LS1 - Introduction Flashcards
Who are the key players in the economy?
Government, industry, consumers, central bank, civil society
What is the governments role in the economy?
The government sets the ‘rules of the game’ that economic agents must follow. For example, food manufacturers are required to meet health and safety standards.
Rules are designed to protect citizens and promote positive economic outcomes.
The government also produces some goods and services e.g. schooling and rail networks. The government can also provide support to business
Define industry
– Businesses produce goods and services. Most businesses are small and medium
enterprises (SMEs): businesses that are not very small or not very large (made up of 50-250
people). The majority of businesses tend to be focussed on the domestic (home) market
rather than the international market. Larger companies are often multinationals
Define consumer
Buyers of goods and services
Define central bank
– Each country has a central bank responsible for setting interest rates and
acting as a banker to the banks. The world’s first modern central bank was the Bank of
England. The roles of central banks in the economy has expanded over time.
Define role of civil society
– Groups outside of government and business are referred to as civil society.
Groups that make up civil society include: trade unions, NGOs, charities and academics.
These groups play various roles in the economy e.g. trade unions fight for improved working
conditions which can result in changes in business and government.
What are the methods for financing a business?
Retained profit
Borrowing
Issuing shares
Issuing bonds
How does issuing shares work?
Why are shares attractive to investors?
Issuing shares – A share is a financial asset that gives one part ownership in a company. The
more shares one owns the greater the amount of control one has over a company. Shares
are attractive to investors for three main reasons:
1. Capital gains can be made
2. Dividends an income stream
3. They provide a means of taking over a company
Shares are traded in primary and secondary markets. Primary markets are where shares are
issued. Investors pay directly to the company issuing the shares. Thus, shares are a source of
finance for companies. Shares can also be bought from investors (this occurs on secondary
markets). Public companies (PLCs), such as Tesco and Apple, can issue shares on stock
exchanges like the London Stock Exchange and the Nasdaq (private ones cannot).
How does issuing bonds work?
A company issues bonds (for simplicity let’s say the company wants to raise £10k by issuing ten £1k one-year bonds)
• Investors* purchase the bonds (this means the company receives £10k in our
example)
• Up until the maturity date** of the bond (one year in our example), investors
holding the bonds will receive regular interest payments***
• When the bond matures investors will receive their cash in full (£1k in our example).
Bonds can be traded so the person that receives the money may not be the investor that initially bought it. Bonds can also be issued by governments.
People who own bonds are also called creditors or debtholders.
**Bonds mature when the required amount of time has elapsed e.g. 5 years for a 5-year government bond.
**The annual interest payment on a bond is called the coupon or coupon rate. Interest payments schedules vary e.g. monthly, quarterly etc.
What are key issues for the government and economy?
Economic growth – the size of the economy determines the amount of goods and service available to citizens i.e. living standards. The quality of a country’s infrastructure and public services is also determined by the size of the economy. Consequently, expanding the size of the economy (economic growth) has come to be seen as a vital economic objective for
governments. The conventional measure for the size of an economy is Gross Domestic Product (GDP).
Employment – most people of working age rely on jobs as a source of income and many derive a sense of purpose from their occupations. Therefore, employment is important. Furthermore, large numbers of unemployed people has the potential to lead to severe social unrest.
Inflation – Inflation is a rise in the general price level for goods and services. High inflation erodes living standards (assuming wages do not keep up). Governments and central banks generally seek to maintain low inflation.
Trade – National economies are only capable of producing a limited range of goods and services. The reasons for this are twofold. Firstly, natural resources and climate mean some goods are unavailable. Secondly, some countries are unable to produce goods and services due to weak technological capabilities. As a result, countries must engage in international trade to obtain such goods.
Define capital good, dividend, economic agent, SME
Capital good: a good used to produce other goods and services e.g. a machine.
Dividend: (a part of) the profit of a company that is paid to the people who own shares in it.
Economic agents: government, consumers, producers
SME (small and medium enterprise): a company, or companies considered as a group, that
are neither very small nor very large
What are macroeconomic aggregate?
They are totals, for example, in this case, total unemployment in an economy or total spending on goods and services
Define economic growth
An increase in the productive capacity of the economy, or an expansion of the potential output
An increase in the real value of goods and services produced and is measured by the annual
percentage change in real Gross Domestic Product (GDP).
Look at PPF on Goodnotes as well as GDP per capita
:)
Define GDP
How can it be calculated?
- Gross domestic product (GDP) measures the total value of national output of goods & services produced in a given time period (usually a year or quarter of a year).
- There are three ways of calculating GDP: Output = Expenditure (Aggregate Demand) = National Income.
- We can see this on a circular flow diagram –it should be the same all the way around although there are inevitably some measurement inaccuracies
