Economic performance Flashcards
Long run economic growth
increase in productive potential
Short run economic growth
uses spare capacity and closes output gap
Benefits of economic growth
Job creation
Increased incomes
Wealth creation
Greater investment
Confidence rises
Multiplier
Cons of economic growth
Greater income inequality
Inflation
Debt
Greater borrowing
More risks taken
Pollution
Economic cycle
shows level of output over period of time
Causes of changes to output
Cyclical instability
global shocks
Demand side shocks
Supply side shocks
Output gap
difference between actual (AD) and potential (LRAS) output
Positive output gap
growth is above trend rate
inflationary
full employment
Negative output gap
economic downturn
unemployment
high spare capacity
Government will use fiscal policy
Evaluation for output gap
Depends on the size of the output gap
Characteristics of a boom
High growth
Low unemployment
Low spare capacity
Demand pull inflation
Recession
2 consecutive quarters of negative economic growth
Characteristics of recession
negative growth
high unemployment
high spare capacity
low inflation
Trend rate of economic growth
average sustainable rate of growth over period of time
Factors affecting trend rate
capital investment
tech development
labour productivity
elasticitiy of supply
public sector
Demand side shocks
where shock affects AD
Supply side shocks
caused by unexpected changes in costs (SRAS)
Unemployment
those willing and able to work at market wage but cant find a job to match their skills
Underemployment
people working fewer hours than they wish (zero hour contracts)
people not utilising their skills
Employment
everyone will and able to work at market wage finds a job
Friction Unemployment
between jobs
Structural unemployment
downturn in industry
Cyclical unemployment
due to boom and bust
Technological unemployment
replaced by machines
Regional Unemployment
certain areas depend on one industry
Voluntary unemployment
by choice
Costs of unemployment
loss of income
negative multiplier
loss of output
waste of resources
budget deficit
benefits rise
crime etc
Claimant count
measure number of people on job seekers allowance
Pros and cons of claimant count
Pros—keeps track on JSA
—easy and cheap
Cons—many claim JSA and work
—inaccurate and not suitable for international comparison
Labour force survey
uses international definitions of employment related topics
Pros and cons of labour force survey
Pros—accurate
—useful for international comparison
Cons—expensive and time consuming
Natural rate of unemployment is made up of ….
Frictional unemployment
Structural unemployment
Voluntary unemployment
In order to reduce NRU
Structural—supply side policies
Frictional—information
Voluntary—lower tax rates as incentive to work
Real wage unemployment
Wage rises leads to unemployment
Demand deficient unemployment
Caused by fall in AD
Less demand for G+S so less demand for labour
Inflation
Sustained rise in prices over a period of time
Effects of inflation
cost of living rises
Poorer in real terms
less competitive
IR may have to rise
Deflation
fall in general price level
Effects of deflation
Value of debt rises
people delay spending
workers resist wage cuts
Disinflation
fall in rate of inflation
Prices go up at slower rate
Consumer price index
focus on cost of goods and services
excludes housing costs
Includes all uk residents
Retail price index
focus on cost of housing
excludes income tax and national insurance
excludes top 4% of earners
more volatile
Changes in interest rates effect on cpi and rpi
impact CPI but not RPI
Demand pull inflation
inflation due to increase in demand for goods and services
pushes pressure on existing factors of production
Ad>As
Cost push inflartion
Cause by rise in costs of production
As<Ad
firms pass costs to consumers
Quantity theory of money
MV=PQ
Wage price spiral
rising wages put pressure on prices
inflation puts pressure on wages(workers ask for pay rise)
Costs of inflation
inflationary noise
Menu costs (changing labels)
Shoe leather costs
fixed incomes—real income falls
decreases debt making banks worse off
fiscal drag
Benefits of inflation
2% supports sustainable growth
when low easier for prices to adjust
when moderate easier for wages to adjust
2% helps steady erosion of value of debt
Evaluate effects of inflation
Depends on the rate of inflation
Solutions for inflation
Demand pull—fiscal and monetary policy
Cost push—supply side policies
Quantity theory of money—monetary policy(Quantitative easing, inflation targeting, lender of last resort)
Evaluate solutions for inflation
depends on the cause of inflation
