Government objectives Flashcards
Macroeconomic objectives
1)2% inflation plus or minus 1%
2)economic growth measured by real gdp
3)achieve full employment
4)balance of payments - current account equilibrium where outflows equal inflows
5)achieve a balanced budget where government spending equals tax revenue
6)reduce inequality
7)protect the environment
What happens if spending on imports increases
The circular flow of income will contract and aggregate demand will decrease. This is because imports are a leakage from the circular flow and a negative component of AD
Balance of payments
A record of transactions between one country and the rest of the world
Two main sections of the balance of payments
-Current account
-capital and financial account
Four parts of current account
-trade in goods
-trade in services
-investment income
-current transfers
Exports injection or leakage?
Exports are an injection as they involve money from abroad entering the circular flow of income in exchange for British goods and services.
Imports effect on current account
Decrease
Exports effect on current account
Increase
Investment income earned by a uk investor abroad
Will appear in the current account as a positive transaction because money is entering the UK. This will increase the current account
Current transfers
When money is transferred abroad without getting any goods or services back in exchange. Common examples are aid which is sent abroad and workers wages which are sent back home (called remittances)
current account surplus
when the current account is a positive number, which indicates that more money is entering the economy than leaving it
current account deficit
when the current account is a negative number, which indicates that more money is leaving the economy than entering it
current account equilibrium
total inflows equal total outflows
capital and financial account
part of the balance of payments and tracks investment into, and out of, a country
why do we want a current account equilibrium
-profit from foreign investment is sent overseas to investors meaning even more money is withdrawn from the UK economy
-At current account equilibrium, financial and capital account is zero meaning zero foreign investment and so less future earnings leak out of the country.
factors affecting the current account
-exchange rates
-relative inflation
-costs
-quality
-income
what happens if a countrys inflation rate is lower relative to other countries?
its exports will become relatively cheaper, so foreign consumers will buy more of its exports. This means that export revenue will increase, which will improve the current account
effect of high production costs on current account
higher export prices will decrease export revenue, worsening the current account
how does low quality of exports affect a country current account
a country which produces lower quality exports will sell less exports, which will cause export revenue to decrease. this will then decrease the current account
how does an increase in national income affect the current account?
As income increases, spending on normal goods increases. If more normal goods are imported, import expenditure will increase and the current account will decrease
inflation
a sustained increase in the general price level
hyperinflation
occurs when inflation rises above 50%
Demand pull inflation
When AD increases, pulling up the price level and leading to inflation.
cost push inflation
an increase in costs causes the SRAS to shift left which leads to an increase in the price level
deflation
a sustained decrease in the general price level
deflationary spiral
begins with deflation. Consumers notice falling prices and delay purchases till prices 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 purchase. And the cycle repeats itself.
Cause of an outward shift in SRAS
fall in costs
Cause of an outward shift in LRAS
increase in the productivity or quantity of the factors of production
benign deflation
when there is an outward shift in aggregate supply
malignant deflation
when there is an inward shift in aggregate demand. Worries economists because of the risk of a deflationary spiral
Causes of deflation
reduction in aggregate demand or an increase in aggregate supply
causes of inflation
increase in aggregate demand or decrease in aggregate supply
progressive tax
a tax where the proportion of your income paid in tax increases as income increases
regressive tax
a tax where the proportion of your income paid in tax decreases as your income increases
proportional tax
a tax where the proportion of your income paid in taxes stays the same, as your income increases
Indirect tax
a tax paid by a producer when goods and services are purchased
income tax
a tax which is paid directly by workers as a percentage of their income
corporation tax
a tax which is paid by firms as a percentage of their profits
direct tax
a tax paid directly to the government
specific tax
a fixed amount of tax paid on each unit sold
Ad valorem tax
charged as a percentage of the price of the good
budget deficit
when government spending is greater than tax revenue
budget surplus
when tax revenue is greater than government spending
balanced budget
tax revenue=government spending
government bond
a method that the government uses to borrow money They sell a bond to an investor and pay it back at a later date with interest
national debt
total debt built up by government borrowing over time
inequality
the difference in living standards between the rich and poor
