative output gap ?
a growth in real GDP, that is below the trend
what are the characteristics of a recession ?
. two consecutive quarters of negative growth
. high/ increasing unemployment
. increasing negative output gap
. low confidence for firms
. usually low inflation
what are the characteristics of a boom ?
. increasing/ high rates of economic growth
. decreasing unemployment
. increasing positive output gap
. high confidence
. demand-pull inflation
. greater government budget
what can indicate a positive output gap ?
rapidly rising prices
what can indicate a negative output gap ?
rising unemployment
what is involuntary unemployment ?
workers are willing to work but there are no jobs available
what is voluntary unemployment ?
workers choose to remain unemployed, at the current wage rate.
how do the government respond to structural unemployment ?
focus on enhancing the unemployed individuals skills to improve their employability
how do the government respond to seasonal unemployment ?
extend operational seasons
how do the government respond to frictional unemployment ?
reduce workers search periods between jobs
how do the government respond to cyclical unemployment ?
take measures to stimulate aggregate demand
the effects of unemployment on the government ?
increased spending on unemployment related benefits
less tax revenue
the effects of unemployment on the firms ?
loss of sales revenue
loss of production
the effects of unemployment on the individuals ?
loss of income
health issues
the effects of unemployment on the economy ?
increased crime
what is the definition for inflation ?
the sustained increase in average price level of goods/services in an economy
what is the definition for deflation ?
the sustained decrease in average price level of goods/services in an economy
what is the definition for disinflation ?
the sustained increase in average price level of goods/services in an economy, but at a lower rate than before
what causes demand-pull inflation ?
unsustainable excess demand in the economy, putting pressure on resources. (outward shift in AD)
. a depreciation in exchange rate
. lower taxes
. increase in government spending
. lower exchange rate
. economic growth
what causes cost-push inflation ?
increases in the costs of production (inward shift in SRAS)
. changes in commodity prices
. labour may become more expensive
. expectations of inflation to rise, may result in workers demanding higher wages, causing wage-inflation
. indirect taxes
. depreciation in exchange rate
what does fisher believe strongly influences inflation ?
the size of the money supply and the speed at which it circulates the economy
more money entering the circular flow of income is going to lead to an increase in consumption and investment leading to demand-pull inflation
MV = PQ
(supply of money x velocity of circulation = price level x quantity of real goods sold/ no. of transactions)
when the money supply increases, consumers have more money to spend. This causes AD to shift to the right. Firms then increase supply in the short run. This creates a positive output gap leading to increased prices in the SR. As a result more workers are employed, so wages increase. This means costs increase for firms, so they increase prices. Purchasing power of consumers falls in the economy, leading to employees demanding higher wages, leading to a leftward shift in SRAS curve. Therefore the economy returns to equilibrium, but the price level is higher than before.
how does inflation impact firms ?
lower interest rates may attract firms to invest
less competitive
creates uncertainty and confidence
delays in investment
how does inflation impact consumers ?
decrease in purchasing power
decrease in value of savings
fall in real income
how does inflation impact the government ?
governments may have to increase welfare payments and state pension
reduces international competitiveness (exports become more expensive)
economic growth may slow
unemployment may rise if we attempt to reduce inflation
how does inflation impact workers ?
demand higher wages to compensate for higher living costs as there real income falls
redundancies due to firms experiencing higher costs
inflation leading to a fall in standard of living may effect motivation and productivity may fall
how is demand-side deflation caused ?
by a fall in total (aggregate) demand in the economy
causing average price level to fall
what are the 6 common consequences of demand-side deflation ?
delays and discourage in spending (consumers believe that goods/ services may be cheaper tomorrow or in the future)
unemployment, due to economic stagnation
consumers lose confidence
firms lose confidence
increases value of real debt
bankruptcies
exports increase (due to domestic prices falling)
how is supply-side deflation caused ?
by increases in the productive capacity of the economy
(this is brought about by any increase in the quantity/quality of the factors of production)
creates excess supply
what are the 6 common consequences of supply-side deflation ?
unemployment
consumers gain confidence
debt
firms gain confidence
exports increase
what is imported inflation ?
occurs when the prices of goods and services imported from other countries increase, contributing to an overall rise in the domestic price level.
e.g. oil, food
what is a commodity ?
something that is useful and valuable
how can changes in other economies exchange rates affect inflation in the UK ?
affect the cost of imports and exports
inflation:
- (A depreciation of the UK pound could lead to higher import prices, increasing the price of imported goods for UK consumers and raising inflation)
- (Conversely, a strengthening pound could lower import prices, dampening inflationary pressures)
how can changes in other economies economic growth of trading partners affect inflation in the UK ?
Economic growth in other economies can affect demand for UK exports
inflation:
- (Strong economic growth in major trading partners may increase demand for UK exports, contributing to inflation in the UK)
- (Conversely, weak economic growth in trading partners may reduce demand for UK exports, leading to lower prices and reducing inflation)
how can changes in other economies global shocks affect inflation in the UK ?
Events like wars, political instability, or natural disasters in other economies can lead to global shocks
inflation:
- (Global shocks tend to increase inflationary pressures)
how will a positive output gap affect unemployment ?
high levels of real GDP in the economy.
Due to increased AD firms operate near or at full capacity
The demand for labour is high, leading to lower unemployment rates
how will a negative output gap affect unemployment ?
low levels of real GDP in the economy.
Due to decreased AD firms operate at low capacity
The demand for labour is reduced, leading to higher unemployment rates
how does a positive output gap impact inflation ?
- In a positive output gap scenario, there is upward pressure on prices and wages
↓ - With firms operating at or near full capacity, they may struggle to meet increasing demand, leading to higher production costs
↓ - As a result, firms may raise prices, contributing to inflationary pressures
↓ - Additionally, low unemployment can empower workers to demand higher wages,
how does a negative output gap impact inflation ?
- In a negative output gap scenario, there is downward pressure on prices and wages.
↓ - High unemployment reduces workers bargaining power, making it difficult for them to negotiate higher wages
↓ - As a result, firms may not face significant cost pressures, and there is a risk of deflation or very low inflation
what does the short run phillips curve illustrate ?
As economic growth increases, unemployment falls due to more jobs being created.
However, this causes wages to increase, which can lead to more consumer spending
and an increase in the average price level.
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- Rising inflation is often accompanied by falling unemployment
- Rising unemployment is often accompanied by falling inflation
what is the relationship between an increase in aggregate demand (AD) to inflation and unemployment ?
(inflation > unemployment)
- An increase in AD from AD1→AD2 causes a positive output gap (YFE - Y2)
With an increase in output the demand for labour rises and unemployment falls from 4% → 3%
The remaining labour in the market is scarcer and workers are able to negotiate higher wages
This causes wage inflation in the economy
Wage inflation leads to an increase in inflation from 3% → 4%
what is the relationship between a decrease in aggregate demand (AD) to inflation and unemployment ?
(inflation < unemployment)
- A decrease in AD from AD1 → AD3 causes a negative output gap (YFE - Y3)
With a decrease in output, the demand for labour falls and unemployment rises from 4% → 5%
Labour is more abundant, and to get hired workers have to accept lower wages
This causes wage deflation in the economy
Wage deflation leads to a decrease in inflation from 3% → 2%
what does the long run phillips curve illustrate ?
no trade-off between inflation and unemployment in the long run
the economy will always return to the natural rate of unemployment (NRU)
- this is because when inflation increases due to an increase in AD, worker will eventually demand higher wages to account for a rise in inflation, this will increase firms costs of production shifting SRAS inwards.
- this leads to a new short run phillips curve (SRPC) being adapted, to account for the shift in SRAS, where unemployment returns to the NRU.
what does the LRPC look like on a diagram ?
a vertically straight line
what is the LRPC similar to ?
the LRAS curve
in the short run you can have small deviations in levels of employment in the economy
however …
in the long run employment will always return to the … ?
natural rate of unemployment (NRU)
as a result supply side polices are more likely to be used, as there is no demand-deficient unemployment.
in the short run you can have small deviations in levels of output in the economy
however …
in the long run supply/ output will always return to the … ?
level of full employment
what does the NAIRU stand for ?
non accelerating inflation rate of unemployment
what is the NAIRU ?
the rate of unemployment where inflation is stable
why can positive output gaps occur ?
if resources are being used beyond the normal capacity, such as labour working overtime
e.g. china
costs of economic growth to the consumer ?
- those on low and fixed incomes might feel worse off due to high inflation and increasing inequality.
- demand-pull inflation
what are the benefits of economic growth to the consumer ?
+ the average consumer income increases as more people are in employment and wages increase.
+ increased confidence in the economy, greater consumption, resulting in potentially higher standard of living
what are the costs of economic growth to the firm ?
- inflation could increase their costs of production, leading to them changing there prices.
what are the benefits of economic growth to the firm ?
+ increased profits, due to higher demand, which may lead to greater investment
+ higher levels of investment could develop new technologies to improve productivity and lower AC in the long run
+ increased competition may make them more efficient and productive
what are the costs of economic growth to the government ?
- increased spending on healthcare if consumption of demerit goods increases
what are the benefits of economic growth to the government ?
+ government budget may improve, less welfare payments and increased tax revenue
costs of economic growth on current and future standards of living ?
- high levels of economic growth could lead to damage to the environment in the long run, due to increased negative externlities from consumption and production of goods and services
what are the benefits of economic growth to current and future living standards ?
+ as consumer incomes increase, some people might show more concern about the environment
+ could lead to the development of technology to produce goods and services more greenly
+ higher incomes means consumers can enjoy more goods and services of higher quality
+ public services improve, due to higher tax revenues
what is an asset price bubble ?
when the price of an asset is predicted to rise significantly, causing it to be traded more, and demand exceeds supply so the prices rise beyond the intrinsic value of the asset.
the bubble then bursts when the price steeply and suddenly falls to its ordinary level, due to a realisation of its true value by society.
it results in a loss in confidence, and can lead to economic decline or depression.
what is destabilising speculation ?
when speculators purchase or sell and asset they believe is likely to appreciate or depreciate in the near future.
what is herding ?
when investors follow the actions of economic agents rather than the market, because they believe the economic agents are better informed about the market.
this can cause instability
what are the impacts of employment or unemployment n consumers ?
If consumers are unemployed, they have less disposable income and
their standard of living may fall as a result.
There are also psychological consequences of losing a job, which
could affect the mental health of workers.
what are the impacts of employment on unemployment on firms ?
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.
what is someone who is economically inactive ?
those who are not actively looking for jobs. (elderly, disabled, children, retired)
what is structural unemployment ?
long term decline in the demand for goods and services in an industry. loss of skills
geographical and occupational immobility of labour. (skills are not easily transferable)
what are the consequences of unemployment ?
less disposable income, may lead to a fall in standard of living, fall in profits, less spending
psychological consequences of losing a job
larger supply and choice of workers to chose from, fall in wages
increased gov spending on welfare payments (JSA)
what is the natural rate of unemployment (NRU) ?
The unemployment rate when the labour market is at equilibrium is called the
natural rate of unemployment.
It includes the frictional level of unemployment, structural unemployment and
workers who do not have the necessary skills for a job.
explain how Fischers theory would play out in a real-world scenario/.
when the money supply increases, consumers have more money to spend. This causes AD to shift to the right. Firms then increase supply in the short run. This creates a positive output gap leading to increased prices in the SR. As a result more workers are employed, so wages increase. This means costs increase for firms, so they increase prices. Purchasing power of consumers falls in the economy, leading to employees demanding higher wages, leading to a leftward shift in SRAS curve. Therefore the economy returns to equilibrium, but the price level is higher than before.
