GOV OBJECTIVES Flashcards
What is inflation
Inflation is a sustained increase or rise in the general price level.
What is Hyperinflation?
Refers to very high and increasing inflation, generally above 50%
What is meant by demand pull inflation
When a shift of the ad curve pushes up the price level
What are the two causes for inflation
cost push
demand pull
What is cost push inflation
Cost-push inflation occurs when SRAS decreases
How is cost push inflation shown on an aggregate supply and demand diagram?
Left shift of short run aggregate supply
What is deflation?
a sustained decrease in the general price level
What is meant by ‘low animal spirits’?
A general lack of confidence in the economy which causes firms to invest less and people to consume less
How are consumers likely to react if they notice that prices are falling?
Delay purchasing goods
what is meant by the ‘deflationary spiral’.
The spiral begins with deflation which is where there is a sustained fall in the general price level.
Consumers notice the falling prices and decide to delay their purchases and wait for prices to fall further.
This causes a reduction in AD as consumption is a component of AD. The fall in AD lowers the price level again and so consumers further delay their purchases.
the cycle repeats.
disadvantage of deflation?
A deflationary spiral can reduce real GDP
What are the causes of deflation
It is caused by a reduction in aggregate demand
or an increase in aggregate supply.
What impact does inflation have on the value of money
Decreases the value of money
What impact does deflation have on the value of money
Increases the value of money
What is meant by nominal income
Nominal income is the amount of money that you earn
What is meant by real income
Real income shows how much your income is actually worth in terms of the number of goods that you can purchase.
how are real income and nominal income related
Real income is nominal income with the effect of inflation removed
Explain the three stages to calculating the UK’s price level.
Selecting the Basket of Goods and Services
Collecting Prices and Weighting Items
Calculating the Weighted Price Index
It takes a long time to calculate the inflation rate from raw data. What solution have economists developed to speed up the process?
Consumer Price Index
How do we workout index for the CPI using base year and current year price levels
Index = current number / base number * 100
How do we workout the inflation rate using new price index and old price index
(new - old) / old * 100
What is disinflation
Disinflation is when the price level is increasing
and the inflation rate is positive and falling
What is deflation
Deflation is when there is a sustained decrease in the general price level.
What are the causes of deflation
A left shift in aggregate demand or a right shift in LRAS
What are the four main problems with measuring inflation?
Spending habits.
Changes in quality.
Time lag.
Mortgages.
Explain why unusual spending habits can be a problem when using the Consumer Price Index measure of inflation.
For consumers with unusual spending habits, the consumer price index with its 650 most common goods and services will not accurately measure changes in their cost of living.
Explain why time lags can be a problem when using the Consumer Price Index measure of inflation.
The goods and services in the CPI basket are only updated once a year. When new goods become popular, their price changes aren’t measured, because they’re not yet in the basket.
What is a mortgage
A mortgage is an amount of money which is borrowed from the bank in order to buy a house.
Why can exclusion of mortgages present problems when using the CPI to measure inflation?
excluding mortgage payments
What is the retail price index
RPI: CPI + Mortgage payments
What is the main difference between the Retail Price Index and the Consumer Price Index?
RPI includes mortgage payments and CPI does not
Why is quality a problem when using cpi index to measure inflation
An increase in prices may be due to an improvement in quality and this is not the same as inflation.
What are the benefits of high inflation (2)
- Protects against risks of negative inflation ( deflationary spiral)
- reduces the real value of debt
What is a consequence of high inflation (3)
price wage spiral leading to hyperinflation
decrease in real wages and savings
less investment due to higher risks
Describe what is meant by the price wage spiral
- Workers demand higher wages because of rising costs of living.
- this causes a shift in sras increasing price level further and causing larger production costs.
- cycle repeats
What is a likely consequence of the price-wage spiral
Hyperinflation
What will be the impact of inflation on a pensioner’s savings?
Decrease the real value of their savings
How can high levels of inflation lead to reduced inequality
High levels of inflation reduce the real value of debt
What is the BOE inflation target
2% +- 1
What is Nominal GDP
The total price of all goods and services produced in an economy
Why can the real GDP measure often be misleading
Because it ignores the size of a countryies population
What is REAL GDP per capita
REAL GDP / total population
What is the formula for Gross National Income
GNI = Real GDP + Net income from abroad
What are remittances
Money earned by workers which is sent home to family in another country.
GNI can also be written as
Gross National Product GNP
What is the Easterlin Paradox and who brought forward the concept
Richard Easterlin:
As income increases, happiness increases up to a point as people are able to afford important items like food and a home.
However, the marginal happiness from each extra £ of income then begins to fall
How does the UK measure happiness
Office for National Statistics national well-being survey
The ONS national well-being estimate isn’t the most accurate because
The answers from people are normative statements as they are based on opinions.
What does Bhutan choose to measure instead of Gross Domestic Product
?
Gross National Happiness
What is PPP
Purchasing Power Parities
A PPP or purchasing power parity between two countries tells us how much of one currency is needed to purchase a basket of goods
compared to another.
What is the big mac index
The Big Mac Index is a measure of purchasing power parity (PPP) that compares the price of a McDonald’s Big Mac
in different countries to assess currency valuation.
What are the problems with comparing two countries nominal gdp’s
Converting into the same currency is often inaccurate as exchange rates are volatile
differences between the price levels in each country
What are the five limitations of real GDP?
Population Changes
Income distribution
Type of goods and services
Underground economies
Subsistence economies
Explain how the existence of the subsistence economy limits GDP as a measure of living standards.
The subsistence economy is made up of people who produce goods to consume themselves rather than sell. This production is not recorded as the goods are not sold
An outward shift in aggregate demand can be caused by an increase in which four things?
Consumption
exports
Investment
Government spending
An outward shift in aggregate demand can be caused by a decrease in what?
Imports
Short run aggregate supply shifts outwards due to a decrease in …
cost of production
An increase in LRAS is caused by what
An increase in LRAS is caused by an increase or rise in the quantity or productivity of the factors of production
What is meant by Actual Economic Growth
An actual increase in real GDP.
What is meant by potential economic growth
An increase in the full employment potential output level, shown by a right shift of the LRAS.
How do you workout % change in real gdp
% change in nominal gdp - inflation rate
underemployment definition
when workers are employed but working fewer hours than they want to or underusing their skills.
What are the two main measure of unemployment
The Claimant Count measures the total number of people receiving unemployment related benefits
Labour Force Survey and Claimant Count
What are the five types of unemployment
Structural
Cyclical
Classical
Frictional
Seasonal
What is meant by real wage/ classical unemployment’
Real wage unemployment is when the wage is above the equilibrium wage. This creates an excess supply of labour also known as unemployment.
What is demand deficient/ cyclical unemployment
it occurs when there is not enough aggregate demand in the economy. This causes firms to reduce their demand for labour, creating unemployment.
What is structural unemployment
Structural unemployment occurs when the structure of the economy changes and jobs shift from one sector to another.
What is occupational immobility
Occupational immobility is when workers can’t move between different jobs because they lack the skills needed.
What is one way a government can intervene to prevent structural unemployment?
investing in education and retraining programs.
What is Geographical immobility
when workers struggle to move between different areas or locations or places .
What are the main two causes of structural unemployment are
The main two causes of structural unemployment are geographical immobility and occupational immobility.
What can the government do to reduce geographical immobility of labour
In order to reduce geographical immobility of labour, the government can use relocation subsidies, or transport or transportation improvements such as HS or High speed 2.
How is cyclical unemployment shown on an AS-AD diagram
?
A left shift in aggregate demand
What is meant by frictional unemployment
when people are temporarily unemployed while searching for a new job.
What is seasonal unemployment
Seasonal unemployment occurs when people are unemployed during certain seasons.
What is the working age population equal too
the economically active population plus the economically inactive population
why does the Claimant Count underestimate the number of unemployed people?
Some unemployed people do not claim Job Seeker’s Allowance
What is meant by the unemployment level
This is the absolute number of people who are unemployed in an economy.
What is meant by unemployment rate
The unemployment rate is the percentage of the labor force that is unemployed. It is calculated using the following formula:
NumberofUnemployedPeople / labor force ×100
What is the labor force
Labor Force: The total number of people who are either employed or unemployed (excluding those not actively seeking work, like retirees or students).
What will happen to the circular flow of income model if UK consumers import more
the circular flow of income will contract and aggregate demand will decrease
What is meant by the balance of payments
a record of payments (or transactions) between one country and the rest of the world.
What is the balance of payments made up of (3)
The first section of the balance of payments is the Current Account. The second section is the Capital and Financial Account.
What are the four parts of the current account
Trade in Goods
Trade in Services
Investment Income
Current Transfers
What is the impact of an increase in imports on the UK Current Account?
It decreases due to an increase in withdrawals
explain the term ‘current transfers’.
Current transfers are when money is transferred abroad without getting any goods or services back in exchange. Common examples are aid which is sent abroad
What does a current account deficit mean
More money leaving the economy than entering it
In an economy what are net investment income and transfers both assumed to be
0
What can be said about the UK current account
The UK is in current account deficit, total outflows > total inflows
why does the UK’s Balance of Payments balances?
The Current Account deficit is balanced by a Capital & Financial Account surplus
What is the Capital & Financial Account and what does it measure?
The Capital & Financial Account is part of the Balance of Payments and tracks investments into, and out of, a country.
What is a problem with a current account deficit
?
It is balanced out by a capital account surplus, which means foreign investors earn profit from UK assets
What are the five factors affecting the current account
Exchange rates
Relative inflation
Costs
Quality
Income
Which of the following will happen if the UK pound appreciates?
import expenditure will increase and export revenue will decrease. This will decrease the UK current account.
What will happen to the UK’s Current Account deficit following a depreciation?
It will improve
What 3 things can make exports cheaper for foreign consumers
Exports will get cheaper if a country has a lower relative inflation rate, a depreciation in the exchange rate or lower production costs.
What effect will a high relative inflation rate have on a countries current account
exports will be relatively more expensive
Export revenue will decrease
worsening the current account
What is direct tax
tax paid directly to the government
What is the name of the direct tax paid by businesses
corporation tax
what are the most common direct taxes
corporation tax - % tax on a business profit
income tax - % tax on income
What are the two types of indirect tax
Specific tax
ad valorem tax
What is indirect tax
A tax paid by a producer when goods and services are purchased.
What is a specific tax
A fixed amount of tax on each unit sold
What is a ad valorem tax
Charged as a % of the price of a good such as VAT
What is meant by a balanced budget
gov spening = gov revenue
What can be said about the UK’s governments budget
84 billion GBP budget defecit
Explain the difference between the terms ‘budget deficit’ and ‘current account deficit’.
A budget deficit occurs when the government spends more than it receives in tax revenue.
A current account deficit occurs when current account outflows are greater than current account inflows.
what is meant by a government bond?
A method of government borrowing
What is meant by national debt
total debt built up by government borrowing over time.
What is meant by economic inequality
The difference in living standards between the rich and poor.
