Macro L10 + 11 Flashcards
What do all economists agree on about LRAS?
An increase in LRAS will increase potential level of output in economy
When is there an increase in LRAS?
Increase in quality/quantity of inputs to the production process
In economics, what is land defined by and what do most economists argue about it?
- All natural resources
- Exploitation of raw materials unlikely to be significant source of growth in developed countries however will be in developing economies
In what way is labour likely to cause economic growth?
- Increase in quantity of workers
- Increase in quality of labour
What are three causes for a change in the quantity of workers?
- Changes in birth rate
- Changes in participation rates
- Changes in immigration
How do changes in birth rate impact the size of the labour force and what are the UK’s like?
- Affects size of labour force for future gen
- UK’s birth rates are relatively low
Participation rates:
Proportion of pop of a certain age who are either in work or seeking work
What factors have reduced/increased participation rates?
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
What is the problem with increasing the size of the labour force and give reasons for this (+ example):
- 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
Out of the two ways labour can cause economic growth, which is much more important and why?
- Increasing the quality of labour
- Labour is homogenous (not all the same) so workers can be made more productive by education and training
Why is investment in human capital important?
Workers need to be:
- Sufficiently educated to cope with the demands of existing capital
- Flexible
- Able to contribute to change
What does there need to be for sustained economic growth but what is the implication of this?
- An increasing stock of capital
- Therefore sustained investment is needed
- There is not necessarily a connection between high investment and high growth
What are the two ways technological processes cause economic growth?
- Cuts avg costs of production of a product
- Creates new products for market
In a market economy, what should lead to greater efficiency and how?
- 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
How can competition be promoted and innovation protected?
Promoting competition:
- Deregulation
- Privatisation
- Control of monopolies
Protecting innovation:
- Laws protecting patents and copyrights
Why is it not possible to measure the productive potential of an economy directly and what is used instead to do this?
- It is not a single monetary figure
- Changes in GDP
Economic cycle:
Fluctuations of real GDP around the long-term trend growth of output
4 stages of an economic cycle and parts on graph:
1) Peak/Boom - peak
2) Downturn - decreasing
3) Recession/Depression - trough
4) Recovery - increasing
Factors showing what part of cycle an economy is in:
- Economic growth
- Unemployment rate
- Consumer spending
- Inflation
- Business investment
Recession (UK definition):
Real GDP falls in at least two successive quarters
2 types of trade cycles:
1) One where GDP actually falls in downturn
2) Milder trade cycles, where GDP does not fall
What two lines can be draw for the real GDP line on trend rate of growth graph?
1) Classical - straight line
2) Keynesian
Causes of trade cycle:
- Demand-side shock (affects AD)
- Supply side shock (affects AS)
Examples of demand-side shock:
- 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
How does a rise in house prices lead to a trade cycle?
- If prices are too high
- Demand collapses
- This causes sharp fall in house prices
- Decreases consumer spending and therefore lowers AD
How does a stock market crash lead to a trade cycle?
- Reduces wealth of individuals
- Decreases consumer spending
- Lowers AD
Why may interest rates and taxes be increased?
Possibly to combat inflation
How does raising interest rates and taxes cause the trade cycle?
- Less consumer spending
- Lower AD
How does a sharp rise in the value of the pound cause the trade cycle?
- Reduces competitiveness
- Lowers AD
Examples of supply-side shocks:
- Large rise in world commodity prices
- Outbreak of TU militancy
How does a large rise in world commodity prices cause the trade cycle?
- Raises price in UK
- Causes rise in import costs
- Reduces AS
How does an outbreak in TU militancy cause the trade cycle?
- Causes large wage increases
- Reduces AS
What do the two lines on a trend rate of growth graph represent?
- Actual level of real GDP (trade cycle)
- Trend level of GDP (estimated amount)
Output gap:
Difference between actual r level of real GDP and estimated long term value at a point in time
What does a negative output gap mean?
There is spare capacity
How is a positive and negative output gap filled?
- Positive –> Long-run economic growth moving LRAS right/ Recession shifting AD or SRAS down
- Negative –> Using spare capacity
What are the issues present when estimating the size of an output gap?
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
Long term benefits of economic growth:
- Increased life expectancy
- Increased food security
- Improved housing standards
- Better literacy
Costs of economic growth:
- Inflation
- Disease of affluence
- Inequality
- Current account deficit
- Pollution
- Use of non-renewable resources
What is the biggest argument against economic growth?
It is unsustainable
Sustainable growth:
Growth in the productive potential which does not negatively impact the future generations
In what way is economic growth argued to be unsustainable?
- Likely to use up more non-renewable resources
- Associated w/ worser environmental effects
What does economic theory suggest as an argument against this?
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
What is one limitation of the responses of gov?
Usually too slow to act
What is the Easterlin Paradox?
Idea that increases in GDP do not lead to increases in happiness
What is the impact of economic growth for consumers, firms, gov, and environment?
- 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
What are the two main issues w/ validity of GDP/GNI?
- National income stats do not measure true value of output produced
- Living standards are closely related to variety of factors excluded in GDP/GNI
Why don’t GDP/GNI accurately reflect the true value of output?
- Doesn’t include non-marketed output
- Doesn’t include output sold in underground markets
- Have differing domestic price levels
Non-marketed output:
- Goods/Services that are not sold in market and do not generate any income
- Likely to be greater in less developed countries
Underground market:
- Goods/Services that are sold in markets and do generate incomes but are unrecorded
- Illegal/Legal goods
How can the issue of missing underground markets be solved?
Estimates of their size can be made and added to GDP/GNI figure
How can the issue of differing domestic price levels be overcome?
Conversion into a single common currency know n as purchasing power parity
Why don’t GDP/GNI accurately reflect living standards?
- 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
GDP/GNI doesn’t make distinctions about composition of output. Why does this not accurately show living standards?
- 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
What is an alternative measure that will show the levels of education, health and income levels?
Human Development Index
GDP/GNI does not show the distribution of income/output. Why is this a problem?
Regional and wealth inequalities are disregarded, which contributes to living standards
Give examples of negative externalities that reflect standard of living and are not included in GDP/GNI:
- Pollution
- Toxic waste
What does national income tend to be correlated with?
Wealth
What is the caveat to the belief that higher incomes correlate to higher happiness levels?
Surgery across countries consistently show that those with above average incomes tend to have higher happiness levels
What are the two suggested explanations for the correlation between relative income and happiness?
1) Symbol of social status
3) Above average incomes correlate w/ a number of other factors associated w/ happiness
Why do some economists and politicians argue inequality to be positive?
- Encourages incentives to work
- Take economic risks
