Key Info Flashcards
what is the Easterlin Paradox
life satisfaction does rise with average incomes but only up to a point
what are the macroeconomic objectives
- low and stable rates of unemployment
- high and stable rates of economic growth
- low and stable rates of inflation
- reducing inequality
- protection of the environment
- improving terms of trade
what makes up the current account
- imports and exports
- net income from abroad
what is the Philips curve
what is a recession
A period of two or more consecutive quarters (1) of negative
economic growth/falling real GDP (1)
how is CPI measured
- It uses a weighted basket of goods and service (1)
- The weights are in proportion to the amount of money spent on each item (1)
- Monthly price surveys are undertaken (1)
- An annual survey of household spending is used to set the
weights/the contents of the basket (1)
what is comparative advantage
if countries specialise in producing goods where they have a lower opportunity cost – then there will be an increase in economic welfare
what is the drawback of using comparative advantage
it ignores transport costs and assumes perfect mobility of factors without any diminishing returns
what is the fisher equation
increase in the money supply will lead to an increase in price levels (MV=PT (M=money supply V=speed P=price level T=number of transactions))
whats the bank multiplier
like the multiplier but for how much QE will be loaned by banks
what factors impact short run AS
- exchange rate
- cost of raw materials and energy
- tax rates
whats hysteresis
the idea that temporary shocks such as a recession actually have long-lasting effects and that the economy doesn’t bounce back fully
what are growth pessimists
those who question the sustainability of long term growth
what are the aims of supply side interventionist policies
- to increase incentives
- to promote competition
- to reform the labour market
- to improve the skills and quality of the labour force
- to improve infrastructure
whats the difference between a direct and indirect tax
- direct taxes are paid directly to the government by the
individual taxpayer e.g. income and corporation tax - indirect taxes are where the person charged with paying the
money to the government is able to pass on the cost to
someone else e.g. VAT
what is the standard rate of VAT
20%
what are the supply side policies
- free-market supply-side policies involve policies to increase
competitiveness and free-market efficiency. For example,
privatisation, deregulation, lower income tax rates, reduced
welfare benefits and reduced power of trade unions. - interventionist supply-side policies involve government
intervention to overcome market failure. For example, higher
government spending on transport, education and
communication.
how might a government control their exchange rate
- interest rates
- buying/selling foreign/domestic currencies
- QE
- set a ceiling and floor
what are the limitations of using HDI
- ignores qualitative factors (quality of education)
- ignores income distribution (inequality)
pros of contractionary monetary policy through increasing interest rates
- reduce inflation (demand pull)
- reduce current account deficit through reduced imports
- discourage debt - chance of defaulting (systemic
risk) - more sustainable borrowing/lending - preventing
bubbles - more affordable housing as it will increase the cost of mortgages - reduce demand - reduce price
cons of contractionary monetary policy through increasing interest rates
- demand side shock - lower growth and higher unemployment
- reduced investment
- worsen current account deficit - hot money flows - appreciation of the currency - less competitive exports
- indebted - bankruptcy/homelessness
pros of contractionary fiscal policy
- reducing national debt - increased confidence - improved credit ratings on government bonds / attract FDI
- greater flexibility for fiscal policy
- less crowding out/x-inefficiency
- less demand pull inflation and improved current account - lower spending on imports
what is cyclical budget surplus
budget surplus in a boom
what is structural budget surplus
budget surplus at full employment
cons of contractionary fiscal policy
- negative multiplier
- demand side shock - fall in growth and rise in unemployment - AD shifts in
- decreased incentive from higher taxes and increased tax avoidance - laffer curve
- income inequality increased if taxes aren’t progressive and cut in government spending on benefits
- cutting government spending on education, healthcare and infrastructure
- inward shift in LRAS in long run as less profit to invest for firms
cons of expansionary fiscal policy
- crowding out / x-inefficiency - however possible crowding in as
increased confidence - ricardian equivalence - people save as they expect a tax rise later on
- if multiplier is large it may not need to be such a heavy policy
- if automatic stabilisers are strong then less need for discretionary fiscal policy
what is ricardian equivalence
that households and firms know that a fall in income tax rates as an expansionary fiscal policy cannot be afforded in the long run so increase savings in anticipation
cons of expansionary monetary policy
- liquidity trap
- dependent on willingness to lend - bank confidence for firms
and households to pay
pros of FDI + development
- injection into the circular flow of income
- fills savings gap - harrod-domar model
- positive effect on the balance of payments
- provide infrastructure development e.g. China in Nigeria for oil
- improved domestic competition -> increased productivity
- tax revenue through income, corporation and VAT
cons of FDI + development
- could be a short term fall in unemployment or firms might bring workers with them
- exploit their power and influence policy making and avoid tax
- may use capital intensive production so there will be little or no increase in employment
- may strip country of natural resources and leave
- there are environmental costs
pros of economic growth on development
- higher incomes -> increased employment/QOL
-> decreased poverty/income inequality - higher profits -> improved employment/technology
- fiscal dividend -> increased spending on healthcare/education/infrastructure
cons of economic growth on development
- increased inequality
- negative externalities e.g. pollution
- growth pessimists -> growth isn’t sustainable in the long run (use of non-renewables)
- growth in one dominant sector e.g. Nigeria 90% of exports being oil
what does foreign aid help to do
fill the savings gap - harrod-domar model
pros of the role of markets on development (free market supply side policies)
- more efficient resource allocation as decreased government spending
- increased competition -> increased productivity
- encourages FDI - de-regulation + trade liberalisation
- removes x-inefficiency from nationalised industries
forms of free market supply side policies
- de-regulation
- trade liberalisation
- privatisation
- promoting FDI
- reduced government spending
cons of the role of markets on development (free market supply side policies)
- lack of infrastructure to promote development
- public goods not provided - free rider problem
- market failure - environmental
- increase income inequality as no welfare payments
- reduced protectionism in developed countries exposes firms to low unit costs of cheap labour in developing countries
- lack of financial institutions - government can fill savings gap
pros of role of government on development (interventionist supply side policies)
- infrastructure development - as no free rider problem
- government are a major employer - e.g. NHS 1.5 million
- government are a major investor into human capital
- welfare payments
- can adopt fiscal and monetary policies
cons of role of government on development (interventionist supply side policies)
- bureaucracy
- x-inefficiency - nationalised industries -> reduced competition -> reduced productivity
- corruption
- government debt
forms of interventionist supply side policies
- protectionism
- exchange rate intervention
- regulations
- nationalisation
- increased government spending
what does 0 and 1 show as values of HDI
0 is low development
1 is high development
methods of increasing international competitiveness
- increased government spending -> increased productivity -> lower unit cost
- privatisation/de-regulation/trade liberalisation
pros and cons of debt relief
pros:
- fill savings gap
- increased government spending
cons:
- corruption
- dependency
- moral hazard
- opportunity cost/time lag
economic effects of a depreciation of currency
pros:
- improvement in current account - J-curve
- increased aggregate demand -> improved living standards
cons:
- not most significant component of AD and depends on output gap
- marshall-lerner condition
how to calculate a real value
nominal - inflation
relative poverty
60% below median income
2 causes of inequality
- discrimination - gender
- post code lottery
2 ways to reduce inequality
- government investment into deprived areas
- increasing NMW or improved tax system
how to calculate unemployment rate
unemployed people / economically active population
how to calculate employment rate
employed people / labour force
what are the types of restrictions on free trade
- tariffs
- quotas
- subsidies to domestic producers
- non-tariff barriers e.g. embargo
what is meant by ‘dutch disease’
- increase in revenue from natural resource exports leading to an appreciation of the currency and negatively impacts other sectors
- can also lead to primary product dependency and therefore instability and volatility
what is meant by the Prebisch-Singer theory
- over time export lead growth from natural resources is slower than manufactured goods
- deterioration of term of trade in the long term
what is meant by the unemployment trap
when benefits are higher than the wage people would
otherwise receive.
