Economics (paper 2) 🔥 Flashcards
Economic growth definition
Growth in real GDP over time
Real GDP
GDP adjusted for the impact of inflation
GDP (Gross Domestic Product)
The total value of goods and services produced in an economy annually
Economic boom
A period of high economic activity and employment levels
Recession
At least 2 consecutive quarters of negative economic growth
Objectives of Macroeconomics
• Economic Growth
• Low unemployment
• Balanced balance of payments
• Price stability
Economic quarter
A period of 3 months
Employment rate
The percentage of a country’s working population that are employed
Unemployment rate
The percentage of the labour force (economically active population) who are unemployed
Claimant count
A method of measuring unemployment by counting the number of people claiming unemployment benefits
What are the 4 types of unemployment?
• Frictional
• Seasonal
• Structural
• Cyclical
Frictional unemployment definition
Unemployment caused by time lags in workers moving between jobs
Seasonal unemployment definition
Unemployment caused by a fall in demand at certain times of year
Structural unemployment definition
Unemployment caused by the permanent change in the structure of the economy
(eg tech advancement or new industry growth)
Cyclical unemployment definition
Unemployment caused by a recession but goes away after a boom
Fiscal policy
The use of government spending and taxation to influence aggregate demand and achieve a macroeconomic objective
Monetary policy
Policy that aims to control the total supply of money in economy to achieve the governments’ objectives, particularly sustainable price (inflation)
• (Eg adjusting the interest rate)
Aggregate demand
Total demand for goods and services in an economy
Aggregate supply
Total supply of goods and services in an economy
Benefits of economic growth
• Higher average incomes (= better standard of living)
• Lower unemployment (due to higher output demand)
• Improved public services (from more tax revenue)
• Environmental protection
• Investment (more profits)
• Increased consumer confidence
Costs of economic growth
• Inflation (from increased demand)
• Pollution (from more production, harming health & env)
• Congestion (more output = more goods transported)
• Depletion of resources (non-renewable resources become at risk of being used up)
• Inequality (uneven spread of economic growth)
What happens during an economic boom?
• More goods and services are produced
• GDP rises
• Unemployment rate decreases
• Demand increases as consumers have more real purchasing power
• Excess demand can lead to prices rising (inflation)
What happens during an economic recession?
• People are spending less
• Therefore less goods and services are produced
• GDP declines
• Firms no longer need as much workers
• Cyclical unemployment occurs
• Deflation takes place when firms reduce prices to increase demand
Different types of income
• Wage/Salary (reward for labour)
• Rent (reward for letting others live in owners property)
• Interest (reward for saving)
• Profit/Dividends (reward for enterprise)
• State benefits (transfer payments from gov)
Reasons for the uneven distribution of income
• Income-earning assets are distributed unevenly
• Differences in wages
• Reliance on benefits (unemployment)
• Age (The older tend to have more experience and skills leading to higher paying jobs)
• Gender (Women tend to go for maternity leave + gender bias means they receive lower pay)
Factors that contribute to economic growth (6)
• Lower interest rates and tax
• Reduces the cost of borrowing and encourages consumer spending
• Increased wages
• Increases disposable income
• Increased government spending
• Improves services and infrastructure
• Devaluation (fall in the value of exchange rate)
• Allows for more exports as they’re cheaper
• Financial stability
• Encourages banks to lend
• Firms will be more willing to invest
• Technological improvements
• Improves productivity
• Increases revenue
How to calculate rate of growth
(Change in GDP / Original GDP) x 100
What does Phillips Curve show?
• The inverse relationship between inflation and unemployment
• As unemployment increases, inflation decreases
What are the features of the economic cycle diagram?
• Economic boom
• Economic downturn
• Economic recovery
• Long run trend rate of real GDP
• Axis: Real GDP and time
What is the trend rate of growth?
The speed limit an economy can grow without overheating
Economics definition
The study of production, distribution and consumption of wealth in society
Who is the chancellor of Exchequer?
Rachel Reeves
What is the chancellor of Exchequer’s role?
• They are the government’s chief financial minister
• Is responsible for raising revenue through taxation or borrowing
• And for controlling public spending
Income definition
A flow of money that you receive overtime for providing services of the factors of production
Dividends definition
Money paid out of a company’s profit to its shareholders
How does a job’s supply and demand affect income?
When jobs are high in demand and supply is low, wages rise therefore income also rises
Wealth definition
The stock of assets an individual, company or country possess at a certain point in time
Examples of wealth
• Luxury cars
• Mansions
• Businesses
• Private Jet
• Ps5
• Savings
Which examples of wealth generate income?
• Property (generates income from rent)
• Businesses (generates income from profit)
• Savings (generates income from interest)
What is neither an example of income or wealth?
Pension contributions
Gross income
Income received before taxes are taken or benefits given out
Net income
Income available after any deductions/additions made (disposable income)
Why is wealth unevenly distributed?
• Inheritance
• Families may own more possessions/assets which can be passed down
• Savings
• People with enough income may save some of it which receives interest and increases wealth overtime
• Purchasing property (mansions/shares)
• The rich are able to afford shares which make dividends and therefore are able to reinvest to buy more shares increasing company stakes
• Enterprise
• Money can be invested to start a business and its worth/value can increase generating more wealth
Example of entrepreneur
• Richard Branson
• Started with a record shop that went on to generate lots of revenue from CDs
• Now owns a business empire that’s worth billions of pounds (Virgin Media)
Consequences of the differences in income and wealth
• Poverty and deprivation
• Poor housing
• Poor health
• Inequality of opportunity
General price level definition
The average price of a basket of goods and services within an economy over 12 months
Deflation meaning
When general price levels fall over a period of time
What key events occur during inflation?
• The general price level increases
• Therefore the cost of living also increases
• As a result the purchasing power decreases
Consumer price index meaning (CPI)
A method used to calculate inflation through tracking the price change in a basket of goods (products spent on by the average household)
Benefits of inequality
• It provides an incentive where higher income motivates people to be more productive
• It creates a trickle down effect where individuals on higher incomes spend more in an economy leading to more income for those on lower income
What effect does inflation have on interest?
It makes the rate of interest lower therefore debt becomes cheaper
2 causes of inflation
• Too much demand (demand-pull inflation)
• A rise in costs (cost-push inflation)
What happens during demand pull inflation?
• It’s where consumers demand and compete more for goods and services pushing the price level up
• It happens when incomes are high and consumer confidence is increased as a result of low unemployment and an economic boom
What happens during cost push inflation?
• Happens when the cost of production increases eg fuel, wages, interest on loans
• Since firms want to maintain profit they pass the costs to the consumers
• This leads to a rise in the general price level
What’s one benefit of cost push inflation?
An increase in the cost of production through wages can lead to increased productivity as workers are more willing to work
What’s a wage price spiral?
When demand pull inflation leads to cost push inflation and vice versa in a cycle
Consequences of inflation for consumers
• Loss of consumer confidence (due to lack of price stability therefore they save)
• Shoe leather costs (consumers spend longer looking for the best deal)
• Real income falls (if nominal income is the same, purchasing power falls and cost of living increases)
• Consumers as debtors gain (debt gets cheaper)
• Income redistribution (those working elastic jobs may not get a pay rise as there’s supply surplus)
Consequences of inflation for producers
• Increased production costs (price of input may increase minimising profit)
• Menu costs (updating pricing information which increases cost)
• Unemployment (cost of production increases so firms lay off workers)
• Producers lose as creditors (value of loans fall)
• Low business confidence (volatile prices make firms less willing to invest reducing productivity)
Consequence of inflation for savers
The purchasing power of money is reduced and therefore the real value of saving falls
Consequences of inflation for government
• They gain as debtors (as real value of debt falls)
• They spend more on benefits (as unemployment increases, benefit claiming does too)
• Government receive more tax income as workers earn more
• They spend more as a major employer as public sector workers demand higher wages
Disinflation meaning
When the general price levels increase at a lower rate
Government spending
Total amount of money spent by the government in a given period of time
Direct tax meaning and examples
• Tax on income or wealth
• Eg Income tax, National insurance contributions, Corporation tax, Inheritance tax
What is capital gains tax?
Tax paid on the profit when an asset is sold
What is corporation tax?
Tax paid by firms on the profits made
Indirect tax meaning and examples
• Tax on spending
• Eg VAT and Excise duties
What is VAT?
20% tax paid on most goods and services
What item does VAT not mainly apply to?
Food
What are excise duties?
Taxes on specific goods eg alcohol and petrol
Examples of local tax
• Council tax (paid on the value of your home)
• Business rates (paid on value of business’ property)
Budget deficit
• When a government’s expenditure is more than government revenue
• This increases economic growth and employment
Budget surplus
• When a government’s revenue is greater than their expenditure
• This reduces economic growth and inflation
Balanced budget
When a government’s revenue is equal to their spending
What is the value of one’s personal allowance? (tax free amount)
£12,570
What do economic agents do?
They make decisions about goods and services
Costs of fiscal policy
• Budget deficit would increase incomes for consumers but there’s no guarantee of them spending it
• As incomes rise, much of the extra income goes to imported goods which increases balance of payment deficit
• This also causes inflation
• Opportunity cost is also present
Progressive tax meaning
Taking a greater percentage of tax the higher the income
• (This reduces the inequality of income and wealth)
Consequences of redistribution of income
• People are reluctant to take higher paying jobs
• People are happy to rely on state benefits instead of finding a job
• Some high earners may move abroad to escape tax
• People may engage in tax avoidance/ tax evasion
• High taxes are a disincentive to invest
• These all reduce economic growth
What do governments want to maximise?
Welfare
Redistribution of income meaning
When the government adjusts the distribution of income eg through tax in order to reduce inequality
What committee sets the interest rates to control inflation?
Monetary Policy committee (MPC)
Who do the Monetary Policy Committee work for?
The Bank of England
Effects of contractionary monetary policy
• If interest rates increase, people save more as reward for saving increases
• Debt increases so disposable income decreases
• Consumers spend less causing profit of firms to decrease
• Employment and economic growth decreases
• However if change in IR is small, saving won’t be affected much
Quantitative easing meaning
When the government make more money available to financial institutions
• (Form of monetary policy)
Effects of quantitative easing
• Banks have more money to lend so the supply of money increases and the cost of borrowing falls
• Reward for saving also falls
• With more borrowing, households spend more and businesses invest more
• Assets price rises- as the interest rate decreases, mortgages and housing demand increases
• Disposable income rises as interest rate and borrowing costs fall
• External value of the currency falls - ‘hot money’ flow between countries in response to IR leaves money behind increasing its supply
• Therefore employment levels increase from increased spending & demand so economic growth and inflation occurs
What are inferior goods?
Goods where when people’s income rise the demand for it falls
What are the main objectives of quantitates easing?
• Economic growth
• Inflation (price stability)
Liquidity meaning
How easily an asset can be convert into cash without affecting its price
Governments bonds meaning
Loans you give to the government in exchange for a promise to get your money back with interest
What is expansionary fiscal policy?
• Increasing government spending
• Decreases taxation
How does expansionary fiscal policy affect the economy?
• Increases price stability (inflation occurs due to more demand)
• Reduces unemployment (increases reward for labour)
• Increases economic growth (supply of labour increases)
• More balanced balance of payments
How can the government use fiscal policy to redistribute income?
• Progressive tax
• Inheritance tax (income-earning assets)
What’s a benefit of unemployment?
• Would help keep labour costs down
• Maximises profit
• Keeps the firm competitive
Costs of unemployment to individuals
• Individuals would have lower living standards as they are able to buy less goods/services
• More difficult to find employment as their skills become outdated overtime
• Cost to taxpayers as more benefit payments must be funded
Cost of unemployment to government
Could be in a budget deficit as more money is spent on benefits than received from tax revenue
How do we calculate CPI?
• The initial/base period is numbered 100
• The basket of goods are watched overtime by government
• Any price changes would be converted to show % change from the base
Hyperinflation meaning
When prices rise at a very high rate eg 1000% per year
Effect of expansionary monetary policy on borrowing
IR decreases so:
• Cost of borrowing and reward for saving increases
• Loan prices go up as demand for them does (eg mortgages)
• House prices go up and they become more valuable
• Household confidence increases so they spend more
• However in the long run as interest payments get high, disposable income decreases so borrowing also decreases
Effect of expansionary monetary policy on consumer spending
As IR decreases:
• CS increases
• Demand in the economy increases
as consumers gain purchasing power
• Leads to increased production and employment as demand increases
• More fossil fuels are burnt and environment is harmed
• Budget increases as more tax is paid
• So public services get improved
• Inflation also occurs and people save less
• However, when IR decreases, the elderly who rely on pensions and savings would earn less interest
• This reduces CS
Supply-side policy definition
A policy that increases the productive potential in the economy, which leads to the ability to supply more goods
Examples of demand side policies
• Monetary policy
• Fiscal policy
Advantage of supply side policies
They can increase GDP without the drawback of inflation
Flow of money meaning
Workers receiving an income for labour
How can productivity be increased? (Supply side policies)
• Deregulation to increase competition
• Education and training
• Reduce power of trade unions
• Decrease direct taxes on firms and workers
• Subsidies
How does education and training increase productivity?
• A government invest in education, quality of labour improves
• Human capital also improves
• This increases productivity so output of goods and services services also improve
How does reducing the power of trade unions increase productivity?
• Ability to go on strike is reduced
• More people can commute to work earlier
• Productivity increases
• Output and supply increases
How does reducing direct tax on workers increase productivity? (eg income tax)
• Increases incentive to join workforce
• Reduces incentive to take benefits
• Increases likelihood of working taking promotions
• Reduces poverty trap as you have more disposable income
• Productivity, output and supply gets increased
Examples of financial institutions
• Commercial banks
• Central bank
• Building societies
• Insurance companies
Utility meaning
When consumers maximise disposable income by getting the most out of products
Externality meaning
An effect of economic activity on third party
Negative externality
A harmful effect of an economic activity on a third party (eg pollution, deforestation, less sales)
Positive externality
A beneficial effect of an economic activity on a third party (eg cleaner environment, more sales, satisfied consumers, less crime)
Tax meaning
Compulsory payment to the government
Subsidy meaning
Money paid to producer to reduce cost of production
How is taxation used to correct the existence of negative/positive externalities?
• Indirect taxes increase cost of production for firms
• Increased cost is passed onto consumers
• This reduces demand for product therefore reducing negative externalities from product
• Tax on a product with positive externalities can also be set at lower rate to encourage supply
Costs and benefits of using tax to correct externalities
Cost:
• If tax is regressive, a larger proportion would be taken from those on lower income
• Reduces standard of living and increases inequality
Benefit:
• Tax revenue which can be used to subsidise goods with positive externalities
Regressive tax meaning
When the same tax amount is taken for everyone
How are subsidies used to correct the existence of externalities?
• Decreases cost of production
• Increases supply as producers have more profit incentive to make output
• Equilibrium price decreases (on graph) therefore demand rises
• Benefits for third parties are increased
Costs and benefits of using subsidies to correct externalities
Costs:
• Opportunity cost for government as they give up investment in another service eg healthcare and infrastructure
• Isn’t effective on goods with inelastic PED as demand barely changes
Benefit:
• Leads to more jobs being created in subsided market as demand for labour increases
What 5 things do the government use to correct externalities
• Tax
• Subsidies
• Information Provision
• Regulation
• State Provision
Information Provision
• The government provides information to encourage people and businesses to change their behaviour
• Eg back of cigarettes packets
Regulation
• Rules to control how individuals and businesses behave
• Eg Driving age limit
• ULEZ
State Provision
• Goods and services provided directly by the government (public goods)
• Eg Defence
• Military
• Schools
• NHS
Imports meaning
• Goods and services services that are bought from overseas into the country
• Eg bananas, wine, refined petroleum into UK
Exports meaning
• Goods and services that a country sells overseas
• Eg machinery, medicine and weapons out of UK
Why do countries trade?
• They have different allocations of resources (land, labour, capital, enterprise)
• Producers and consumers need things that may not be available in their country
• Eg oil
How can international trade solve the economic problem?
• It can increase the productive potential of a country and encourage economic growth
• This can incentivise better political relationships
How does trade benefit consumers?
• Wider range of access to products
• Cultural diversity
• Lower prices from increased competition
• Quality of product increase from innovation due to competition
How does trade benefit producers?
• Gives them advantage over other businesses that have limited supply
• Access to larger market worldwide increasing revenue and profit
• Cheaper costs of production as resources can be cheaper abroad
• Specialisation improves efficiency leading to economies of scale
Balance of payment definition
A record of all financial transactions between one country and the rest of the world
Current account definition
A record of trade in goods and services, investment income and transfers between one country and the rest of the world
How does money enter/leave the UK?
• Trade in goods
• Trade in services
• Income flows
• Transfers
Trade in goods meaning
Trade in tangible products
Trade in services meaning
Trade in intangible products
Income flows
• Earnings on investment abroad
• Eg Interest that a Uk investor makes on an investment in a German company
Transfer payments
• Transfers of money from governments/ consumers to individuals/organisations
• Eg Remittance payments (money sent back home)
Free trade agreement definition
Arrangement to move goods and services between countries without restriction
Current account deficit definition
Where the total revenue coming in from overseas is less than the total spending leaving the Uk (leakages > injections)
Current account surplus definition
Where the total revenue coming in from overseas is greater than the total spending leaving the Uk (injections > withdrawals)
Balanced current account definition
When injections are the same as withdrawals
Positive effects of having a current account deficit
• More imports mean lots of raw materials to create more exports
• Reduces inflation as exchange rate falls
• Increases international competitiveness exports are cheaper
Negative effects of having a current account deficit
• Falling demand for exports results in lower employment
• Reduces productivity for making exports
• Causes exchange rate to depreciate
• Increases country’s debt
Reasons for a current account deficit (eg less exports than imports)
• Structural problems in the economy (domestic exports are overpriced/poor quality)
• Falling incomes from people overseas which reducers demand for exports
• A rise in the exchange rate
Reasons for a current account surplus (eg more exports than imports)
• Products are of high quality and low prices making them more attractive
• Lack of domestic growth so exports are cheaper and can be done more
• Net inflow of investment income (investment from foreign firms is not as high as investment from British firms collected from overseas)
Exchange rate meaning
The price of one currency in terms of another
Currency meaning
The system of money used in a country
Where is the exchange rate on a Supply Demand Curve
The equilibrium
Factors affecting demand for a currency
• Goods and services becoming more desirable
• Rise in foreigners’ income
• Interest rates rise making savings more attractive
• Being more attractive to investors (Lower corporation tax = more profit)
Factors affecting supply of a currency
• Attractiveness of other countries (ease of setting up, lower corp tax)
• High IR in foreign countries
• Increasing domestic income level (so demand for imports and other currencies rise)
• Speculation in foreign countries (hot money flow)
SPICED meaning
Strong Pound Imports Cheaper Exports Dearer
Types of diseconomies of scale
• Communication
• Motivation
• Co- ordination
As a company expands, these things become weaker
Effects of a falling exchange rate on consumers
• Higher prices of imported goods/services
• Standard of living decreases
• Inflation doesn’t rise as quickly (disinflation)
• Products become more affordable
Effects of a falling exchange rate on producers
• Higher raw material prices
• COP increases which causes supply to decrease
• Prices of products increases so Quantity of exports decreases
• Unemployment increases
• Businesses in tourism grow
• It’s cheaper for foreigners to exchange
money into country’s currency
• More exports as it’s cheaper to buy the currency
• Leads to a current account surplus
Structure for an Analyse question
Structure for an Evaluate question
