Macro 2 Flashcards
Inflation definition
General persistent rise in the level of prices of goods and services in an economy of a period of time
Increases the cost of living and reduces purchasing power
Disadvantages of inflation (4)
Reduces purchasing power of a given sum of money
Decline in real income, effects those with a fixed income in particular
Causes unemployment
Exports become less competitive
Possible advantages of inflation (4)
Gives incentives for firms to produce
Could stimulate economic growth
Increases wages
Borrowers/ debt people gain
Advantages of deflation (3)
Increases purchasing power
Increases the value of savings
Lenders gain if money repaid is of higher value
If resulted from advances in technology
Decreases costs of production increases competitiveness
Increases exports, reduces imports, improves current account position
Increases employment increases output
Disadvantages of deflation (2)
Consumers reduce spending on expectation that prices would lower even further
Reduces firms’ output which decreases investment and employment
Decreases economic growth
Increases the burden of debt
Amount people give back will have higher purchasing power
Reasons for changes in employment (6)
Changes in demand due to changes in income causes change in taste and preferences
Changes in government policy measures
Government may subsidise certain industries to encourage expansion
Decrease in the role of the government in the economy by reducing public sector employment
Advances in technology creates new jobs
Increase in education increases skills of younger workers
Country becomes developed
Less primary sector, more then less secondary sector, more tertiary sector
Reasons for increase in unemployment (3)
Aggregate demand decreases
Firms reduce output so demand for labour decreases
Cyclical unemployment
Increase in unemployment benefits
Workers take longer and less willing to look for jobs
Frictional unemployment
Increase exchange rate
Exports more expensive, imports cheaper, reduce international competitiveness
Reduces demand for labour in affected industries
Structural unemployment
Consequences of unemployment in an economy (5)
Under-producing compared to potential output
Decreases rate of economic growth
Waste of scarce resources
Government loses tax revenue from income tax and VAT
Opportunity costs for unemployment benefits
GDP definition
Total output produced in a country
How GDP is measured (4)
Rate of growth measured in real output
Change in GDP per head over a period of time
Increase in productive potential
Shift outwards of the production possibility curve
Causes of economic growth (4)
Discovery of minerals
More materials enable firms to produce more
Increase labour force increases total demand and productive capacity
Consumer boom increases total demand and encourages firms to produce more
Advances in technology increases demand and productive capacity
Recession definition
Fall in output of a country as measured by GDP, it is two successive quarters of negative growth
