initial macro content Flashcards
exports
g and s sold to foreign countries and are positive in the BOP because they are in inflow of money
what is the balance of payments
a record of all the financial transactions (every quater of the year) made between consumers, firms and the government in a given time period
states how much was spent on imports and what the value of exports is
imports
g and s brought from foreign countries and they are negative on the BOP because they are an outflow of money
what is the BOP made up of
the current account
capital account
financial account
what is the current account
identifying the transactions in g and s between the residents of a country and the rest of the world
what is the capital account
identifying transactions between physical capital between residents in a country and the rest of the world (smallest part)
what is the financial account
identifies transactions between financial assets between the residents/firms of a country and the rest of the world
current account sections
trade in goods
trade in services
primary income
secondary income
trade in goods
balance of goods exported to good imported for a nation
trade in services
balance of services exported to services imported for a nation
primary income
net income flows
the net flow of profits, interest and dividends from investments in other countries
secondary income
refers to transfers of financial resources between residents and non-residents without an exchange of goods, services, or assets, such as remittances, foreign aid, and pensions
why is achieving a sustainable balance of payment important and what should it theroteically be at
aim for current account to be 0
A balanced current account implies that a country is not accumulating unsustainable levels of debt to finance its consumption or investment. Persistent current account deficits can lead to growing debt, making a country vulnerable to external shocks and financial crises
current account formula
trade in goods+ trade in services+ primary income+ secondary income
why should the balance of payments be equal to 0
all transactions should balance out, resulting in a net zero
why is it important to achieve a sustainable balance of payments position (2)
an imbalance may make it seem the uk is reliant on other countries performance. if export markets become weak, uk economic performance may suffer- e.g 2008 financial crisis causing rises in unemployment and debt in the uk
it could become difficult to finance this deficit in the long run as you want to avoid having to rely on external financing e.g being in debt to other countries
what causes a current account deficit
import value is higher than the export value
Wages. For example, if UK companies pay UK workers abroad, this leads to money leaving the UK and is a debit on the current account.
Since the mid 1980s, the UK has generally had a persistent current account deficit. Essentially, the UK has been importing more goods and services than it has been exporting.
why may the bop not be equal to 0 (3)
high consumer spending
low competitiveness
differences in countries’ levels of exports and imports lead to trade imbalances, resulting in a surplus or deficit in the trade balance component of the BOP
high consumer spending explained
If there is rapid growth in consumer spending, then there tends to be an increase in imports causing a deterioration in the current account. For example, in the 1980s boom, we saw a fall in the savings rate and a rise in UK consumer spending; this caused a record current account deficit. The recession of 1991 caused an improvement in the current account as import spending fell.
competitiveness explained
If there is a decline in relative competitiveness, e.g. rising wage costs, then it is harder to export causing a deterioration in the current account.
causes of exchange rate to increase (2)
Countries with stable political environments and sound economic policies tend to attract more foreign investment, strengthening their currencies.
Countries with trade surpluses (exporting more than importing) typically experience an appreciation in their currency, as foreign buyers need to purchase the domestic currency to pay for exports.
causes of exchange rate to decrease (2)
Weak economic indicators, such as low GDP growth, rising unemployment, or declining productivity, can reduce investor confidence in a country’s economy. This may lead to decreased demand for the currency, causing its value to fall.
Uncertainty surrounding government policies, elections, or geopolitical tensions can lead to decreased investor confidence and capital outflows. As investors move their funds to safer places, the demand for the country’s currency may decrease, causing its value to decline.
calculating inflation (cpi)- basket of goods
measures household purchasing power with the family expenditure survey. this finds out what consumers spend their income on. from this, the basket of goods is created. the goods are weighted according to how much income is spent on them. each year this is updated to see how spending patterns have changed.
limitations of the cpi when measuring inflation (2)
only representative of your average household- so its not representative for those who don’t own cars as people who do spend 14% of their income on motoring
different types of people have different spending patterns - could be down to age, ethnicity etc
what is the retail price index
alternative measurement of inflation
unlike cpi, it also includes housing costs like mortgage interest payments and council tax. some consumers think this is a more accurate reflection of cost of living
advantage of the rpi (1)
been used for a lot longer than cpi so its easier to make comparisons
what are index numbers used for
making comparisons between years and to measure the size of change over time
calculating the rate if inflation using index numbers
a base number is used (100) and, for example, if inflation has risen by 5%, the index number will be 105
what are the triggers for demand pull inflation (2)
When real income increases, individuals have more purchasing power, enabling them to buy more goods and services.
lower interest rates as people save less and spend more meaning ad will rise
when does cost plus inflation occur (2)
labour becoming more expensive- if wages make up a large amount of a firms costs this could lead to them needing to increase prices to cover this. these price rises could lead to further wage demands leading to further price increases and so on (wage- price spiral)
depreciation in the exchange rates may cause imports to be more expensive which increases the price of raw materials
deflation meaning
Deflation is a process where prices of consumer goods and services fall and money increases in value.
cause of deflation
when there is a significant decrease in spending, investment etc aggregate demand in the economy falls. This can lead to excess supply in the market, causing businesses to lower their prices in an attempt to stimulate demand, resulting in deflationary pressure
If businesses produce more goods and services than consumers are willing or able to purchase, it can lead to a surplus of supply. In an effort to sell the excess, businesses may reduce prices, contributing to deflation.
consequences of deflation (2)
When consumers expect prices to continue falling, they may delay purchases in anticipation of lower prices in the future. This reduction in spending can further worsen deflationary pressures by reducing demand for goods and services.
Deflationary pressures can lead to layoffs and job losses as businesses cut costs in response to decreased demand and lower prices. Persistent deflation can exacerbate unemployment by discouraging hiring and investment, leading to a downward spiral of economic activity.
consequences of inflation on consumers - explanation
those on low and fixed incomes will suffer the most as it erodes the purchasing power of money over time, meaning that the same amount of money buys fewer goods and services. As prices rise, consumers need to spend more money to purchase the same quantity of goods and services, reducing their standard of living as consumers’ real incomes will decline. Even if nominal wages increase, if they fail to outpace inflation, consumers’ purchasing power will be eroded. This can lead to financial insecurity for individuals and households.
consequence of inflation on firms - explanation
High or unpredictable inflation rates can create uncertainty for firms, making it challenging to plan and make investment decisions. Businesses may hesitate to invest in long-term projects or expansion plans if they are unsure about future costs and revenues. this can reduce their confidence as they’re unaware of what their costs will be leading to less investment
how can economic growth be depicted on a graph
expansion of productive potential of the economy which can be depicted by an outwards shift on the ppc curve or the countries lras curve
what is the economic cycle stages
Expansion (Recovery)
Peak
Contraction (Recession)
Trough
and then goes back around to the expansion
what is the expansion (recovery)
During this stage, key economic indicators such as GDP, employment, consumer spending, and business investment typically rise. Confidence among consumers and businesses tends to increase, leading to higher levels of consumption, investment, and overall economic activity. Central banks may implement accommodative monetary policies, such as low interest rates to support economic growth during this phase.
what is the peak
highest point of the economic cycle, characterised by strong economic activity and near-full employment. During this stage, the economy is operating close to its potential output, and inflationary pressures may begin to emerge as demand exceeds supply in certain sectors.
what is the contraction (recession)
marked by a decline in economic activity, typically measured by a decrease in GDP for two consecutive quarters or more. During this stage, key economic indicators such as employment, consumer spending, and business investment decline, leading to reduced output and income levels. Consumer and business confidence often weakens, leading to cautious spending and investment behaviour.
how can gdp change over time (use previous flashcards)
through the phases of the economic cycle- expansion it will begin to increase as consumers and firms will gain confidence to spend more and invest more. GDP tends to rise steadily as businesses expand production and output, leading to overall economic growth.
The peak of the economic cycle represents the highest point of GDP growth in the expansionary phase. At this stage, the economy is operating at or near full capacity, with high levels of employment and production.
economy enters a contractionary phase marked by declining GDP growth. This phase can lead to a recession, defined as two consecutive quarters of negative GDP growth. During a recession, economic activity slows, businesses cut back on production, and unemployment may rise as consumer spending declines.
GDP reaches its lowest level during a recession. At this stage, the economy may experience high levels of unemployment, reduced consumer spending, and weak business confidence in the trough
causes of short run economic growth (2)
Technological advancements and innovation can lead to productivity gains and efficiency improvements in the short run, driving economic growth. Investments in research and development, adoption of new technologies, and improvements in production processes can all contribute to short-run growth.
Short-run economic growth can be influenced by changes in external demand for a country’s exports. Stronger global economic conditions, increased demand from trading partners, or favourable exchange rate movements can boost exports and contribute to GDP growth in the short term.
consequences of short run economic growth (2) - 1 good 1 bad
Short-run economic growth often leads to higher demand for goods and services, prompting businesses to expand production and hire additional workers. This can reduce unemployment rates and improve labour market conditions, providing more opportunities for individuals to find jobs and earn incomes.
Rapid short-run economic growth can lead to increased demand for goods and services, putting upward pressure on prices. If the supply of goods and services cannot keep pace with rising demand, it can lead to inflationary pressures, eroding purchasing power and potentially reducing real incomes, especially for fixed-income earners.
causes of long run economic growth
Investment in human capital, including education, skills training, and health care, is essential for long-run economic growth. A well-educated and skilled workforce is more productive, adaptable, and innovative, leading to higher levels of productivity, technological adoption, and overall economic performance.
Long-run economic growth is facilitated by the accumulation of physical capital, such as machinery, equipment, infrastructure, and buildings. Investments in capital goods increase the economy’s productive capacity, enabling higher levels of output and income over time.
consequences of long run economic growth 1 good 1 bad
Economic growth can help lift people out of poverty by creating employment opportunities, raising wages, and expanding access to essential goods and services. As incomes rise and economic opportunities expand, individuals and families at lower income levels can experience improvements in living conditions and greater economic security.
While economic growth can bring significant benefits, it can also pose challenges to environmental sustainability. Rapid industrialisation, urbanisation, and resource extraction activities can lead to environmental degradation, pollution, and depletion of natural resources, threatening ecosystems, biodiversity, and public health.
usefulness of gdp (positive-1)
GDP allows for comparisons of economic activity over different time periods. Changes in GDP provide insights into economic trends, cycles, and growth rates. For example, positive GDP growth indicates economic expansion, while negative growth suggests a contraction.
usefulness of gdp (limitation-1)
there are things that don’t get accounted as there are large hidden economies such as the black market which can make gdp calculations inaccurate therefore difficult to compare
what is the claimant count
counts the number of people who are claiming unemployment related benefits, such as job seekers allowance (jsa). they have to prove they are actively looking for work
what does the labour force survey directly ask people (3)
if they’ve been out of work for more than 4 weeks
able and willing to start work within 2 weeks
available for 1 hour per week. (part time unemployment included)
what is frictional unemployment
the time between leaving a job and looking for another
causes of unemployment (2)
During periods of economic downturn or recession, businesses may reduce production, cut costs, and then have to lay off workers due to this and decrease in demand
human labour being replaced by tech
consequences of unemployment- (2)
Unemployment often leads to financial strain as individuals lose their primary source of income. This can result in difficulty meeting basic needs such as food, housing, healthcare, and education. Financial hardship can exacerbate poverty, increase debt levels, and lead to economic instability.
Unemployed individuals have less disposable income to spend on goods and services, leading to a decrease in consumer spending. This reduction in demand can negatively impact businesses, leading to lower sales and potentially further job losses.
effects of full employment (2)
With labour markets tight and demand for workers exceeding supply, employers may need to offer higher wages and better benefits to attract and retain employees. This can lead to rising incomes for workers, improving their standard of living and purchasing power, and reducing income inequality.
Full employment contributes to higher levels of economic output and growth as all available labour resources are engaged in productive activities. Increased labour force participation, rising incomes, and enhanced productivity can boost consumer spending, business investment, and overall economic activity, driving sustained economic expansion.
what is demand pull inflation
a period of inflation which arises from rapid growth in aggregate demand. It occurs when economic growth is too fast. ad is bigger than as
what is cost push inflation
when the costs of production, such as wages, raw materials, or energy, increase, leading to higher prices for goods and services. It is driven by a fall in the short-run aggregate supply
3 ways of measuring gdp
national income
output
expenditure
(three things equal each other)
what is the relationship between aggregate demand and price level
Inverse Relationship:
As the price level decreases, aggregate demand typically increases.
As the price level increases, aggregate demand typically decreases.
what is the relationship between income and consumption
direct relationship
As disposable income rises, consumption typically increases because people have more resources to spend.
why is the aggregate supply curve (sras) sloping upwards
at a higher price level, producers are willing to supply more because they can earn more profits
if AD increases what is there in sras (expansion or contraction)
expansion
if AD decreases what is there in sras (expansion or contraction)
contraction
what do keynesians suggest about the price level (think lras graph) (i hope you understand what your past self is trying to explain. if not go onto pmt and aggregate supply 3rd page down )
the price level is fixed until resources are employed
