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IB economics > macro 3.3- macroeconomic objectives > Flashcards

macro 3.3- macroeconomic objectives Flashcards

1
Q

Define unemployment

A

people above the age of 16, who are able, available and willing to work at the going wage but cannot find a job despite an active search for work

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2
Q

define the economically active population

A

employed people + unemployed people

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3
Q

give the equation for unemployment rate

A

numbers unemployed/economically active population x 100

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4
Q

what is the activity/participation rate?

A

proportion of working age population that are (potentially) active, so either employed or unemployed

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5
Q

what is the inactivity rate?

A

the percentage of the population of working age that is out of the labour force.

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6
Q

what is the labour force?

A

the active working age population (16-64yo) that are either in work or able to work and actively seeking work

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7
Q

give a flow diagram for population

A

population -> population of working age -> labour force/out of labour force (inactive) ->employed/unemployed

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8
Q

define unemployment rate

A

percentage of the labour force that is not working.

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9
Q

state 2 difficulties of measuring unemployment

A
  1. Hidden unemployment, including discouraged workers and underemployment
  2. average ignores disparities
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10
Q

hidden unemployment

A

people who are jobless, but official unemployment figures do not include them.
- eg, people who have stopped looking for a job and people who work less than they want to

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11
Q

discouraged workers

A

people that would like to work and have previously been seeking employment, but have since stopped because they could not find a job.

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12
Q

underemployment

A
  • part time work; where workers would prefer to work more hours but cannot get them
  • workers working below their skill levels
    economy may be working inside PPC despite low headline unemployment figures
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13
Q

average ignores disparities

A

the unemployment rate is only an average so does not account for disparities in age, gender, ethnicity and region. For instance, youth unemployement tends to be higher as well as the unemployment rate amoungst ethnic minority groups.

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14
Q

give a pro and a con of unemployment benefits

A

pro: can make labour market more efficient by enabling better ‘matching’
con: less incentive to find work

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15
Q

what is youth unemployment?

A

percentage of labour force between 15 and 24 that is unemployed

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16
Q

give equation for youth unemployment rate

A

no of 15-24yo unemployed/economically active 15-24yo x 100

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17
Q

why is youth unemployment unreliable?

A

there is an inevitable exaggeration in youth unemployment rates as the activity rate (denominator) is smaller than for the whole population (students are inactive)

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18
Q

what can we use instead of youth unemployment?

A

NEETs (not in employment, education or training)

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19
Q

state 5 types of unemployment

A
  • classical/real wage
  • demand deficient/cyclical
  • structural
  • seasonal
  • frictional
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20
Q

describe the causes of classical or real wage unemployment

A

caused by real wages being forced above the equilibrium wage rate by actions of:
- government (eg minimum wage laws)
- trade unions

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21
Q

describe how demand deficient/cyclical unemployment happens in the classical view

A
  1. AD falls
  2. causing a NOG
  3. derived demand for labour falls
  4. in the short run, wage rate remains fixed; Qs of labour remains at Q1 but the Qd of labour falls to Q2
    (wages then fall and employment restored as SRAS shifts right)
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22
Q

assumptions behind classical unemployment theory

A
  • short run unemployment can occur but is a temporary phenomenon; wages are flexible and so will fall, and the labour market will move back into equilibrium
  • long run unemployment will be ‘voluntary’
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23
Q

causes of demand deficient/cyclical unemployment

A
  • general lack of AD in the economy
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24
Q

how can demand deficient/cyclical unemployment be fixed? (according to Keynes)

A

by pushing AD back up, ie through lower interest rates, lower taxes and increased govt spending

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25
Q

describe how demand deficient/cyclical unemployment happens with a diagram in Keynesian view

A
  1. AD falls from AD1 to AD2, causing:
    - new equilibrium at P2Y2
    - NOG
  2. Derived demand for labour falls to D2
  3. Wage rate stays the same (W1)
  4. Qs>Qd = unemployment
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26
Q

what did Keynes argue about falling wages?

A

he argued that if wages fell and workers accepted them, that AD would fall even further, worsening unemployment

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27
Q

what is structural unemployment?

A

unemployment caused by the decline of industries and the inability of former employees to move into jobs being created in new industries.
- the decline of such industries may be caused by automation and ‘offshoring’ due to globalisation

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28
Q

why would structural unemployment persist?

A

due to occupational and geographic immobility of labour (ie workers don’t have necessary skills for a different job, and they cannot move)

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29
Q

draw a diagram for structural unemployment

A

flashcards: NB that labellings need to be SPECIFIC FOR A PARTICULAR INDUSTRY

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30
Q

define frictional (or search) unemployment

A

unemployment caused when people move between jobs. it will inevitably take time to find alternative work, during which period the worker is ‘frictionally’ unemployed

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31
Q

what affects frictional unemployment?

A
  • the quality of the information available for job seekers is crucial to the extent of the seriousness of FU
  • the generosity of benefits can also impact upon the time taken
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32
Q

why may frictional unemployment be a good/bad thing?

A

if it is too short- underemployment
however, if it is too long- this could become long term unemployment

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33
Q

define seasonal unemployment

A

unemployment caused by the seasonal nature of employment- tourism, construction, agriculture, skiing, sports, beach lifeguards etc

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34
Q

state and explain the costs of unemployment to governments, firms, the economy and the individual

A

Individual:
- loss of income
- health issues (mental instability, sense of failure, increased stress, marital failure, suicide)
Economy:
- increased crime and vandalism
- increased anti-social behaviour
- increased homelessness
Government:
- increased spending on benefits
- less tax revenue
- increased spending on retraining
Firms:
- loss of sales revenue
- loss of output/production

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35
Q

what did the Philips curve lead to?

A

a theory expressing a trade-off between inflation and unemployment

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36
Q

what did the Philips curve state?

A

it showed an inverse relationship between inflation and unemployment. as unemployment decreased, inflation rose

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37
Q

draw the short run and long run Philips curve, explaining the LRPC

A

the long run Philips curve is always at the natural rate of unemployment

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38
Q

what is stagflation and when does it happen?

A

the simultaneous increase in inflation and unemployment. it can only occur when there is cost push inflation.

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39
Q

what is the macroeconomic objective relating to unemployment?

A

low unemployment

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40
Q

what is the macroeconomic objective relating to inflation?

A

low and stable rate of inflation (uk=2%)

41
Q

define inflation

A

the sustained rise in the general (or average) level of prices

42
Q

how do we measure inflation?

A

by using the consumer price index (CPI)

43
Q

describe the method for finding the CPI

A
  1. a typical basket of goods and services is identified annually (from National Accounts)
  2. Weights are assigned to items to reflect relative importance, or percentage income. this is changed annually
  3. monthly price surveys are conducted and used to adjust the index
  4. changes in the index are used to calculate the inflation rate (% inflation)
44
Q

what are the limitations of the CPI in measuring inflation?

A
  • the basket used in any country represents the purchasing habits of a ‘typical household’, but this will not be applicable to all people.
  • there may be variations in regional rates of inflation within a country
  • items are removed or added to be more representative of typical demand; however, this limits the ability of analysts to make comparisons from one period of time to another/international comparisons
  • prices may change for a variety of reasons that are not sustained- eg seasonal variations in the prices of food and volatile oil prices may lead to unusual movements in the inflation rate and can be misleading
45
Q

what is a core rate of inflation?

A

a measure that uses the information of the consumer price index but excludes food and energy prices

46
Q

why does the CPI exaggerate inflation?

A
  1. substitution effects- the CPI disregards the fact that people tend to switch towards cheaper substitutes as prices rise
  2. quality improvements are disregarded- sometimes as price increases, you get more value for your money (ie the rise is not just due to inflation)
47
Q

why is the exaggeration of the CPI significant?

A

economic agents have to use this measure:
- workers/unions; for base pay demands
- businesses; for base price increases
- governments; to set taxes

48
Q

give the two causes of inflation

A
  • demand pull inflation
  • cost-push inflation
49
Q

state the difference between anticipated and unanticipated inflation

A

anticipated inflation= correctly predicted inflation
unanticipated inflation= where actual inflation catches economic agents by surprise (could be higher OR lower than expected)

50
Q

why is unanticipated inflation problematic?

A

as it results in a misallocation of resources (allocative inefficiency) by affecting the price mechanism signal

51
Q

describe demand pull inflation with a diagram

A
  1. AD increases from AD1 to AD2
  2. this causes the general price level to rise, and causes a positive output gap
52
Q

what could be 4 causes of demand-pull inflation?

A

demand side:
- cut in interest rates
- increased money supply
- higher wages
- inflation expectations

53
Q

what could be 4 causes of cost-push inflation?

A

supply side:
- higher wages
- devaluation/depreciation
- increase in VAT
- inflation expectation

54
Q

why would cutting interest rates cause an increase in AD?

A

cheaper to borrow:
- encouraged spending and investing

55
Q

why would devaluation/depreciation cause both types of inflation?

A
  • increases the cost of imports so there will be an increase in cost-push inflation.
  • increases domestic demand (exports), so there could be some demand-pull inflation
56
Q

describe cost push inflation with a diagram

A

firms respond to rising costs by increasing their prices to protect profit margins

57
Q

describe the wage-price spiral

A
  • rise in wages causes cost of production to rise
  • leading to cost push inflation
  • higher incomes cause AD to rise
  • leading to demand pull inflation
  • higher prices reduce real incomes and unions demand pay rises
58
Q

what determines the economic costs of inflation?

A
  • the degree of inflation (most costly when it is high/variable)
  • unanticipated/anticipated
  • whether it is higher in the uk than trade partners
  • whether the exchange rate adjusts to restore lost price competitiveness for exporters
59
Q

state the 6 main costs of inflation

A
  1. uncertainty
  2. redistributive effects
  3. monetary policy response
  4. damage to export competitiveness
  5. increasing inflation expectations (self-fulfilling)
  6. shoe-leather costs/menu costs
60
Q

uncertainty as a cost of inflation

A

loss of business confidence due to high levels of uncertainty:
- decrease in planned investment (component of AD)
- AD falls, lowering GDP
- in the long run, this will harm productivity and health of economy (LRAS may not increase)

61
Q

why do redistributive effects happen by inflation?

A

misallocation of resources due to distorting PM:
- lenders -> debtors
- away from those on fixed incomes/with a weak bargaining power
- tax-payers -> government

62
Q

redistributive effects (lenders->debtors) as a cost of inflation

A
  • inflation rate becomes higher than nominal interest rate, so real interest rates become negative
  • borrowing is cheaper; profits of lenders decrease
63
Q

redistributive effects (away from those on fixed incomes/with a weak bargaining power) as a cost of inflation

A
  • nominal pay stays the same but real pay decreases; lower purchasing power and income
64
Q

redistributive effects (tax payers-> government) as a cost of inflation

A
  • as inflation rate rises, tax payers are moved into higher tax bands (despite the fact that their real income is staying the same/decreasing)
  • ensures they are charged a higher proportion of their real incomes
65
Q

monetary policy response as a cost of inflation

A
  • central banks increase interest rates
  • AD falls so real GDP falls (output in the country has fallen)
  • worse unemployment as firms adjust their production/supply in response to the AD fall
66
Q

damage to export competitiveness as a cost of inflation

A
  • SRAS falls as cost of production increases
  • exports become more expensive and decrease
  • imports become relatively cheaper and more attractive, so demand for these increases
  • net exports (X-M) falls so AD falls and real GDP falls
67
Q

increasing inflation expectations as a cost of inflation

A
  • consumers will not delay purchases; AD rises
  • greater demand for higher wages
68
Q

micro costs of inflation as a cost of inflation

A

shoe leather costs:
- costs that people incur to maximise their cash holdings during times of high inflation
menu costs:
- costs that businesses face when they change their prices
both of these create distractions and opportunity costs, which are detrimental for the economy

69
Q

why is some inflation desirable?

A
  • deflation can be harmful
  • falling/stagnant nominal incomes cause household confidence to fall; AD falls, GDP falls
  • reduces the real value of debt, helping households/firms
70
Q

difference between deflation and disinflation

A

deflation- price level is falling (negative inflation)
disinflation- the inflation rate is falling (prices are rising but at a slower rate)

71
Q

describe good deflation

A

caused by improvements in the supply side of economy/productivity
LRAS shifts to right so PL decreases and output increases

72
Q

describe bad deflation

A

AD falls; decrease in price level; PL falls and output falls; unemployment rises as firms need fewer workers

73
Q

state the 6 effects of bad deflation

A
  1. unemployment
  2. deferred consumption
  3. falling consumer confidence/uncertainty
  4. effect on investment
  5. costs to debtors
  6. policy ineffectiveness
  7. Def
74
Q

unemployment as a cost of deflation

A

AD falls so firms lay off workers, further reducing AD (deflationary spiral)

75
Q

deferred consumption as a cost of deflation

A

consumers delay purchases of durable goods; fall in AD (deflationary spiral)

76
Q

falling consumer confidence/uncertainty as a cost of deflation

A

lower AD

77
Q

effect on investment as a cost of deflation

A

businesses make less profit/ more losses; increased unemployment and decreased business confidence; reduced investment; negative effect on future economic growth

78
Q

cost to debtors as a cost of deflation

A

value of their debt rises

79
Q

policy ineffectiveness as a cost of deflation

A

very low/negative interest rates associated with deflation make expansionary monetary policy ineffective, as it is not possible to reduce IR to raise AD

80
Q
A
81
Q

what did the Philips curve state?

A

it showed an inverse relationship between inflation and unemployment. as unemployment decreased, inflation rose

82
Q

define economic growth

A

an increase in real GDP/GNP over time (typically a year)

83
Q

distinguish between short run and long run economic growth

A

SR:
- caused by an increase in AD
- ca only be sustainably achieved if there is a NOG
LR:
- caused by an increase in LRAS
- Supply side and efficiency improvements shift the LRAS (and the PPC) to the right- resulting in an increase in the potential growth rate

84
Q

describe short run economic growth using a diagram

A
  • caused by an increase in AD
  • only happens if there is a NOG
  • causes a movement from inside the PPC toward the PPC boundary
85
Q

describe long run economic growth using a diagram

A
  • takes place if there is an improvement in supply capacity of economy (ie improvement to FOPs)
  • LRAS shifts to the right
  • PPC shifts outwards
    NB: there also needs to be an increase in AD in order to realise the extra potential output
86
Q

give 4 effects of boosting LRAS (long run economic growth)

A
  • higher growth of GDP
  • lower unemployment (higher derived demand for labour)
  • reduced inflationary pressure
  • improved trade performance (reduced inflationary pressure improves IC)
87
Q

why are supply side improvements better than changes in AD?

A

SS may improve all 4 indicators (inflation, growth, unemployment and trade performance)

changes in AD lead to 2 indicators improving and 2 worsening.

88
Q

define trend growth

A

the smooth path of long run national output- the average historical growth rate over 20-30 years.

89
Q

define a recession in terms of growth

A

2 consecutive quarters (3 months) of negative economic growth

90
Q

define the sustainable growth rate

A

the annual rate of growth that can be sustained without:
1. causing accelerating inflation (eg rise in AD= short run issue)
2. reducing the ability of future generations to grow.

91
Q

describe how you would calculate economic growth

A
  1. Calculate nominal GDP from a set of data for two time periods
  2. Calculate the real GDP for each time period using the GDP deflator
  3. Calculate the percentage change in real GDP between the two time periods
92
Q

give and explain the consequences of economic growth on living standards

A

PROS
- Increased incomes lead to better standards of living
- Increased employment
CONS
- Rising aggregate demand causes demand pull inflation and the purchasing power of people on fixed incomes may fall
- Increased income usually leads to greater consumption of demerit goods
- Greater output often requires more time from workers and can decrease leisure time and well-being

93
Q

give and explain the consequences of economic growth on the environment

A

PROS
Improvement in the quality/quantity of environmentally friendly technologies\
CONS
Environmental damage caused by negative externalities of production and consumption increases
Resources are depleted more rapidly

94
Q

give and explain the consequences of economic growth on income distribution

A

PROS
Decreased levels of absolute poverty
Higher levels of employment mean that there is more tax revenue for governments to redistribute on welfare payments
CONS
Lack of equity in the distribution of income - the rich may get richer and the poor poorer

95
Q

four sources of economic growth

A
  1. natural factors
  2. human capital factors
  3. physical capital and technological factors
  4. institutional factors
96
Q

natural factors

A
  • anything that will increase the quantity/quality of their natural factors should lead to an increase in potential growth
  • quantity can be improved by means of land reclamation
  • quality may be improved by fertilisation, better planning of land usage, improved agricultural methods, building upwards
97
Q

human capital factors

A
  • increase: encouraging population growth or increasing migration levels.
  • improved: improving healthcare, education, vocational training and re-training for unemployed, fresh water/sanitation
98
Q

physical capital and technological factors

A

includes things like factory buildings, machinery, shops, offices and motor vehicles.
- increase: level of saving, domestic investment, government involvement and foreign investment
- improvement: higher education, research and development and access to foreign tech/expertise

99
Q

institutional factors

A
  • adequate banking system
  • structured legal system
  • good education system
  • reasonable infrastructure
  • political stability
  • good international relationships

IB economics (26 decks)

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