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Economics > Macro 2.1 > Flashcards

Macro 2.1 Flashcards

1
Q

Deflation

A

Reduction of the general price level in the economy

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2
Q

Hyperinflation

A

Large increases in the price level (at least 50% over a month)

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3
Q

Short run economic growth

A

The actual annual percentage change in real national output.

OR

% Change in Gross Domestic Product

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4
Q

What is Gross Domestic Product?

A

The value of goods and services produced in the economy over a period of time

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5
Q

Long-run economic growth

A

An increase in the potential productive capacity of the economy.

This is shown on a PFF.

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6
Q

What’s the difference between nominal and real values?

A

Nominal is expressed in monetary terms, but real value takes into account inflation

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7
Q

How to calculate real national output

A

Nominal national output / Average price level

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8
Q

What is total national income?

A

The value of all goods and services produced in a country

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9
Q

What is per capita income?

A

The total income divided by the number of people in the country

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10
Q

What is Gross National Product?

A

The value of all goods and services produced by domestic businesses and property at home and abroad

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11
Q

What is Gross National Income?

A

The total level of income of a country, including net income earned abroad from dividends and interest payments.

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12
Q

Why is GNI not suitable for low income countries?

A

Many jobs in those countries are informal rather than official , so they are not given a financial record.

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13
Q

What is Purchasing Power Parity?

A

It takes into account the relative costs of living, for example, £1 goes further in some countries than others.

Say if a basket of goods costs $2 in one country and £1 in another country, then the national income should be converted at $2:£1 regardless of the exchange rate.

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14
Q

Limitations of using GDP to compare living standards

A

Accuracy of statistics - some countries may not be able to record them well due to limited resources

The quality of goods may not be represented by monetary value

The shadow economy is not included in measurements

Transactions can be without a monetary value

The negative externalities that economic growth can cause aren’t taken into account

Economic growth can cause inequalities in income and wealth within a country - distribution of income is not measured

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15
Q

Problems of comparison between developed and developing countries

A

Accuracy of statistics can vary dramatically between developed and developing countries

Developing countries often consume what they produce (subsistence farming) - no monetary value

Developed countries often increase incomes at the expense of quality of life, like working long hours

Developing countries might wish to achieve growth at the expense of health and safety

Alternative methods of measuring quality of life are available

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16
Q

Why is economic growth such an important Macro-economic objective/

A

Increase in real GDP = Increase in National Income

This is a proxy measure fo an improvement in living standards

Increased income = the power to buy more consumer goods and services that make us happy

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17
Q

The 6 factors that the UN identifies for World Happiness Report

A 
Real GDP per capita
Healthy life expectancy
Having someone to count on
Perceived freedom to make life choices
Freedom from corruption
Generosity
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18
Q

3 ways of calculating GDP

A

Expenditure/Aggregate demand

National Income

National Output

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19
Q

Factors of GDP (Expenditure)

A 
Consumption
Government spending
Investment spending
Change in value of stocks
Exports minus imports
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20
Q

Factors of GDP (Income)

A

Incomes for people in jobs and in self-employment
Profits of private and public sector businesses
Rental income from the ownership of land

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21
Q

Factors of GDP (Output)

A

Value added from the main economic sectors:

Primary (like farming)
Construction
Manufacturing
Tertiary (like tourism)
Quaternary (like consultancy)
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22
Q

What is inflation and how is it measured?

A

Inflation is the sustained increase in the cost of living/fall in the purchasing power of money

This is measured by the rate of change in the general price level over time.

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23
Q

What are the 3 principle measures for inflation?

A

CPI - Consumer Prices Index
CPIH - as above with housing costs
RPI - Retail Prices Index

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24
Q

What is the government’s preferred measure of inflation?

A

CPI

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25
Q

What is the Basket of Goods and Services?

A

The Office of National Statistics compile the CPI, CPIH and RPI

A base year is selected and a family expenditure survey is carried out, covering 40,000+ households

All measures are based upon a basket of goods and services which is designed to represent typical purchases of consumers throughout the UK

Each month government officials collect 120,000 separate price quotations in 141 locations of around 700 products

700 items in the basket of goods and services

Different items are weighted according to their relative importance in terms of how much their price changes impact upon customers

For example, petrol is given a high weighting given that it forms a large part of individuals disposable income and there are few direct substitutes

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26
Q

Limitations of CPI as a measure of inflation

A

It’s not fully representative, it will be inaccurate for the ‘non-typical’ household, like 14% of the CPI index is devoted to motoring costs - inapplicable for non-car owners.

Single people have different spending patterns from households that have one or more children

Changing quality of goods and services - although the price of a good or service may rise, this may also be accompanied by improvements in quality/performance of a product

New products - CPI’s reaction is slow, only a few items are switched every year

CPI omits housing costs which can comprise significant part of some people’s spending

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27
Q

What is deflation

A

It’s a decrease in the general price level.

Inflation rate is negative

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28
Q

Causes and problems of deflation

A

Deflation tends to occur during periods of very low, or stagnant growth

Despite the fact the value of none would be rising, deflation generally indicates that demand is very low or suppressed

As prices are falling, consumers tend to deal purchasing decisions because they think prices will fall in the future

As a result, consumptions slows significantly, which means that firms will lose the confidence to invest, thus harming greater demand still further

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29
Q

What is disinflation?

A

The inflation rate is positive but is falling

Fall in the rate of inflation

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30
Q

Causes of inflation

A

Demand-pull
Cost-push
Growth of money supply

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31
Q

Demand-pull inflation

A

Excessive growth in aggregate demand

High consumer spending

Fiscal stimulus (government increasing spending or reducing taxes)

High foreign demand for exports

Bottleneck shortages

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32
Q

Cost Push Inflation

A

Continuing rises in input costs which occur independently of aggregate demand:

A rise in wages
A rise in the cost of imported raw materials
Firms with market power increasing profit margins
A rise in indirect taxes

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33
Q

Internal causes of inflation

A

A large surge in property prices

Higher wages/labour costs

Boom in credit/money supply

Rise in business taxes like VAT

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34
Q

External causes of inflation

A

Increase in world oil/gas prices

Inflation in global commodity prices

Depreciation of the exchange rate

High inflation in other countries

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35
Q

Effects of inflation

A

The price of goods and services tends to rise

If wages and earnings remain constant, then as prices rise, consumers are worse off in real terms, as their disposable income will buy less goods and services than previously

Therefore it is said that inflation erodes the value of money

Inflation is a main focus of macroeconomic policy and the Bank of England has been delegated an inflation target of 2%

36
Q

Costs of inflation: Shoe leather costs

A

Lose knowledge of what a fair price is and therefore more shopping around

Reduced disposable income due to higher prices

Loss of value in savings

37
Q

Costs of inflation: Menu costs

A

Businesses need to spend money recalculating prices and also print off new menus, price labels

38
Q

Psychological and political costs

A

People feel worse even if income rises

Unpopular for government

Disturb the distribution of income

39
Q

Costs of inflation: Redistribution costs

A

Inflation causes redistribution of income, such as:

Those on a fixed income (pensioners from private companies will lose money in real terms)

Borrowers benefit

If government taxes don’t change, government will experience a deficit in real terms

Government’s failure to change personal taxes in line with inflation, the burden of tax could be heavier

40
Q

The costs of inflation: Unemployment and growth

A

Inflation is believe to cause unemployment and lower growth as inflation…

Causes a rise in cost of production and lower profit margins

Causes uncertainty in consumer confidence therefore reduced spending

Causes uncertainty of investor confidence therefore less likely to take risk

Exports become too expensive

41
Q

The difference between anticipated and unanticipated inflation

A

Anticipated inflation is expected inflation, and steps have been taken before to mitigate its effects.

This could be done by indexation, which is where wages and taxes are adjusted in line with inflation.

Unanticipated inflation is inflation that was not estimated by the government and steps have not been taken before, having a greater impact on the economy.

42
Q

Effects of inflation on consumers

A

Higher prices - less able to afford goods and services, and erosion of living standards if wages do not keep up with price rises.

Savers will suffer a fall in the value of their savings in real terms (unless interest rates keep up with rise in prices).

Borrows may benefit from a reduction of the value of debt (over time) in real terms.

Those on lower incomes may suffer real hardship as they tend to spend a greater proportion of income than other groups.

43
Q

Inflation effect on workers

A

Workers are likely to exert pressure on bosses to increase wages.

Longer term - workers may have less job security if firms become less competitive due to rising costs

44
Q

Effect of inflation on Firms

A

Increased costs - this will affect their ability and willingness to supply as many goods and services as before, affecting their profitability.

Uncertainty - Rising costs cause uncertainty as firms find it difficult to plan and budget. Investment decisions are likely to be postponed.

Menu costs - firms have to adjust their prices on menus, on websites, in store, in vending machines.

45
Q

Effect of inflation on the economy

A

Reduced investment due to uncertainty. This will reduce AD in the short term and economic growth long term.

Decline in competitiveness - Firms selling goods overseas will not be able to compete if rising costs have forced their prices to increase. This will reduce economic growth and damage the balance of trade.

The Bank of England may raise interest rates - causing high costs for businesses and reducing consumption.

46
Q

Who is responsible for interest rates and how do they manage it?

A

The Bank of England

They’re responsible for monetary policy:

Exchange rates
Quantitative Easing
Interest Rates

The MPC (Monetary Policy Committee) meet every 6 weeks to set the base rate.

47
Q

How changes in world commodity prices affect domestic inflation

A

Commodities such as oil and some food items make up a large proportion of UK imports

This means that they have a significant impact on the price level

Many of the commodities that are brought in the UK are price inelastic products

Therefore, a rise in the world price of commodities will feed trough to UK inflation

48
Q

How changes in other economies can affect inflation in the UK

A

The UK is impacted in a number of ways

Emerging markets are creating a growing demand for goods and services globally. This has led to demand pull inflation.

The economic performance of our major trading partners such as the EU and the US will impact on demand for UK products.

49
Q

Evaluating the Consequences of Price Deflation

A

Holding back on spending

Debts increase

The real cost of borrowing increases

Lower profit margins

Confidence and saving hit

Income distribution (redistribution of income from debtors to creditors)

Increased competitiveness eventually, coming at a cost of higher unemployment in the short term

50
Q

Unemployed

A

The unemployed are those people able, available and willing to work at the going wage but cannot find a job despite an active search for work

51
Q

What is the level of unemployment by definition?

A

The number of people who are unemployed

52
Q

What is the rate of unemployment by definition?

A

The number of people unemployed as a % of the labour force

53
Q

What does the labour force include?

A

All those who are economically active - people willing and able to work

54
Q

What is the activity/participation rate by definition?

A

Number in work or unemployed divide by the population of working age

55
Q

What is the inactivity rate by definition?

A

Those not in work and unemployed divided by the population of working age

56
Q

The two ways of measuring unemployment

A

Claimant Count - the number of people claiming Job Seekers Allowance

Labour Force Survey (International Labour Organisation) - Quarterly survey of approximately 60,000 households compiled by the Office of National Statistics studying the employment circumstances of the UK population

57
Q

What is underemployment?

A

It occurs when workers cannot find a nob that is suitable for their qualifications and experience or who cannot find enough hours to work:

  • Graduates are unable to find work that is of graduate standard and are being forced to work in less skilled jobs such as supermarket assistants
  • Workers are being put on zero hour contracts and are called into work when required rather than being given a permanent contract
58
Q

Factors changing the rates of employment, unemployment and inactivity

A

The school or compulsory training leaving age

Number of school leavers entering high education

State retirement age

Level of net migration

Availability of jobs

Level of taxes and benefits

59
Q

Significance of increased employment

A

Improved Skills - Investment in human capital raises productivity and international competitiveness

Multiplier Effects - Increased incomes leads to increased spending so firms see increased profits and a virtuous cycle

Higher government taxation revenue - more people pay more income tax and spend more (VAT revenue)

60
Q

Significance of decreased unemployment and inactivity

A

All significances of increased employment

Falling government spending on out-of-work benefits

Prevents people from become unemployable

Job market becomes more flexible (more workers for employers to choose from)

Decreased dependency ratios (the number of inactive people that active and employed people are supporting, directly or indirectly)

61
Q

What is the Classical view of unemployment?

A

There are only unemployed people who are not able and willing to work at the going wage rate

Leave the market to get on with it and eventually unemployment will vanish

Real wage inflexibility

62
Q

Keynesian View of unemployment

A

People can be unemployed even in the long run because of insufficient aggregate demand (equilibrium with full employment)

Demand-deficient unemployment

63
Q

What is Real Wage unemployment?

A

Real Wage unemployment occurs when wages are above the equilibrium level causing the supply of labour to be greater than demand

When real wage rates are stuck at a level above than needed to reduce unemployed any further.

One cause of this is minimum wage legislation. Some unemployed people may be willing to work for less than the minimum wage, likewise some employers may be willing to take money workers but only if below the minimum wage

64
Q

What is structural unemployment?

A

A measure of workers who lose jobs in a declining industry and do not have the skills to join other industries

Regional unemployment (poor mobility of factors of production)

Sectoral unemployment (some skills are not transferable and retraining is required)

Technological unemployment (technology replacing their jobs)

65
Q

What is cyclical unemployment?

A

This is heavily linked to the economic cycle and occurs when there is a negative output gap, indicating demand is low, or demand-deficient.

GDP above and below the trend line.

66
Q

What is seasonal unemployment

A

When people are employed at certain times of the year - they are not needed all year round.

67
Q

What is frictional unemployment

A

Transitional unemployment due to people moving between jobs

68
Q

Economic costs of unemployment

A

Lost output, the economy is inside the PFF - lost efficiency.

Fall in real incomes and lower living standards for those affected

Drop in tax revenues and higher welfare - budget deficit

Possible decline in labour supply as unemployed move overseas

69
Q

Social costs of unemployment

A

Increase in relative poverty and welfare benefit dependency

Extra demands on NHS

Link between persistent unemployment and social problems

70
Q

Any beneficial effects for high unemployment?

A

Reduced risk of inflation - lower wage claims and price discounts

Pool of unemployed labour available for growing businesses

Rise in self employed start-ups as an alternative to being unemployed

71
Q

Labour scarring effects from high unemployment

A

Loss of work experience

Loss of current and future income

Changing pattern jobs in the economy

Check pg26 of GoodNotes 2.1

72
Q

What does the balance of payments (BOP) record?

A

All financial transactions made between consumers, businesses and the government in one country with other nations

Inflows of foreign currency = positive entry
Outflows of foreign currency = negative entry

73
Q

What is the balance of trade in goods?

A

The difference in value between visible imports and visible exports

74
Q

What are invisibles?

A

Services

75
Q

What is a current account deficit?

A

Imports > exports

76
Q

What is a current account surplus?

A

Exports > imports

77
Q

Income and current transfers

A

Income - generated from the loan of factors of production overseas:

  • Interest payments
  • Profits
  • Repatriation of earnings/wages

Current Transfers - Mainly government transfers to and from overseas organisations such as EU, NATO.

78
Q

What is a financial account?

A

Records money flows for investment purposes: FDI and FPI - speculative flows related to exchange rates and interest rates

79
Q

What is the capital account?

A

Records changes in net assets in each country

80
Q

What items are included in the current account?

A

Trade balance in goods
Trade balance in services
Net primary income from overseas assets
Net secondary income

81
Q

What is listed under primary income?

A

Profits, interest and dividends from investments in other countries

Net remittance flows from migrant workers

82
Q

What is listed under secondary income?

A

Overseas aid/debt relief
Military grants
UK Payments to the European Union

83
Q

Causes of a current account deficit

A

Relatively low productivity
Relatively high inflation rate
Over-valued exchange rate
Dependence on highly prices imported raw materials
Relocation of manufacturing industries to low-wage countries
Protectionism by other countries

84
Q

Causes of a current account surplus

A

Export-oriented growth

Foreign direct investment

Undervalued exchange rate

High domestic savings rates

Closed economy

Strong investment income from overseas investments

85
Q

Why is there a persistent deficit on the UK current account?

A

We have a high propensity to consume imported goods.

UK firms have become less competitive in the manufacture of goods.

Our exchange rate is too strong (pre-Brexit).

We have an unbalanced economy.

86
Q

Restoring a balance to a current account deficit

A

Controlling consumer spending will reduce the demand for imports

Investing in the supply-side

Depreciation of the exchange rate

Improve overall macroeconomic conditions in the UK

Economics (14 decks)

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