Economic preformance Flashcards
What is economic recovery ?
When short run economic growth occurs after a recession
How do shifts of AD work ?
When there is a change in any of the components of AD it will shift. However the impact on economy depends on the shape and slope of the supply curve.
For example in the SRAS upward slopping curve at low levels of output there is a lot of spare capacity so a shift in AD will bring about real increase in output whilst the price level stays the same.
However as output increases increases in AD will result in inflation as well as rising real output.
How do AS shifts work ?
When economies are working on their maximum production capacity the LRAS needs to shift in order for sustainable growth to occur
What is the trend growth rate ?
The rate at which output can grow on a sustained basis without putting upward or downward pressures on inflation. ( reflects annual average % increase in productive capacity of the economy )
What are the 2 types of fluctuations that happen during economic activity ?
- Seasonal - variation of economic activity resulting from seasonal changes in the economy by seasonal changes e.g weather, tourism etc
- Cyclical - taking place over a number of years e.g alternating patterns of contractions and expansions
What is an economic cycle ?
Upswing and downside in aggregate economic activity taking place over 4 to 12 years.
What is the difference between actual output and trend output ?
Actual output is the level of real output produced in a particular year which goes through the economic cycle: recovery, boom and recession.
Actual output differs from trend level of output ( maximum production ) when there are negative or positive output gaps.
What are the causes of change in the phases of the economic cycle ?
- Fluctuations in AD.
- Supply side factors.
- Role of speculative bubbles - rapid economic growth leads to rapid rise in speculative bubble in asset prices. once prices rise beyond value selling occurs causing the bubble to burst and there is loss of confidence.
- Outside shocks e.g Ukraine war leading to a supply shock.
What are the definitions of negative and positive output gaps ?
Negative - level of actual rate is less than trend rate ( productive potential )
Positive - level of actual rate is greater than trend rate ( productive potential )
What other measures can be used to identify economic cycles other than GDP ?
- In a boom there is excess demand which leads to higher prices leading to rise in wages. Therefore there is an inflation measure.
2.Employment and unemployment
- Investment
What are the benefits of economic growth ?
- Increases living standards and people’s welfare
- Provides new and environmentally friendly tech
- Increased life expectancy
- Reduced poverty
5.Produces fiscal dividends - greater tax revenues that can be used to correct market failures, provide infrastructure and pay national debt
What are the costs of economic growth ?
1.Uses up finite resources that cannot be replaced
2.Pollution and environmental degradation
3.Widen inequalities
4.Leads to urbanisation and spread of huge cities so less good land for agriculture
5.In early phases it leads to rapid population growth meaning more mouths to feed and more poor people
Define full employment
When the number of people who are willing to work equals the number of employees employers are willing to hire
Define frictional unemployment
Unemployment that is usually short term and occurs when a worker switches between jobs
What are the 2 causes of frictional unemployment ?
1.Geographical immobility of labour - when workers are unwilling or unable to move to another location for work
2. Occupational immobility of labour - when workers are unwilling or unable to move from one type of job to another e.g because of lack of skills
Define structural unemployment
long term unemployment occurring when some industries are declining e.g deindustrialisation, or when there is increases automation or when production requires new skills that are not available.
Therefore it can also be associated with occupational and geographical immobility of labour.
An example is an aging population
Define cyclical unemployment
Also known as demand deficient unemployment, caused by a lack of aggregate demand in the economy e.g during a recession or depression
How can represent cyclical demand graphically ?
- On AD AS diagram where AD is shifting inwards
- Shifting from on the PPF curve to inside
What is stagnation ?
High inflation and low growth
Define seasonal unemployment
unemployment arising in different seasons of the year of the year e.g holiday season
Define real wage unemployment
Unemployment caused by real wages being stuck above the equilibrium real wage level.
fig 8.13 pg 204
Why do free market economists believe that real wage unemployment is temporary
Because they believe that as long as labour markets are competitive, market powers cut down real wages back to the equilibrium levels to get rid of excess supply of labour.
However if the stickiness of real wages is due to trade unions market mechanisms fail and so it may require government intervention.
What is the natural rate of unemployment ?
the rate of unemployment when the aggregate labour market is in equilibrium
What are the consequences of unemployment ?
- It means that economy has failed to operate in its potential as there are idle resources in the economy
- Reduces an economy’s international competitiveness because it reduces incentive for firms to invest in technologies that will help increase the competitiveness of that country - they lack the skills and their labour is cheaper so use labour intensive production instead.
Another reason for low investment is that firms would not like to be subjected to high taxes in order for government to pay UC.
- Low growth - stagnant economy
What are the 5 types and causes of unemployment
- Seasonal
2.Cyclical
3.Frictional
4.Real wage
5.Structural
What policies can governments use to tackle unemployment ?
It depends on the cause of unemployment
1. Occupational immobility: retraining schemes and supply side policies
2.Geographical - help with rent, better transport or social housing
What are the 2 causes of inflation ?
Demand pull inflation and cost push inflation
Define demand pull inflation
rising price levels caused by an increase in aggregate demand shown by a shift of the demand curve to the right.
Note:
If the economy is in deep recession then an increase in demand doesn’t impact inflation too much because it is creating jobs and output. Where as if it operating at max capacity any outward shift of AD solely results in inflation with no real increase in output.
An economy is able to temporarily work beyond its max capacity by overutilizing its factors of production
what causes the demand curve to increase
an increase in any of the components of aggregate demand introduces demand pull inflation
HOWEVER: if the government spending and investment increases then it will shift the LRAS which can offset the demand pull inflationary levels.
When is the economy preforming at its maximum/normal capacity on an AD /AS diagram ?
When AD intersects the LRAS
Define cost push inflation
rising prices due to an increase in the costs of production - upward shift of SRAS
e.g increased wages or increased world commodity prices - wage cost inflation and import cost inflation
Define disinflation
when the rate of inflation is falling
How can changes in other countries affect UK inflation ?
- Import inflation from booming economies.
2.When other countries are experiencing recissions demand for UK exports fall which can result in deflation in the UK due to falling demand
3.USA - export demand and China - cheap imports impact UK inflation to a great extent
Why is it important for governments to know the exact cause of inflation
To be able to employ effective policies
What is the monetary theory of inflation
Fisher’s equation:
MV=PQ
m- money supply
v- velocity of circulation of money
p-price level
q- quantity of output
price level increases when money supply or velocity increase whilst quantity of output can not change
What are the several costs of inflation ?
