Economic Performance Flashcards
What are counted as withdrawals in the circular flow of income?
Imports
Taxation
Savings
What are counted as injections in the circular flow of income?
Exports
Government expenditure
Investment
What does a current account deficit mean?
Spending more on imports from other countries
Than is being earned from exports to other countries
Definition of inflation?
The sustained rise in general price level over time
Definition of deflation?
Average price level in the economy falls
Negative inflation rate
Definition of disinflation?
Falling rate of inflation
Price level is rising but at a slower level
Two umbrella causes of inflation?
Demand pull
Cost push
Describe how demand pull causes inflation?
When aggregate demand grows unsustainably
Pressure put on resources
Producers increase prices
Earn more profits
Describe how cost push causes inflation?
When firms face rising cost
When does cost push occur?
Changes in world commodity prices e.g. Raw materials
Labour becomes more expensive e.g. Trade unions
Depreciation in exchange rate - imports more expensive
Indirect taxes - increase goods as producers choose to pass cost on to consumer
Expectation of inflation - consumers ask for higher wages
What effect does inflation have on consumers?
Purchasing power falls
Value of loan repayment is lower
People made redundant as firms cut costs
What effect does inflation have on the government?
Increased value of state pensions and welfare
As cost of living increases
What effect does inflation have on firms?
Borrowing + investing is less attractive as cost is higher
Workers demand higher wages increasing costs of production
Less competitive price on global scale
Reduced business confidence leading to less investment
What is bad deflation?
When people see prices falling and postpone consumption or spending
What is good deflation?
When prices fall due to improvements in technology (due to four factors of production)
Short run economic growth?
When there is an increase in real output of the economy
But the same resources are being employed
Long run economic growth?
An increase in real output due to an increase in the productive capacity of a country
What is caused by an increase in aggregate supply?
Long run economic growth
What is caused by an increase in aggregate demand?
Short run economic growth
Characteristics of a boom?
High economic growth Positive output gap Full employment Confidence to invest Demand pull inflation Improvements in government budgets
Characteristics of a bust?
Low economic growth Negative output gap Reduced government budget Unemployment Less confidence to invest Low inflation
Definition of a recession?
Negative economic growth for 2 consecutive quarters
Why are recessions rare?
Economics normally grow over time
Factors of production improve
Increased wealth
Example of a cause of a recession?
Supply side shock e.g. Earthquake
Unusual event e.g. Brexit
Index number formulae?
Price level in gear being compared
/
Price level in base year
*100
Describe economic growth?
Increase in the capacity of an economy to produce output pcompared from one time period to another
Measured by GDP
When does a negative output gap occur?
When the actual level of output is less than the potential level of output
Characteristics of a negative output gap?
Downward pressure on inflation
Usually means an unemployment or resources in an economy
Lots of spare capacity
Characteristics of a positive output gap?
Resources being used beyond the normal capacity e.g. Overtime labour
Productivity growth
Upward pressure on inflation
How might a government handle a recession?
Increase spending to stimulate economy
Spending on welfare payments to help those lost their jobs
Cutting tax
Cutting interest
What is equal in the circular flow?
Income = output = expenditure
What is an injection into the circular flow?
Money entering the economy In the form of: Government spending Investment Exports
What is a withdrawal into the circular flow?
Money that leaves the economy Form of: Taxes Savings Inputs
Why does long run economic grown occur?
Investment in FOP
Education - labour
Technology - capital
Low tax - enterprise (people set up businesses)
factors influencing LRAS?
Technological advances - more money spent on improving technology, the economy can produce goods in larger volumes / improve the quality of goods produced
Productivity - more productive labour and capital input produces more output for same input
Education and skills - improves quality of human capital, more productive, wider variety of goods and services produced
Government regulations - can limit how productive and efficient a firm can be if excessive (red tape)
Demographic changes and migration - onward migration of working age increases the size of the labour force increasing output
determinants of SRAS?
Cost of employment e.g. taxes wages labour productivity
Cost of other inputs e.g. raw materials commodity prices exchange rates (stronger currency reduces price of imports so they’re cheaper)
Government regulation/ intervention e.g. environmental laws, green taxes, buisness regulation (red tape)
Outward migration of workers leads to brain drain on domestic economy as skills leave
Fall in capital spending
what is stagflation
when inflation is high
but economic growth is minimal
why may stagflation occur
supply side shock - prices go up, costs of production go up so supply goes down (unemployment and lower wages), demand falls, profit falls
causes of long run economic growth
increase in productivity advancement in technology increase in investment (capital) government spending improving infrastructure increase in migration
example of demand side shock
housing market crash
example of supply side shock
sudden increase in price of oil or commodities or raw materials
why does inflation go up as demand increases
as move closer to FE
more pressure put on existing factors of production
exhausting more spare capacity in economy
pressure on land labour capital
more pressure put on them price increases due to scarcity
eg workers want higher wages
which type of inflation is detrimental for the economy
cost push
what is good inflation
demand side
what is bad inflation
supply side
what is good deflation
supply side
what is bad deflation
demand side
deflational spiral
what determines business confidence?
expected profit
expected demand in the economy
why does low growth in the rest of the world affect the recovery of the uk economy i
fall in demand for u.k. exports
explain why lower growth in the rest of the world slows economic recovery in u.k.
demand for exports falls exports are a component of AD AD falls firms cut back on production job losses rising unemployment
falling incomes in export sector lead to a negative multiplier
fall in consumer spending which reduces output and income in other sectors of the economy
how can reductions in corporation tax increase labour productivity in the U.K.?
Increase incentive to invest
new machines are more efficient as they incorporate latest technology
increase in capital stock (more machines per worker) increases output per worker
how can increased government spending improve labour productivity in the u.k.?
Finances education and training
improved skills of labour force
more flexible carry out a wider range of tasks
poor quality output and mistakes reduced
increased flexibility of labour force
easier for firms to implement changes in working practises
leads to a rise in productivity
