GDP and Inflation Flashcards
What are the 4 main macroeconomic objectives?
Sustainable economic growth
Low and steady inflation
Low unemployment
Healthy current account balance
What are the 2 additional macroeconomic objectives?
Protection of the environment
Redistribution of income
What identity is used to calculate the national income of an economy?
Income ≡ Expenditure ≡ Output
Define ‘GDP (Gross Domestic Product)’.
The total value of goods and services produced in an economy in a year
Define ‘economic growth’.
The rise in an economy’s national income over a period of time (usually a year)
What are the 3 benefits of using GDP as a measure of growth?
Relatively simple measure
Allows for comparison between countries - widely adopted
Allows for comparison between years to assess growth rate
What are the 8 limitations of using GDP as a measure of growth?
Value of home-produced goods Inflation Black market Environmental damage/improvement Population Income inequality Cost of living Statistical errors
How is the black market a limitation of using GDP as a measure for economic growth?
It involves the unrecorded transaction of goods, leading to the GDP being underestimated
How is the value of home-produced goods a limitation of GDP as a measure of growth?
Goods that are produced at home and aren’t sold (eg. home-grown food, homemade clothes) aren’t recorded, leading to the GDP being underestimated
Define ‘real GDP’.
The total value of goods and services produced in an economy in a year adjusted for inflation
How does economic growth occur?
When there is an increase in the quality or quantity of the factors of production
Define ‘the economic cycle’.
The overall state of the economy as it goes through four stages in a cyclical pattern
What are the 5 stages of the economic cycle?
Growth Boom Downturn Recession Recovery
What are the 4 features of the ‘Growth/Recovery’ stage of the economic cycle?
GDP starts to rise
Business/consumer confidence increases
Unemployment falls due to increase in demand
Prices start to rise
What are the 4 features of the ‘Boom’ stage of the economic cycle?
Peak of the cycle
Economy is doing well
Jobs are created as demand rises
New firms enter the market
What are the 4 features of the ‘Downturn’ stage of the economic cycle?
Economy still growing but slower
Demand for G&S begins to fall
Unemployment starts to rise
Firms stop expanding due to falling profits
What are the 4 features of the ‘Recession’ stage of the economic cycle?
Bottom of the cycle
Economy isn’t doing well - GDP begins to fall
Unemployment rises sharply due to fall in demand
Bankruptcies are common
What are the 7 benefits of economic growth?
Increased tax revenue for government
Increased investment fuelled by higher profits
New jobs created
Higher real incomes
Increased funds for infrastructure
Greater consumer confidence
Higher standards of living
Define ‘standard of living’.
The degree of wealth and material comfort available to a person or community
What are the 6 disadvantages of economic growth?
Risk of demand-pull inflation
Risk of environmental damage
Rising inequality
Over-exploitation of scarce finite resources
Opportunity cost of increased capital investment
Social problems arising from consumer society
Define ‘aggregrate demand’.
The total demand for all the goods and services in an economy at a given price level
What is the equation for aggregate demand?
AD = C + I + G + (X - M)
Aggregate Demand = Consumption + Investment + Government Spending + (Exports - Imports)
What 3 factors does the benefit of economic growth depend on?
How much growth is occurring
Role of the government
State of the economy
Define ‘inflation’.
The general and persistent rise in the prices of goods and services over a period of time
Define ‘CPI (Consumer Price Index)’.
Measure of the general price level which includes house prices and council tax
Define ‘purchasing power’.
The ability to buy goods and services at the same income level
In 4 steps, how is the consumer price index measured?
- Government records prices of 720 G&S purchased by a sample of 180,000 families every month
- Weights added to prices to account for proportion of expenditure
- Average monthly price worked out
- Price compared to base year price to set inflation rate
What are the 4 types of inflation?
Deflation - fall in prices
Low and steady (1-3%)
High inflation (> 8%)
Hyperinflation (>15-20%)
What are the 3 possible causes of inflation?
Demand-pull inflation
Cost-push inflation
Money supply inflation
How does demand-pull inflation occur?
When any component of AD increases, causing AD to shift out, GDP to increase and prices to go up
How does cost-pull inflation occur?
When the costs of production for all firms are rising, causing prices to be pushed up by firms
How does money supply inflation occur?
When there is too much ‘printed’ money chasing too few goods, demand outstrips supply
What are the 2 effects of inflation on consumers?
Less purchasing power
Reduced supply of labour
What is the effect of inflation on firms?
They have to sacrifice profit margins due to increasing costs of production
What are the 2 effects of inflation on the government?
Spending increases as funding for public/merit goods increases
Decreased tax revenue due to corporation tax decreasing
How does inflation affect savers/pensioners?
Saved money is worth less - workers will have to save larger amounts for longer
How does inflation affect borrowers?
They BENEFIT - they have to return less money back to lenders
How does inflation affect lenders?
They’re worse off if inflation is more than anticipated - interest rates set accordingly
Define ‘interest rate’.
A price paid to lenders for borrowed money - the price of money
Define ‘menu cost’.
The administrative cost of firms replacing signage/labels as prices increase
Define ‘shoe leather cost’.
Cost of funding new suppliers of raw materials as prices continually increase
How does inflation affect exporters?
Their goods become less attractive and internationally competitive so demand for them decreases
How does inflation affect importers?
Their goods appear more attractive so they see a rise in demand
What 5 factors does the impact of inflation depend on?
The level of interest rates
If inflation is anticipated or not
Country’s reliance on exports/imports for growth
Level of inflation
Cost-pull inflation being worse than demand-pull inflation
Define ‘depression’.
A period of temporary economic decline where trade and industrial activity reduce
Define ‘recession’.
Bottom of the economic cycle where GDP starts to fall with significant increases in unemployment
Define ‘government revenue’.
Money received by a government from taxes and non-tax sources to enable it to spend
