Macro 2.1 Flashcards
What is economic growth?
The rate of change of output, indicating an increase in the long-term productive potential of a country.
Economic growth is typically measured by the percentage change in real GDP per annum.
How is Gross Domestic Product (GDP) defined?
The total value of goods and services produced in a country within a year.
GDP is an indicator of the standard of living in a country.
What does GDP per capita represent?
The total GDP divided by the number of people in a country.
GDP per capita grows if national output grows faster than population.
What is the difference between real GDP and nominal GDP?
Real GDP strips out the effects of inflation, while nominal GDP does not.
Real values represent the volume of national income, whereas nominal values represent the monetary cost.
What is Gross National Income (GNI)?
The value of goods and services produced by a country plus net overseas interest payments and dividends.
GNI accounts for profits from businesses owned overseas and remittances sent home by migrant workers.
What does Gross National Product (GNP) measure?
The value of goods and services produced through labor or property supplied by citizens of a country, both domestically and overseas.
GNP includes the value of all goods produced by citizens, regardless of location.
What is the significance of using real GDP for comparisons?
Real GDP strips out the effect of inflation, providing a clearer picture of actual growth.
This is important to avoid misleading conclusions about economic performance.
True or False: GDP can increase due to inflation without any increase in actual goods and services produced.
True.
This highlights the importance of using real GDP figures for accurate comparisons.
What are Purchasing Power Parities (PPP)?
An exchange rate that compares how much a typical basket of goods costs in different countries.
PPP provides an alternative to using exchange rates for GDP comparisons.
List some problems with using GDP to compare standards of living.
[“Inaccuracy of data collection”, “Hidden or black market activities”, “Exclusion of home-produced services”, “Errors in calculating inflation”, “Differences in calculation methods across countries”]
What does an increase in GDP not necessarily indicate about living standards?
It may not increase living standards for everyone, as income distribution can vary.
Growth in GDP can be due to income increases in just one group.
Fill in the blank: The quality of goods and services today is much higher than those ______ years ago.
fifty
What is a common currency used for comparing GDP figures internationally?
US dollars.
This is due to the size of the American economy.
What type of expenditure does not contribute to an increase in standard of living but does increase GDP?
Defence spending.
For example, the UK’s GDP was higher during the Second World War due to increased defense spending.
What does GDP measure?
Income
GDP stands for Gross Domestic Product and measures the total income generated in a country.
What are the six key factors found in the UN happiness report?
- Real GDP per capita
- Health
- Life expectancy
- Having someone to count on
- Perceived freedom to make life choices
- Freedom from corruption
- Generosity
What initiative did the UK Prime Minister launch in 2010?
Measuring National Wellbeing report
This report was launched to assess how lives are improving in the UK.
What four key questions are asked in the UK National Wellbeing report?
- Life satisfaction
- Anxiety
- Happiness
- Worthwhileness
True or False: Higher levels of income are always associated with increases in happiness.
False
This notion is challenged by the Easterlin Paradox.
What is the Easterlin Paradox?
Happiness and income are positively related at low incomes but not at higher levels
This means that rich people aren’t necessarily happier.
What is inflation?
The general increase of prices in the economy
Inflation erodes the purchasing power of money.
What is deflation?
The fall of prices
Deflation indicates a slowdown in the rate of growth of output in the economy.
What is disinflation?
A reduction in the rate of inflation
Prices are still rising but at a slower rate.
What is the formula for calculating the index figure?
(new figure/base figure) x 100
This is used to compare nominal figures to real figures.
What does the Consumer Price Index (CPI) measure?
The average price changes of a basket of goods and services
The CPI is updated monthly based on data collected from various retailers.
What are the limitations of the CPI?
- Not representative of all goods sold
- Different households spend differently
- Excludes the price of housing
- Comparisons with historical data are difficult
What is the Retail Price Index (RPI)?
An index that includes housing costs such as mortgage payments and council tax
It is similar to CPI but calculated differently.
What are the causes of inflation?
- Demand pull
- Cost push
- Growth of money supply
What effect does inflation have on consumers?
- Decreased purchasing power
- Reduced living standards if incomes do not rise
- Psychological effects causing decreased spending
How does inflation affect firms?
British goods may become more expensive compared to foreign goods
This can lead to reduced competitiveness in international markets.
What effect does rising inflation have on consumers’ spending behavior?
Consumers may decrease their spending even if their income is rising in line with inflation.
This is due to feeling less well-off because prices are rising.
How does higher inflation in Britain affect British goods in the international market?
British goods become more expensive, making them less competitive and harder to export.
This can also affect the balance of payments.
What negative behavior does deflation encourage among consumers?
Deflation encourages consumers to postpone purchases while waiting for prices to fall further.
This can lead to increased savings and reduced borrowing.
What is a potential consequence of deflation on firms?
Firms may experience falling demand for goods, leading to decreased profits and business confidence.
This can result in a long-term reluctance to invest.
What can happen if the government fails to adjust excise taxes in line with inflation?
Real government revenue will fall.
Conversely, failing to change personal income tax allowances can increase real government income.
What happens to workers’ living standards if they do not receive pay rises in line with inflation?
Their living standard will decrease.
Workers in weaker unions are often the most affected.
What is indexation in relation to inflation?
Indexation is when wages or taxes are increased in line with inflation.
An example is workers negotiating wage rises based on predicted CPI or RPI.
What is the relationship between macroeconomic inflation figures and microeconomic impacts?
The inflation figure is a macroeconomic concept, while its effects on individuals like firms, consumers, or workers are microeconomic impacts.
This illustrates how macroeconomic factors can have microeconomic effects.
What does unemployment represent in an economy?
Unemployment represents a waste of resources and is a good indicator of a country’s economy.
High unemployment levels can indicate economic issues.
What is the Claimant Count?
The Claimant Count is the number of people receiving benefits for being unemployed.
It reflects the number of claimants on a particular day each month.
What defines someone as unemployed according to the International Labour Organisation?
Unemployed individuals are of working age, without work, able to work, seeking work, and have actively sought work in the last 4 weeks.
They must also be available to start work in the next 2 weeks.
What does the Labour Force Survey (LFS) measure?
The LFS measures personal circumstances and activity in the labour market to classify people as employed, unemployed, or inactive.
It is a legal requirement for every EU country.
What is the difference between the economically active and the workless in the labor force?
The economically active includes the employed and unemployed, while the workless includes the unemployed and inactive.
The workless do not participate in the labor market.
What is underemployment?
Underemployment refers to individuals who are in part-time or zero-hour contracts when they would prefer full-time work.
It also includes those in jobs that do not reflect their skill level.
What is frictional unemployment?
Frictional unemployment occurs when people are between jobs or new workers enter the labor market.
It is typically short-term and not a serious problem.
What is structural unemployment?
Structural unemployment results from a long-term decline in demand in an industry, leading to a reduction in employment.
This can be caused by international competition or technological advances.
What is structural unemployment?
When the demand for labour is lower than the supply in an individual labour market
An example is the shipbuilding industry.
What is regional unemployment?
Low levels of employment in certain areas due to industry closures
This can lead to a fall in demand for other businesses in the area.
Define sectoral unemployment.
When one sector (primary, secondary, tertiary) suffers a dramatic fall in employment
What is technological unemployment?
Unemployment caused by job replacement due to technological improvements
Describe seasonal unemployment.
Unemployment that occurs due to seasonal demand in certain industries
For example, tourism jobs are prominent only during specific times of the year.
What causes cyclical unemployment?
A general lack of demand for goods and services within the country
Also known as Keynesian ‘demand deficient’ unemployment.
What is real wage inflexibility?
Unemployment resulting from real wages being above the market clearing level
Fill in the blank: An increase in net inward migration tends to lead to increased _______.
jobs
How has migration affected the UK labor market since the 1990s?
Increased immigration from mainly Eastern European countries leads to more jobs
Immigrants often take lower-skilled jobs and are less likely to claim benefits.
What is the impact of increased skills on employment levels?
Higher skills are needed to maintain employment levels in progressing economies
What are the impacts of unemployment on workers?
Loss of income, decline in living standards, stigma, stress, and health issues
How does long-term unemployment affect job seekers?
Those unemployed for more than 12 months often find it more difficult to get another job due to skill loss
What are the effects of unemployment on firms?
Decrease in demand for goods, potential profit fall, and a smaller pool of skilled people to employ
How do consumers in high unemployment areas suffer?
Local shopping centres may be run down, leading to less choice and lower quality of goods
What is the government’s financial challenge due to unemployment?
Fall in tax revenues and higher spending on welfare payments
This may lead to an increase in the budget deficit.
What is the relationship between rising unemployment and social issues?
Linked to social deprivation, crime, and social dislocation
Define the balance of payments.
A record of all financial dealings over a period of time between economic agents of one country and all other countries
What are the two main components of the balance of payments?
- Current account
- Capital and financial account
What does the current account record?
Payments for the purchase and sale of goods and services
Fill in the blank: Trade in goods are also known as _______.
visibles
What is the balance of trade?
The difference between visible exports and visible imports
What are invisibles in the context of the current account?
Services traded in or out of the country
What are invisibles in the context of trade?
Services traded in or out of the country
What is an example of an invisible import?
A holiday to Spain by a British family
What is an example of an invisible export?
A Japanese firm buying insurance from a London firm
What does the balance of trade in goods and services include?
Balance of trade + balance of invisibles
How can income and current transfers be categorized?
Primary and secondary incomes
What is primary income?
Result of loans of factors of production abroad e.g. interest, profits, dividends
What is secondary income primarily composed of?
Mainly government transfers to overseas organisations
What is the equation for the current balance?
Balance of trade + Balance of invisibles + Net income and current transfers
True or False: A current account surplus occurs when imports are greater than exports.
False
What is a current account deficit?
Where imports are greater than exports
List the four main macroeconomic objectives of governments.
- Low unemployment
- Low and stable inflation
- Economic growth at a similar rate to other economies
- Balance of payment equilibrium
How does high economic growth typically affect the current account?
It tends to create a deficit due to increased imports
What kind of growth do governments tend to want to achieve?
Export-led growth
What are the four key ways that have led to globalization?
- Growing proportion of output traded internationally
- Increased ownership of assets in other countries
- Rising migration between countries
- Faster sharing of technology
How does international trade affect countries’ interdependence?
Changes in one country’s economic condition affect others
Fill in the blank: In theory, all current balances should add up to _______.
Zero
