Essay Q Flashcards
Explain the main problems for an econ of having a large positive output gap
demand-pull inflation as too much money is chasing too few goods
o cost-push inflation due to labour shortages
o wage-price spirals
o rising imports as consumption is rising and possible leakages rise
o falling exports if inflationary pressure occurs
o an increase in the current account deficit
o unsustainable asset price rises
o potential effects on the exchange rate
What to consider when discussing budget deficit
Sturctural or cyclical
Arguments why a currnet account defiifct may need to be reduced
it could indicate lack of productivity
o it could cause depreciation of currency
o possible risk of capital flight
o it could cause problems for a country’s reserves
o a surplus on the financial section of the balance of payments increasing international
indebtedness
o deflationary pressure
o it could indicate structural weaknesses
o effects on jobs such as structural unemployment
Method to calculate the rate of inflation from index numbers
Minus index no (y2) from previous index no (year before)
Divide that number by origional number 9y1) x 100
How do subsidies improve competitive advantae
Lower average costs therefore firms lower prices where demand is elastic, increasing competition adv, thus sales, thus boost exports
Or
Subsidies rd increase innovation/quality and thus gain com adv where demand less price sensitive in international markets boost exports
Which industries should be targetted by protectionist measures in developing country
Reduce in Industries unlikely to have comparative adv to give consumers access to cheaper ipmorts and thus benefitting from the income effect
while identifying those industries that have comparative adv to exploit export led growth
For 10 markers p3
3x points explain and judgement with limitations
Need overall conc
National living wage 25 marker
May help imporve living standards
Exports
Real wage unemp
Nat living wage- improve living standars
Reduce those living in poverty yet are employed, poverty defined as having an income les sthan 60% nat mediam
Poor quality ofl life- individ less disposable income to spend on gs from which derive utility and pleasure
Alieviate ppressur eon gov welfare spnening, enabling gov to spend on imporving capacity of econ
Increased spending on education create silled workforce- innovative and productive
May reduce unemp trap and replacement ratio- alongside cuts in beneifts- work more financially rewarding
Exports- nlw
Increase in prices- cost push inflation,
Increase cost british exports less comp
Esp with weak productivity growth
However- unlikkely to be the case as exports high value added- workers relatively skilled paid more than min wage
May impact smaller businesses
Employment- nlw
Increase unemp real wage unemp with excess supply
Shift with greater automation- technological unemp= labour to capital increasing productivity
But Obr predicted this would lead to 60,000 unemp in 2020- small number of 1.4mill
Depends on elasticity for demand- currently inelastic even in less skiled industries such as retail hospitality- we are service bassed econ
Boost emp due to increased ad with higher wages
Monospony power many sectors - min wage boost emp and reduce exploitation reduce welfare payments universla credit to working poor that employers such as amazon appeared to have been exploitning
Gov of sri lanka should cut its spending to reduce its debt
No
-cyclical v structural
-has financed merit goods- which should not be cut
Y
-accelerating inflation- undermine confidence- finance spneding through print more money
-areas to cut spending
-increase taxation
Context nat debt
As a result of covid, nat debt in many developed and less developed econ rose above 100% of gdp
Danger of high gov debt
Esp less developed econ such as sir lanka
If creditors lack confidence in econ ability repay its debts and unwilling to finance futhrer loans may cause signif fall gov spending ad
Render econ bankrupt
In order to cut debt where should cut
May fall anyway due to automatic stabilisers
-not welfare on education- damage lt econ growth
-not on healthcare,nutrition, safety net programmes could increase absolute poopverty and inequalit
-could postpone infrasturcture- or possibly aim to attract foriegn aid
-could cut military spending
or examples gov failure or waste due to inefficiney- excess ciil servants- spending reduced without damaging growth
Cut debt through increasing taxes
Higher ncome groups with bigger share nat income, beneffitted strong growth
Tax riases careful avoid laffer curve- avoidance and brain drain
Indirect taxes raised on demerit goods- cigarettes and alcohol hypothecated cover healthcare costs
Raise tourism taxes and excise duties on luxury goods sold to tourists- sri lanka luxury and so inelastic destination
Limiting tourism using pigouvian taxes could limit pollution and neg externlaitis whilst raising tax rev
Sucessful in luxury destinations such as glapagos islands
Global slowdown
Slowing increase in gdp
Less than 3% grothh
As pop may increase morme than increase gdpp
Uk mahor trading partners
Eu
Where would a decrease in exports affect
In manufacturing areas such as north and midleands
May lead to negative multiplier effect- contraction output less emp, less consumer spending less ad cycle cont
Exports in uk strnegth
6th bigest world
Impmact of decrease exports on investment
Decrease exports
Decrease gdp
Lead to decrease investment accelerator
When does crowding out effect not happen
When in recession or neg output gap
Why do exporters produce less in global recession
Produce less because lss demand in recession
Impact of sustained global slowdown on living standards
Decreased demand birtish exports- increase emp as cut output- lower gov beneifts, less disposable income, purchaisnggoods and servcies
Fall in exports may lead to negative multipleier effect esp manufacturing regions of uk
Diagram neg output gap
Reduction in investment- accelerator- less comp, worse living standards as shut
May lead to reduction in demand imports, as whilst in theroy cheaper imports from less grotwh oevrseas, depreciaition of pound 9iin source) makes more expesnive, reducing demand income elasticity imports such as foirgen holidays
Impact of min wage on exports
In therry increase cost of production less comp
But less likley as uk most likely high value added or less lab internsive manufacuring exoprts
But for smaller firms are liekly to lack iin competition
What does real wage unemployment rely on
Dpend if above equlibirum
Elastciity supply and demand of labour- both of which relatively inelastic due to labour shortage
Esp in skilled but also unskilled as since brexit- less wokrers and if need overseas firmes help support visa
Thus less slikely to lead to real wage unemp
Also if in monopsony labour market or emp monopsony employer then real wage unemp less likely as higher employment levels and wages accepted
Who sets min wage
Independent boyd
Low pay commison
Work to not set a t levels create unemp
History of min wage
Major remove
New labour inrtoduce and gradually introduce
Osbourne nlw
History min wage- major
Real wage unemp exploiation
Decrease wgaes, emp not increase
Thus disproves negative impact of min wage
Min wage under new labour
Reintroduced as clear min wage does not increase unemp
Cautious so set low as close to equilibrium level but diff deterine what level this is
Osbourne min wage
Inrtoduced nlw
Evidence min wages below equlibrium wages
Moonopsonist asda amaxion next pay below as could
And would encourage indivdi to claim working tax credits- thus part of austerity plan
Grants for amazon
Set up in areas high unemp eg wales scot
Has unemp recently risen with signif min wage ncrease
Only 3.8 to 4.2 and may be linked to other supply side factors
When answering q 4 marker on nairu calculatig
Compare when known recessions
Suggest how much fallen by
Term for sickness benefits
Personal indpendence payments
Can a recession ever be avoided
No just mitigated and impact reduced
Australia up until 2020 saw no recession for 30y
Montetary policy to prevent recession
More effective to fine tine the con to maintain ad and keep econ at its nat rate output
But monetary policy cannot prevent demand side and supply side shocks that could cause recessions
But stop go cycles of 50-70s suggest fiscl policy less effective to fine time econ due to greater time lags
In what countires is greater risk of brain drain
Ledcs and medcs with medical staff teachers engineers
Tourism tax
Whilst may not beneift everyone
Limit pollusion and negative externalities whilst also raising tax rev
Demand may be inelatsic for lucyr areas
Successful in galapagos islands
Uk productibvity gap
25% less than usa
Why rapid econ growth not always result in rapid econ development
Meaning of both
Measuremnt econ development- hdi
Unequally distributed- qatar- oil rich, benefits flow to those in oil industry
China income inequality gini 0.57, thus poverty not allieveiated as much
Depends where growth seen- if in merit goods- education and healthcare- ppf but education and healthcare against other goods- flatline educational nd healthcare whilts othergoods increase
Neg externalities- air pollution
Eval on the use of ir to reduce inflation
Cost push or demand pull
Depend on how far above target and how long above target
Accuracy of economic forecasting- if overeestimate may increase bank rate too high and thus damaging gdp
Time lags - 18-24months by then economic conditions may have changed
The use of increasing base rate may reduce expecttations of inflation lower wage settlements lower inflation
Unemp
Those of working age who are not in a job but are actively seeking one at oing wag erate
Factors which may effect extent a rising tax bruden
Position econ cycle
Multiplier effect
Depends if gov spendingalso increasing
Factors of production internationally mobile- eg firms and individ (laffer curve)
How desirable uk is foriegners- eg flexible laboru market
How should welfare reform be done
Cuts to welfare oatments to fund tax cuts
Porblems iwth cutting corp tax
Short termism in financial markets may encourage private sector firms to pay higher dividends to shareholders rather than invest rd
Thus keynsian would invest directly in road and rail or subsidies to indusrteis for rd
How is fiscal drag happening more
Frozen tax levels
Tax brackets
12570- 0
12571-50270- 20
50271-125140- 40
125140-45
Impact o fni changes
Cut 2%
Compensate for fiscal drag for middle income workers not pesnioners
Lower paid and mensioners are worse off
Regressive policy
In ledc dfinition
Defne
And state how know hdi or gdp
Explaining arguments in favour of budget surplus
reduction of national debt
o reducing the burden on future generations
o the possible improvements to government credit ratings and the effect on
coupon rates and debt interest
o the reduction of crowding out
o the possible reduction in inflation
When may borrwoiing be benefiial and chepa
When coupon rates are low
Why falling unemp may imrpove living standards
Increased incomes and consumption possibilitis
Allowing individ to have more disposable icnoem to spend on leisure
Motivational and possible health effects
Social inetraction
Increased tax rev allow gov to cont spenidng without accumulating debt
How falling unemp may not imrpove living standards
Gig econ and zero hours contracts- job secuirty
Type of work and bargianing power of workers may detemrine relative winners and losers from falling unemp
Inflationalry efects- worsen those on fized incomes or low bargainng power
Inequality may get worse particularly for those not in work
Cost of living increases
Reduced unemp may indicate increased output which may indicate more pollution
Eval effects of trade deals on uks macroecon performance
Trade creation
Trade diversion
Depends which countries- size , uk net exporter or importer
Comp may spur improcements in productivity
Etv to improve living standards of citizens gov across world should prioritise achieving econ growth
Econ growth lead improvenent living standards
Worsen living stadrds
Achieve sr and lr econ growth
Depends on country -h ow welel developed and thus how much further can go
Stage of econ cycle
Explain why econ growth may lead to worsening living standards
inflation and its effects on individuals such as those on fixed incomes or those with low wage-
bargaining power
o the negative externalities of production such as pollution or deforestation
o the using up of scarce resources
o inequality
o stress/loss of leisure time
Explain why eocn growth may lead to imrpoved living standards
o increased employment and disposable incomes
o more consumption possibilities
o improved public services and merit good provision
o a reduction in absolute poverty
Why a suply of currency may increase
a rise in imports
o a rise in FDI going abroad
o a rise in tourism to another country
o a fall in interest rates leading to a rise in hot money flows out of a country
o speculation
