Economics Unit 2 Flashcards
0
Q
Circular Flow Model (BEGH)
A
- Households
- Businesses
- Government
- External Sector
1
Q
Key Objectives of Macroeconomic Policy (PSFHIE)
FIEPSH
SHIEPF
A
- Price Stability i.e. Low Positive Inflation
- Sustainable Growth of Real GDP (National Output)
- Falling Unemployment
- Higher Average Living Standards
- Improved Global Competitiveness
- Equal Distribution of Income and Wealth
2
Q
National Income
A
Measures the monetary value of the flow of output of goods and services produced in an economy
3
Q
Income
A
A flow of money going to factors of production
4
Q
Wealth
A
The current value of a stock of assets owned by someone or society as a whole
5
Q
Examples of Income
A
- Wages and salaries from jobs
- Rental income from property
- Interest from savings
- Profits flowing to shareholders
6
Q
Examples of Wealth
A
- Savings in bank accounts
- Ownership of property
- Shares/ Stocks in businesses
- Wealth held in pension schemes
7
Q
Aggregate Demand
A
Consumption + Investment + Government Spending + (Exports - Imports)
8
Q
Factors Affecting Consumer Spending
A
- Real Disposable Income
- Employment and Job Security
- Household Wealth
- Confidence (Animal Spirits)
- Market Interest Rates
9
Q
Factors Affecting Household Saving
A
- Real Interest Rate
- Price Expectations
- Availability of Credit
- Unemployment
- Consumer Confidence
- Taxation of Savings
- Trust in Banks
- Need to Pay Back Debt
10
Q
Factors Affecting Investment
A
- Profits and Taxes
- Business Confidence
- Interest Rates + Availability of Finance
- Actual & Expected Demand
11
Q
Rise in Business Investment
A
- New capital can boost productivity and creates additional capacity to supply
- Extra demand in investment goods and can lead to strong multiplier effects on the level of GDP
- Boost a country’s competitiveness and improve trade balance
12
Q
Evaluation of High Investment
A
- Some of the investment (capital) goods might be imported, leakage from the circular flow
- Might be a lengthy time lag between workers getting more capital and productivity rising
- Some capital investment replaces labour and therefore might cause short term unemployment
- Level of the exchange rate affect competitiveness
13
Q
Reasons for Low Investment
A
- Weak business confidence
- Low profits
- High level of spare capacity
- Exports hit by weak demand in overseas markets
14
Q
Shifts in SRAS (Input costs)
A
- Wage costs per unit of output
- Labour productivity
- Raw material and component prices
- Interest rates, business rents, fuel and energy costs
15
Q
Shifts in SRAS (Business taxes, subsidies and imported costs)
A
- VAT, environmental charges/ employment taxes
- Scale and size of government subsidies to certain industries
- Costs of meeting business regulations
- Cost of imported components (affected by exchange rate + fluctuations of world commodity prices)
16
Q
Examples of Supply Shocks
A
Hurricanes, Tsunami and Droughts can have an effect on a country’s national output
17
Q
External Factors affecting AS
A
- World Oil and Gas Prices
- Energy Prices/ Costs
- Foodstuff Prices
- Import Tariffs
18
Q
Factors affecting LRAS
A
- Higher Productivity of Labour and Capital (rise in output per person employed)
- Increased Labour Market Participation (growing labour supply and a rise in the number of people in work)
- Gains from Innovation and Enterprise (determine competitiveness)
- Capital Investment (capital spending by businesses, inward investment from abroad and the government)
19
Q
Increasing LRAS (Productive Potential)
A
Changes in
- Labour supply available for production
- Stock of capital inputs
- Efficiency of allocations of factor inputs
- Quality of factor inputs/ Productivity of inputs
- State of technology
20
Q
AS Productivity
A
- Fall in labour productivity leads to a rise in firms’ costs of production
- Higher productivity allows businesses to pay higher wages and achieve increased profits at the same time
21
Q
Fall in AS
A
- Outward migration of workers
- Collapse in business capital investment
- Higher production costs
- Effects of a major natural disaster
22
Q
Consequences when AS falls
A
- Cause higher inflation
- Reduce real GDP/ National Output
- Reduce unemployment
- Increase BoP current account deficit
23
Q
Negative Output Gap (II)
A
- When actual GDP is less than potential GDP
- Some factor resources are under utilised
- Higher unemployment
24
Positive Output Gap (II)
- Actual GDP is greater than potential than GDP
- Some resources working beyond usual capacity
- Main problems is rising inflationary pressures
25
Causes of Recession
- Rise in global commodity prices
- Higher interest rates leading to more expensive loans
- A rise in taxation / Cut in government spending
- Steep decline in the level of house prices
- Lower business confidence cuts investment and may lead to job losses
- Declining consumer confidence leads to less spending and more saving
26
Shocks
Unexpected events cause changes in the level of demand, output and employment
27
External Shocks to AD
- A large rise or fall in the exchange rate
- A recession or boom in one or more main trading partner countries
- A slump in the housing market or a change in the level of share prices
- A event such as the global financial crises which caused a fall in the supply of credit
28
Short Term Effects of Recession
- Falling demand can cause more businesses to fail and profits fall
- Planned investment declines, hitting industries that make capital goods
- Drop in AD causes a fall in demand for labour
- Recession causes a decline in tax revenues and more welfare spending (increases the budget deficit)
29
Long Term Economic/ Social Effects of Recession
- Rising structural long term unemployment
- Low investment can reduce the capital stock
- Persistent budget deficit and rising national debt
- Falling real wages reduces living standards
- Widening inequality of income and wealth
- Social costs from rising relative poverty
30
Costs of High House Prices
- Worsens affordability for first time buyers
- Increases level of mortgage debt
- Increases wealth inequality
- Causes an increase in demand for and cost of renting property
- Worsens geographical mobility of labour
31
Benefits of House Prices
- Increases wealth of home owners
- Boosts consumer confidence
- Stimulates an expansion of new house building
- Increases tax revenues from stamp duty
- Improves the financial stability of the banks
32
Multiplier Effect
A change in one of the components of AD can lead to a multiplier final change in the equilibrium level of GDP
33
Housing Markets (AD)
- Unemployment rises
- Labour intensive, demand and output have large multiplier effects
- Low consumption, high savings
- Falling house prices, fall in consumption
- House affordability is high
34
Multiplier Effect (AS)
- When AS is highly elastic, multiplier effect likely to be high
- When AS is inelastic, hard for AS to expand to meet rising AD
35
High Multiplier Value
- Economy has plenty of spare capacity
| - Propensity to import and tax is low
