MACRO 3 - Economic Performance Flashcards
What is short run economic growth?
the % increase in a country’s real GPD, usually measured annually
What is long run economic growth?
productive capacity of the economy is increasing, it refers to the trend rate growth of real national output over time
What is potential output?
what a country/economy could produce if resources were fully employed
What is a negative output gap?
the actual level of output is less than the potential level, this means downward pressure on inflation, and spare capacity
What is a positive output gap?
the actual level of output is more than the potential level of output, puts upwards pressure on inflation
Characteristics of a boom:
- high rates of economic growth
- near full capacity/positive output gap
- (near) full employment
- government budget improves (surplus)
- consumers & businesses have confidence
- increased inflation (over-heating)
Characteristics of a downturn:
- short run growth is decreasing
- increase in interest rates to combat inflation
- decreased business and consumer confidence
- tax revenue decreased, means government in a deficit
- decreased spending on imports
Characteristics of a recession:
- business and investment confidence is low
- low inflation (potentially deflation)
- decreased consumption
- increased unemployment
- increased gov spending on benefits
Characteristics of a recovery:
- low levels of short run economic growth
- increased consumer and business confidence
- decreased inflation
unemployment starts to plateau - using spare capacity
What is the economic cycle?
the repeated pattern of fluctuations in short run economic growth and how it differs from trend rate growth
What is sustainable economic growth?
growth that does not compromise the ability to grow in the future
What are automatic stabilisers?
fiscal changes that occur in the business cycle
Benefits of sustained economic growth:
- increased living standards
- job creation
- decreased poverty
- attractive investment location
Costs of sustained economic growth:
- inflation
- inequality
- negative externalists
- depletion of natural resources
Causes of the economic cycle:
- multiplier & accelerator effects
- inventory cycle
- asset price bubbles
- animal spirits
- excessive credits
- economic shocks
What is the natural rate of unemployment?
the level of unemployment that exists in an economy when it is operating at full potential or at long term equilibrium (4-5%)
What is unemployment?
the % of the economically active population who are willing and able to work, but are unable/don’t have a job (4.2% currently)
What is the Claimant count?
a measure of unemployment, how many people are claiming unemployment benefits (universal credit)
What is the labour force survey?
a measure of unemployment, a survey that means to be considered unemployed:
- 18 - 67 yrs
- willing and able to work
- actively seeking a job
What is long term unemployment?
unemployed for 12+ months
What is mass unemployment?
unemployment reaches 10%
What is hidden unemployment?
“Disguised unemployment”
the number of people who do not have to work, but are counted in the government reports e.g. stopped looking for a job
What is underemployment?
working less hours than you would like
What is the “Gig economy”?
short-term, flexible work e.g. Uber Eats or Deliveroo
What are the causes of unemployment?
- frictional
- structural
- cyclical
- real wage
What is frictional unemployment?
when people are between jobs
What is structural unemployment?
long-term changes in the labour market e.g. technological advancements
What is cyclical unemployment?
links to the economic cycle, a result of weakened economic activity e.g. a recession
What is real wage unemployment?
when the real wage is higher than at equilibrium
Who is economically inactive?
people who are 18-67 year olds, not actively seeking a job in the last 4 weeks
What is the unemployment trap?
loss of skills, which means firms desire you less, which means the government are forced to increase benefits
How to stop the unemployment trap:
- furlough
- job centres
- information e.g. Indeed
- re-skilling/training courses
- reduce benefits
What is inflation?
the rate at which prices of goods and services in an economy increase overtime
What is hyperinflation?
extreme inflation (above 10%)
Example of a country that experienced hyperinflation:
Argentina (2023-24)
What is staginflation?
high inflation + low economic growth
What is cost-push inflation?
businesses respond to increased costs of production by increasing prices for consumers
How is cost-push inflation shown on a diagram?
decrease in SRAS
What is demand pull inflation?
a rapid increase in AD (increase in one of the components of AD = C+I+G+(X-M)
How is demand pull inflation shown on a diagram?
an increase in AD
Consequences of inflation:
- increase in poverty
- decrease in the real value of money
- decrease in the value of assets
- increase in house prices
- uncompetitive exports
- uncertainty + decrease in confidence
Economic costs of inflation:
- inequality
- decrease in real income
- negative real interest rates
- cost of borrowing
Gainers from inflation:
- workers with strong wage bargaining power (unions)
- producers, make more profit
- debtors
- fiscal drag = increased tax revenue
Losers from inflation:
- retired people
- savers
- lenders
- workers with low paid jobs (no unions)
Fiscal policies to help control cost push inflation:
- decrease corporation taxes
- increase subsidies
Fiscal policies to help control demand pull inflation:
- increase income tax
- increase corporation tax
- decrease gov spending
Monetary policies to help control cost push inflation:
- lower interest rates = decrease cost of loans for firms
Monetary policies to help control demand pull inflation:
- increase interest rates = increased return on savings, increased cost of loans for investment
Supply side policies to help control cost push inflation:
- increase productivity
- increase labour supply
Supply side policies to help control demand pull inflation:
- decrease gov spending
What is disinflation?
a decrease in the rate of inflation
How is disinflation shown on a diagram?
a decrease in the general price level, from an increase in AS or a decrease in AD
What is deflation?
a sustained period when the general price level of an economy is below 0%
Why is deflation bad?
- delays consumption
- wage rigidity
- increased value of debt
- asset price deflation
How can the government prevent deflation/
cause some inflation to happen in an economy, either increase AD or decrease SRAS
Economic policies to help avoid deflation:
- lower interest rates + quantitive easing (print more money)
- fiscal stimulus measures (increase AD)
What is the Phillips curve? (SRPC)
a curve that shows the possible inverse relationship between the unemployment rate and the rate of inflation
What are some challenges to the SRPC?
In the 1970s, some developed countries experienced high inflation and high unemployment, therefore it wasn’t accurate
What is the long run Phillips curve?
the natural rate of unemployment (4-5%)
Policies regarding the Phillips curve:
- decrease in unemployment is temporary
- lowering unemployment by stimulating demand
- supply side policies = improve occupational mobility of labour, attract more people to search for jobs, lift labour productivity
