Economic Policy Objectives Flashcards
What is short-run economic growth?
An increase in the total value/output of all goods and services produced in an economy in a given period of time.
What is long-run economic growth?
An increase in the productive potential of an economy
4 ways to show short-run economic growth on a diagram
- change in costs
- an increase in AD
- an increase in AD Keynesian (from curve to vertical area)
- using a PPC (outwards to inwards)
What is the policy objective of economic growth?
Increase standard of living for the population
What is meant by nominal value?
the value of an economic variable based on current prices, taking no account of changing prices through time
What is meant by Real Value?
the value of an economic variable based on current prices, taking account of changing prices through time
How do you calculate a price index?
nominal value/real value x 100
How do you calculate real value?
normal value/price index x 100
What is nominal GDP?
National output measured in terms of prices in the year in question
What is real GDP?
Nominal GDP with the effects of inflation removed
How to calculate real to nominal GDP
nominal gdp/price index x 100
What is GNI
Gross National Income is GDP plus net income from abroad
What is GDP per capita?
The average level of GDP per head of the population
go back to issues with gdp
What is meant by a recession
It occurs when actual growth falls for 2 or more consecutive quarters
Four reasons why GDP and Economic Growth are measured
- indicator of performance to governments
- can be used to assess the population’s standard of living
- can inform government decision - making
- can be compared with other economies
What is economic growth
Economic growth is an increase in real GDP in an economy in a year caused by an increase in AD or an increase in LRAS
What are the five macroeconomic objectives
Sustainable economic growth
Low unemployment
Low/ stable inflation
Fair distribution of income
Competitive international trade
What are the five macroeconomic objectives
Sustainable economic growth
Low unemployment
Low/ stable inflation
Fair distribution of income
Competitive international trade
How to calculate real GDP GO BK
1) Calculate nominal GDP
2) Base year price index and current year price index
3) multiply nominal GDP by base year index divided by the current year price index
What is meant by a recession
Occurs when actual growth falls for 2 or more consecutive quarters
Why are GDP and economic growth measured
- can be used to assess quality of life for citizens
- inform gov decision making
- can be compared with other economies
What are the main difficulties of measuring economic growth and GDP
Doesn’t take into account:
Income inequality
Unofficial work
Exchange rate problems -
Quality of goods and services
What is the economic cycle
A phenomenon whereby GDP fluctuates around its underlying trend, following a regular pattern
What is GDP per capita
The average level of GDP per head of the population
Describe divergence from the trend of the economic cycle
Sustained economic growth above the trend rate is likely to cause inflation and be unsustainable
Factors affecting the trend rate of economic growth
Investment in capital
Technological development
Labour productivity
Flexibility
Public sector investment
What is an output gap
The difference between the actual and potential GDP growth
What is a negative output gap
When the level of actual GDP is less than potential GDP
What is a positive output gap
When the actual GDP is greater than the estimated potential
Main problem with the output gap
- difficult to measure the potential output of a country
What is sustainable economic growth
A rate of growth which can be maintained without creating other significant economic problems especially for future generations
What is poverty
Income is below the level that would allow someone to enjoy some agreed minimum standard of living
What is economic development
The process of improving people’s economic well-being and quality of life
What is the primary sector
The sector in which production uses natural resources, including the extraction of raw materials and the growing of crops
What is the secondary sector?
The sector involving the production of manufactured goods
What is the impact of the importance/reliance on the agricultural sector but lower development countries?
- agriculture tends to display lower productivity than other sectors
- Tends to be correlated with low income per head
Explain the policy of sustainable development
Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs
What are the two ways to measure economic development?
GNI and HDI
What are the advantages of GNI as a measure of development?
- straightforward/wildly understood
- Figures available for most countries in the world
What are the problems of GNI as a measure of development?
- doesn’t address extent of income distribution
- doesn’t address the informal sector
- doesn’t address pace and scale of pollution
- failure to include quality of life measures
What are the three aspects of human development
- resources
- knowledge of how to make good use of those resources
- a reasonable life span in which to make use of those resources
3 pros of the HDI
- determine areas that need urgent attention
- accuracy: text measurement in three areas, health education and income level
- allocation of funds : highlights areas that need development
What are three cons of the HDI?
What is the definition of employment?
People who are either working for firms or other organisations or self-employed
What is the definition for economically inactive?
Those people of working age are not looking for work for a variety of reasons
What are discouraged workers
Discourage work as people who have been unable to find employment and who are no longer looking for work
What is the workforce?
The workforce is made up of people who were economically active either in employment or unemployed
What is meant by unemployment?
Those who are jobless available to work and are actively seeking employment
What is the calculation for the unemployment rate?
Unemployed / labour force x 100
What is meant by the policy objective of full employment?
Situation where people who are economically active in the workforce and are willing to work at going wage rate are able to find employment
What are the two ways in which unemployment is measured?
1) Claimant Counts
2) Labour Force Survey
What is the definition of unemployment based on the ILO?
People who are out of work want a job have actively sort work in the last four weeks and are available to start in the next two weeks or waiting to start in the next two weeks
What are the problems with the claimant count?
- not everyone will claim benefits who cannot find a job
- some people clean the benefit but I’m not prepared to work
- Some people are not eligible for any benefits
What are the problems with ILO unemployment data?
Based on sample evidence
some people may be unemployed because they can’t find work at their desired wage
Some people may be unemployed because they can’t find work as many hours as they would like
What is the natural rate of unemployment?
The level of unemployment at which inflation is at a stable level, but there was no downward pressure on the price level
What is voluntary unemployment?
Refers to a situation where an individual is not working, but is able and willing to work and is actively seeking employment
What is meant by inflation
A sustained increase in the general price level
What is meant by disinflation
- a fall in the inflation rate
- it means that the general price level is increasing at a slower rate
What is meant by deflation
A situation where there is a fall in the average price level
- negative inflation
What are nominal values
The unadjusted rate or current price, without taking inflation into account
What are real values
Adjust,meta are made for general price level changes over time
What are the two measures of inflation
CPI and RPI
What is the balance of payments ?
The BOP is a set of accounts recording all financial transactions made between consumers, businesses and the government in one county with others
What is income?
The flow of wages/salaries and other income in a period
What is wealth
And accumulated stock of assess, which can generate income
What is the marginal productivity theory?
It’s suggested an individuals pay is determined by the individual workers marginal revenue
