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Economics Y1 > Macro L10 + 11 > Flashcards

Macro L10 + 11 Flashcards

1
Q

What do all economists agree on about LRAS?

A

An increase in LRAS will increase potential level of output in economy

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2
Q

When is there an increase in LRAS?

A

Increase in quality/quantity of inputs to the production process

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3
Q

In economics, what is land defined by and what do most economists argue about it?

A
  • All natural resources
  • Exploitation of raw materials unlikely to be significant source of growth in developed countries however will be in developing economies
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4
Q

In what way is labour likely to cause economic growth?

A
  • Increase in quantity of workers
  • Increase in quality of labour
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5
Q

What are three causes for a change in the quantity of workers?

A
  • Changes in birth rate
  • Changes in participation rates
  • Changes in immigration
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6
Q

How do changes in birth rate impact the size of the labour force and what are the UK’s like?

A
  • Affects size of labour force for future gen
  • UK’s birth rates are relatively low
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7
Q

Participation rates:

A

Proportion of pop of a certain age who are either in work or seeking work

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8
Q

What factors have reduced/increased participation rates?

A

Reduced size:
- Increase in prop of young ppl staying on in education
- More ppl can afford early retirement
Increased size:
- Pension age increased leading to growing number of workers
- More women have better childcare arrangements and are encouraged by high wages

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9
Q

What is the problem with increasing the size of the labour force and give reasons for this (+ example):

A
  • It will not necessarily increase economic welfare
  • Increased income has to be shared out amongst more people so there is little/no change in income per person
  • Leisure time has to be given up for some people to do this eg. women coming back to work
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10
Q

Out of the two ways labour can cause economic growth, which is much more important and why?

A
  • Increasing the quality of labour
  • Labour is homogenous (not all the same) so workers can be made more productive by education and training
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11
Q

Why is investment in human capital important?

A

Workers need to be:
- Sufficiently educated to cope with the demands of existing capital
- Flexible
- Able to contribute to change

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12
Q

What does there need to be for sustained economic growth but what is the implication of this?

A
  • An increasing stock of capital
  • Therefore sustained investment is needed
  • There is not necessarily a connection between high investment and high growth
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13
Q

What are the two ways technological processes cause economic growth?

A
  • Cuts avg costs of production of a product
  • Creates new products for market
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14
Q

In a market economy, what should lead to greater efficiency and how?

A
  • Promoting competition
  • Protecting innovation
  • Firms w/ more efficient production drive those who don’t out and firms w/ new, better products do the same to firms w/ old products
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15
Q

How can competition be promoted and innovation protected?

A

Promoting competition:
- Deregulation
- Privatisation
- Control of monopolies
Protecting innovation:
- Laws protecting patents and copyrights

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16
Q

Why is it not possible to measure the productive potential of an economy directly and what is used instead to do this?

A
  • It is not a single monetary figure
  • Changes in GDP
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17
Q

Economic cycle:

A

Fluctuations of real GDP around the long-term trend growth of output

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18
Q

4 stages of an economic cycle and parts on graph:

A

1) Peak/Boom - peak
2) Downturn - decreasing
3) Recession/Depression - trough
4) Recovery - increasing

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19
Q

Factors showing what part of cycle an economy is in:

A
  • Economic growth
  • Unemployment rate
  • Consumer spending
  • Inflation
  • Business investment
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20
Q

Recession (UK definition):

A

Real GDP falls in at least two successive quarters

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21
Q

2 types of trade cycles:

A

1) One where GDP actually falls in downturn
2) Milder trade cycles, where GDP does not fall

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22
Q

What two lines can be draw for the real GDP line on trend rate of growth graph?

A

1) Classical - straight line
2) Keynesian

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23
Q

Causes of trade cycle:

A
  • Demand-side shock (affects AD)
  • Supply side shock (affects AS)
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24
Q

Examples of demand-side shock:

A
  • House prices rise too high
  • Stock market crashes
  • Central bank sharply increasing interest rates
  • Sharply raising taxes
  • Cutting gov spending
  • World economy is in recession –> causes UK to go into recession
  • Sharp rise in value of pound
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25
Q

How does a rise in house prices lead to a trade cycle?

A
  • If prices are too high
  • Demand collapses
  • This causes sharp fall in house prices
  • Decreases consumer spending and therefore lowers AD
26
Q

How does a stock market crash lead to a trade cycle?

A
  • Reduces wealth of individuals
  • Decreases consumer spending
  • Lowers AD
27
Q

Why may interest rates and taxes be increased?

A

Possibly to combat inflation

28
Q

How does raising interest rates and taxes cause the trade cycle?

A
  • Less consumer spending
  • Lower AD
29
Q

How does a sharp rise in the value of the pound cause the trade cycle?

A
  • Reduces competitiveness
  • Lowers AD
30
Q

Examples of supply-side shocks:

A
  • Large rise in world commodity prices
  • Outbreak of TU militancy
31
Q

How does a large rise in world commodity prices cause the trade cycle?

A
  • Raises price in UK
  • Causes rise in import costs
  • Reduces AS
32
Q

How does an outbreak in TU militancy cause the trade cycle?

A
  • Causes large wage increases
  • Reduces AS
33
Q

What do the two lines on a trend rate of growth graph represent?

A
  • Actual level of real GDP (trade cycle)
  • Trend level of GDP (estimated amount)
34
Q

Output gap:

A

Difference between actual r level of real GDP and estimated long term value at a point in time

35
Q

What does a negative output gap mean?

A

There is spare capacity

36
Q

How is a positive and negative output gap filled?

A
  • Positive –> Long-run economic growth moving LRAS right/ Recession shifting AD or SRAS down
  • Negative –> Using spare capacity
37
Q

What are the issues present when estimating the size of an output gap?

A

Difficult to estimate as:
- Economists do not know exact position of LRAS curve
- Initial estimates of GDP are almost always inaccurate as they are constantly revised

38
Q

Long term benefits of economic growth:

A
  • Increased life expectancy
  • Increased food security
  • Improved housing standards
  • Better literacy
39
Q

Costs of economic growth:

A
  • Inflation
  • Disease of affluence
  • Inequality
  • Current account deficit
  • Pollution
  • Use of non-renewable resources
40
Q

What is the biggest argument against economic growth?

A

It is unsustainable

41
Q

Sustainable growth:

A

Growth in the productive potential which does not negatively impact the future generations

42
Q

In what way is economic growth argued to be unsustainable?

A
  • Likely to use up more non-renewable resources
  • Associated w/ worser environmental effects
43
Q

What does economic theory suggest as an argument against this?

A

The growing scarcity of resources will result in:
- Lower demand, therefore fall in consumption –> price mechanism conserves resources
- Becomes profitable to explore new supplies
- Producers + consumers switch to substitutes
- Gov respond to pressures

44
Q

What is one limitation of the responses of gov?

A

Usually too slow to act

45
Q

What is the Easterlin Paradox?

A

Idea that increases in GDP do not lead to increases in happiness

46
Q

What is the impact of economic growth for consumers, firms, gov, and environment?

A
  • Consumers –> rising incomes
  • Firms –> Changing technologies create opportunity for increased sales
  • Gov tax revenues rise due to rising incomes
  • Less pollution (in developed countries) due to better technology
47
Q

What are the two main issues w/ validity of GDP/GNI?

A
  • National income stats do not measure true value of output produced
  • Living standards are closely related to variety of factors excluded in GDP/GNI
48
Q

Why don’t GDP/GNI accurately reflect the true value of output?

A
  • Doesn’t include non-marketed output
  • Doesn’t include output sold in underground markets
  • Have differing domestic price levels
49
Q

Non-marketed output:

A
  • Goods/Services that are not sold in market and do not generate any income
  • Likely to be greater in less developed countries
50
Q

Underground market:

A
  • Goods/Services that are sold in markets and do generate incomes but are unrecorded
  • Illegal/Legal goods
51
Q

How can the issue of missing underground markets be solved?

A

Estimates of their size can be made and added to GDP/GNI figure

52
Q

How can the issue of differing domestic price levels be overcome?

A

Conversion into a single common currency know n as purchasing power parity

53
Q

Why don’t GDP/GNI accurately reflect living standards?

A
  • No distinctions about composition of output
  • Doesn’t reflect achievements in education, health and life expectancy
  • No info on:
    –> distribution of income and output
    –> increased leisure
    –> value of negative externalities
    –> depletion of natural resources
    –> improvements in quality of goods and services
54
Q

GDP/GNI doesn’t make distinctions about composition of output. Why does this not accurately show living standards?

A
  • It includes the value of all good and services
  • As a result, it does not show to what degree each product contributes to living standards
55
Q

What is an alternative measure that will show the levels of education, health and income levels?

A

Human Development Index

56
Q

GDP/GNI does not show the distribution of income/output. Why is this a problem?

A

Regional and wealth inequalities are disregarded, which contributes to living standards

57
Q

Give examples of negative externalities that reflect standard of living and are not included in GDP/GNI:

A
  • Pollution
  • Toxic waste
58
Q

What does national income tend to be correlated with?

A

Wealth

59
Q

What is the caveat to the belief that higher incomes correlate to higher happiness levels?

A

Surgery across countries consistently show that those with above average incomes tend to have higher happiness levels

60
Q

What are the two suggested explanations for the correlation between relative income and happiness?

A

1) Symbol of social status
3) Above average incomes correlate w/ a number of other factors associated w/ happiness

61
Q

Why do some economists and politicians argue inequality to be positive?

A
  • Encourages incentives to work
  • Take economic risks

Economics Y1 (12 decks)

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