economic policy objectives (MACRO) Flashcards
what is economic growth
changes in national output over time measured by real GDP or GNP
short run = increase in actual GDP
long run = increase in productive potential of an economy
economic growth as a policy objective
.governments want economic stability and a reduction in fluctuations of actual economic growth around the trend rate of growth
.UK policy = steady rate of economic growth
.economic growth is a policy as it is an indicator of the health of the economy and performance of other key indicators (inflation, employment rates)
what are the different stages of the economic cycle
boom - rate of actual growth exceed trend rate and output gap is narrowed
downturn- economic growth rate begin to fall and approach 0
recession- two consecutive periods of negative economic growth
recovery- economic growth becomes positive after a recession
what is GDP
GDP is the total output produced by an economy
real GDP = takes inflation rates into account
nominal GDP = at current prices(no inflation)
how can the real value of GDP be calculated
current prices/price index
how does GDP change over time
.caused by changes in D or S side of the economy
.the rate of the change in GDP over time relates to the stage of economic development
e.g. less developed countries will likely grow at a faster rate
how to calculate economic growth rates
change in GDP/original GDP X 100
what is GDP per capita
measures the average level of national income per person in a pop
GDP/pop
short run economic growth caused by a rise in AD graph
.y = PL
x = real GDP
draw LRAS and AD curve
.change in demand side of the economy is caused by an increased component of AD
.this shifts AD to the right and leads to a rise in real GDP and price level = positive growth
short run economic growth caused by a rise in SRAS
y = PL
x = real GDP
draw SRAS and AD curve
.change in factor input costs e.g. labour costs affects the supply side of the economy
.this results in a shift of SRAS to the right and PL and real GDP increase = positive growth
long run economic growth graph
y = PL
x = real GDP
draw a vertical LRAS curve and a AD curve
.growth is caused by supply-side policies that increase productive capacity
.this shifts LRAS to the right resulting in an increases in real GDP and an decrease in PL
.there is also an extension of AD
what are the causes of economic growth
short run:
.shifts in AS or AD
.changes in AD is caused by changes in the components of AD and injections and leakages into/out of the circular flow of income
.changes in AS is due to a change in factor input prices
long run:
.supply changes due to alterations in the productive potential of the economy
e.g. labour market, product market and capital market policies
what are the causes of economic growth
benefits:
.rise in average household income
.reduced unemployment due to more labour is needed for an increased output
.rise in material standards
.reduction in poverty levels
.improvements in public services
costs:
.demand-pull inflationary pressure as spare capacity is used up
.rising income inequality
.relative poverty can rise
.
what is economic development
rise in peoples economic well-being and quality of life
what is the primary sector of an economy
production that includes the extraction of raw materials and agriculture
what is the secondary sector of an economy
production that includes manufacturing goods/processing raw materials
what is the tertiary sector
production that includes provision of services
information about the primary sector
.has lower production than secondary and tertiary
.less developed countries are more reliant on the primary sector = lower total factor productivity = more vulnerable to volatile commodity prices on international prices
what is the policy objective of sustainable development
meeting the needs of the present without compromising the ability for future generations to meet their needs
what is the relationship between economic growth and sustainable development
.economic growth can stimulate sustainable development
e.g.
.higher GPD per capita
.improvements in public services = higher taxation receipts can be used to fun gov spending on healthcare and education = improve life expectancy and mean school years
.firms through higher rates of profit can be able to invest in greener tech reducing negative externalities
why does economic growth always guarantee sustainable development
.environmental capital stock should not diminish over time
.there should be governance of resources
.inequality can still exist
what is the usefulness of GDP
Pro
.simple and objective measure
con
.only looks at the income of one country
what is the usefulness of GNI per capita(PPP$)
pros
.WB and the UN use it as it more accurately represents income of households and net income flow between countries then GDP per capita
.its the WB classification for countries
cons
.only includes formal transactions as informal distorts the data
.does not represent the distribution of income
.environmental factors, negative externalities, public goods and demerit goods aren’t included
what is the usefulness of HDI (human development index)
pros
.includes a broader range of factors compared than GNI per capita
e.g. represents social factors
cons
misses out environment and social factors
what is the usefulness of GPI (genuine progress indicator)
pros
.broader measure than HDI
cons
assigning economic value to environmental and social factors can be difficult = distorting accuracy of the measure
what is unemployment
num of people of working age in population who are seeking for a job but do not have one
what is voluntary unemployment
when the going wage rate is not sufficient to incentivise someone to accept a job
what is involuntary unemployment
when someone is unable to find employment but is wiling to work at the going wage rate
what is the policy objective for full employment
.when everyone who are economically active in the workforce who are willing and able to work at the going wage rate are in employment
.this means that the economy is making full use of its human capital stock = no spare capacity and economy is operating on the PPC as demand and supply of labour are equal
why does full employment not mean zero unemployment
.as the economy is dynamic there will always be frictional (people between jobs) unemployment due to changes in the demand for labour
.this is as there is occupational and geographical barriers
what is the labour force survey
measures the percentage of the workforce who are available for work, looking and willing to work
how does the ILO define unemployment
.people without a job, want a job, actively seek for a job in the last 4 weeks and are available to start in 2 weeks
pros and cons for the labour force survey
pros
.can be used to make international comparisons
.uses the ILO definition
cons
.its an estimate as it uses sample data to make a calculation
what is the claimant count
measure the num of people in the UK registered as unemployed and claiming JSA (job seeking allowance)
what is the requirements for receiving a JSA
.18 or over and under pension age
.working less than 16 hours a week
.available for full time
.actively looking for full time work
.not in full time education
.not claiming income support
.without illness or disability
pros can cons for the claimant count
pro
.measure is cheap and easy as the gov already has a record of the num of people claiming JSA
con
.excludes unemployed but are unable or unwilling to claim the JSA
what is frictional unemployment
.unemployment due to people being inbetween jobs
.does not indicate weakness in the economy and is short term
what is cyclical unemployment
.unemployment due to a downturn or recession
.is SR but can be damaging to the economy as a large amount to workers can be laid off at once
what is demand-deficient unemployment
.occurs due to a deficiency in AD
.SR
what is seasonal unemployment
.unemployment that arises during seasons of the year
.SR
what is structural unemployment
.occurs due to changes in the pattern of economic activity
.LR
what are the consequences to unemployment
.lower GDP- wasting economic resources and so working within the PPC
.lower standards of living
.greater income inequality
.pressure on government finances
.hysteresis effect- people who haven’t worked in a long time loss their skills and so making them less productive and making them unemployed in the LR
depends on:
.the type of unemployment
.rates of unemployment
.LR unemployed
.wages
what are the effects of full employment
.operating efficiently
.no negative consequences from high unemployment
.risk of experiencing demand-pull inflation when there is a rise in AD
.underemployment
what is inflation
rise in the average PL over time
what is deflation
fall in the average PL overtime
.inflation = below 0
what is disinflation
fall in the rate of inflation
what is hyperinflation
when inflation is extremely high
why is stable inflation a policy objective
.it provides price stability = decisions of firms and households remain the same = consumer confidence improves as they have a clearer expectation of the value their income and return in investment
.volatile inflation = distorted price signals = firms and households struggle to allocate
.volatile inflation = distorted wage signals = increased D for higher wages = increased cost-push inflation
.volatile rates = inflationary noise = distorts price signals = makes it hard to know the value of money in the furture = less confidence = less investment and savings
what is the UK’s inflation targets
CPI = 2% (+-1%)
inflation band = 1-3%
what are real values
values adjusted to inflation
what are nominal values
values not adjusted to inflation = current prices
what is the consumer price index(CPI)
measure of general price levels in the UK
excludes:
.housing costs and council tax
CPIH covers housing costs but not mortgages interest repayments
what are the causes of inflation
demand-pull = inflation due to a rise in AD in excess of AS = shifts AD right
cost-push = inflation due to rise in the cost of production = shifts SRAS up or left
cause of deflation
.lack of AD resulting in lower output
what are the consequences for inflation
.fall in the value of money = fall in the value of incomes and purchasing power (assumes incomes do not rise)
.fall in rate of interest
.causes uncertainty = firms will be unwilling to invest and consumers dont know whether to save or spend
.loss of international competitiveness of exporting firms and price competitiveness of domestic goods compared to imports
.there is fiscal drag- tax brackets aren’t adjusted = people who recieve higher incomes lead to higher tax bracket = fall in disposable income
what are the consequences of deflation
.lower prices = delayed spending as consumers and firms expect the price to fall further = firms reduce output = employment falls = fall in AD = further fall in prices
.reduces confidence = reduces effectiveness of gov policy measures
.leads to increase in the burden of debt on HH firms and gov = reduced spending
.deflation due to AD = bad due to AS = good
.good deflation = due to a greater productivity = increased international competitiveness of exports = improved current account on BoP = increased firms output = reduced unemployment as AD rised
what are the components of the balance of payments
current account
capital account
financial account
.net errors and omission
what is the current account
the value of the transacitions of g+s
includes:
.trade in goods
.trade in services
.net income from aboard investment = primary income
.net transfers = transactions between governments = secondary income
what is the capital account
record of all capital transfers
what is the financial account
transactions of financial capital between people within the country and people outside the country
.foreign direct investment
.portfolio investment- investment into equity markets or purchase of property
why is sustainable BoP a policy objective
