macro objectives Flashcards
benefits of economic growth (4)
higher employment rates due to an increase in demand for labour
increase in tax revenue- increase in g spending on education, healthcare, infrastructure etc
increased life expectancy- better living standards
increase in consumer spending- higher job security, higher wages making consumer confidence increases
problems of economic growth (4)
consumption of raw materials
pollution can lead to external costs for firms e.g fines and meaning we will have to spend more on health care, close schools etc
higher incomes will lead to an increase in the consumption of demerit goods which are things that are bad for us e.g fast food, alcohol
stress on the labour force
relationship between economic growth and sustainable development- the environment (positive)
Economic growth fosters technological innovation and advancements, which can lead to more sustainable production methods, resource efficiency, and environmental conservation. Innovations in renewable energy, sustainable agriculture, and clean technologies can support sustainable development objectives while promoting economic growth. this means the economy can get to maximum output sustainably. The economic benefits include lower healthcare costs for business, employees and public agencies, more productive employees, and students better prepared to learn
relationship between economic growth and sustainable development- the environment (negative)
Unsustainable patterns of economic growth can lead to environmental degradation, depletion of natural resources, and pollution. these may pose challenges to sustainable development goals such as environmental conservation and tackling climate change.
Negative externalities can disproportionately affect vulnerable communities, worsening social inequalities and disparities. For example, pollution from industrial activities may disproportionately impact low-income neighbourhoods or minority communities.
what is the human development index
indicator that measures the average achievements in human development, including health (measured by life expectancy at birth), education (measured by mean years of schooling and expected years of schooling), and standard of living (measured by Gross National Income per capita).
usefulness of the hdi (positive-1)
education and health are important factors to consider and provide information about the country opportunities. it also shows how successful government policies have been
usefulness of the hdi (limitation-1)
there are things that don’t get accounted as there are large hidden economies such as the black market which can make gdp calculations inaccurate therefore difficult to compare
what is the human poverty index (hpi)
meausres life expectany, education and the ability of citizens to meet basic needs. there are two types- hpi-1 and hpi-2
can you explain hpi-1
measures the probablitity of living to the age of 40. the education component considers adult literacy rate (able to read or write) and ability for people to meet basic needs is measured by the percentage of underweight children and people not using improved water sources
can you explain hpi-2
the probablity of not surviving to the age of at least 60. the percentage of adults which do not have literacy skills is calculated, and poverty calculated by those living under the poverty line (their income is under 50% of the median household income after housing costs for that year)
how is the hpi useful
The HPI can inform policy decisions by identifying areas where interventions are needed to alleviate poverty and improve human well-being.
what decreases the hpis usefulness
HPI does not capture other dimensions of poverty and deprivation, such as access to healthcare, sanitation, housing, and social protection, which are essential for comprehensive poverty assessment.
what is sustainability
meets the needs of the current generation without compromising the ability of future generations to meet their own needs
economically, what does this ensure
economic growth increases the standard of living, quality of people’s lives now and in the future.
environmental objectives
examine full social cost of economic Growth – e.g. stock of natural resources, quality of life, negative externalities
what is cyclical unemployment
unemployment which rises It rises during recessions and falls during expansions
what is structural unemployment
long term
mismatch of skills and jobs
technological unemployment
new tech causes redundancies
reginal unemployment
unemployment within a particular region
Could be due to labor market immobility
frictional unemployment
short term
workers between jobs
search unemployment
spending time searching for the best job
seasonal unemployment
labor only demand at certain times of the year
casual unemployment
Casual unemployment occurs when a worker is employed on a day-to-day basis for a contractual job and has to leave it once the contract terminates
classical unemployment
caused by wages being driven up to cause a surplus of labour e.g trade union power e.g either 4 people at 25 grand wage or 10 at 10 grand wage
what is Occupational immobility of labour
When workers find it difficult to change jobs in different industries
what is Geographical immobility of labour
Inability of labour to move from one area of work to another to find work
causes of Occupational immobility of labour (3)
lacks qualifications
lacks specific skills/training that’s required
technology replacing labour
causes of Geographical immobility of labour (3)
family ties may prevent people from wanting to move
cost of living may increase if they move to a diff area e.g london higher than here
may not be good schools in the area for people’s children or they may be doing gcses or a levels
What is the claimant count
2 benefits of the claimant count
Number of people claiming unemployment benefits (jobseekers allowance and universal credit)
Data is easy to obtain
no cost in collecting data
2 problems of the claimant count
Can be manipulated by gov to make it seem smaller
Older people have a pension instead of job seeker allowance which doesn’t reflect unemployment as they wouldn’t be apart of this yet they are unemployed
how do they collect the labour force survey
Nationally representative survey of 60,000 households of people 16 or above.
Each household - interviewed face to face.
Figures based on average for last 3 month period.
2 benefits of using the lfs
Internationally agreed measure for unemployment so it’s easier to make comparisons with other countries
thought to be more accurate than the claimant count- claimant count only includes those eligible for benefits.
2 problems of using the lfs
The LFS relies on survey data from a sample of around 60,000 people. However, this sample may not be fully representative of the entire population
expensive to put together
how does unemployment affect businesses (2)
High unemployment reduces consumer purchasing power, as unemployed individuals have less disposable income to spend on goods and services. This can lead to decreased sales for businesses, particularly those in industries that rely heavily on consumer spending, such as retail, hospitality, and entertainment. As a result, businesses may experience lower revenues and profitability.
Lower consumer spending and weak economic conditions can dampen business confidence, leading to reduced investment in new projects, research, and development. This can hinder long-term growth prospects for businesses and the economy as a whole.
how does unemployment affect individuals (2)
Loss of income can make it difficult to meet basic needs such as housing, food, and healthcare. This can result in increased poverty rates, homelessness, and reliance on social welfare programs.
Without a steady income, individuals may resort to borrowing to cover their expenses, leading to increased debt and potential long-term financial challenges.
possible benefit of unemployment
Unemployment can provide individuals with the opportunity to invest in their skills and education. When someone loses their job, they may use the time they would have spent working toenrollin training programs, pursue further education, or develop new skills.
Unemployment can prompt individuals to seek additional education or training to improve their employability, potentially leading to a more skilled workforce in the long run.
what makes unemployment worse for the economy as a whole (2)
Prolonged periods of unemployment can lead to skill degradation, loss of human capital, and reduced employability, making it more difficult for individuals to re-enter the workforce even when economic conditions improve.
Surplus in labour means that there a higher spare capacity making it harder to reach its potential output and actual output will decrease so if resources are not utilised efficiently its not going to be a le to operate at potential leading to slower econ growth and lower gdp so there is less products available to consumers than there should be
how does demand pull inflation relate to economic growth
Demand for products increased meaning that firms can charge higher prices as they can’t match the demand just yet. Consumers are willing to pay higher prices as they are demanding the product
how does demand pull inflation relate to unemployment (and try to include the type)
Employment will increase as firms will need to match the demand of the consumers. Through this firms will have to hire more people decreasing the problem of unemployment as more people will be able to join the work force. Cyclical e unemployment will decrease
how does demand pull inflation relate to economic growth international Competitiveness & Current Account of the BOP
As demand-pull inflation increases prices domestically, the cost of goods and services can also rise. This can make domestically produced goods more expensive compared to those produced in other countries, potentially reducing their competitiveness in the global market this leads to less export demand therefore less revenue meaning the current account will worsen
how does cost push inflation relate to economic growth
The costs of products increase meaning to cover these costs firms will have to increase the costs of the products they sell. This may mean that consumers might not buy the product or as much as the product depending on its elasticity. This may mean AD would decrease and GDP would decrease taking a toll on economic growth.
how does cost push relate to unemployment
Due to the higher costs, firms may have to lay off workers as they can’t fund their wages as they will have to spend their money on raw materials to get the products that consumers are demanding
how does cost push inflation relate to International Competitiveness & Current Account of the BOP
Higher domestic prices can lead to higher export prices. If a country’s goods become more expensive for foreign buyers, demand for those exports may decrease. this would worsen the current account as there is less exports leaving the country leading to a current account deficit as its imports are more valuable then exports
what are the consequences of inflation (7)
Evaluation of the impact of inflation (5 points)
Effects of inflation will depend upon its level, whether it is stable or fluctuating and whether it is anticipated or unanticipated.
The cause of inflation is significant as cost push inflation has more negative effects on macroeconomic indicators than demand pull inflation.
Costs of inflation are smaller when inflation is anticipated, since steps can then be taken to protect the real value of people’s income and saving and firms can plan with more certainty encouraging I.
High, volatile and unanticipated rate of inflation can be damaging -individual businesses, consumers and economy.
However, a low, stable and correctly anticipated rate of inflation can be beneficial.
why low, stable and correctly anticipated rate of inflation can be beneficial
Stability is vital for firms to invest. PL begins to raise as the economy nears Yf so it is near full employment. By investing they can further push the economy to potential output as they use the spare capacity in the economy
why is deflation bad (2)
Deflation leads to lower prices for goods and services, which can reduce the revenue and profits of businesses. This, in turn, can lead to cost-cutting measures, such as layoffs and reduced investment.
When consumers expect prices to continue falling, they may delay purchases in anticipation of lower prices in the future. This behavior reduces current consumer spending, which can slow down economic activity and growth.
why is deflation good (2)
As prices fall, the purchasing power of money increases. Consumers can buy more goods and services with the same amount of money, which can enhance their standard of living.
The pressure to cut costs and maintain competitiveness can drive technological advancements and innovation, potentially leading to greater productivity gains over time- technological advancements can enable businesses to produce more output with the same amount of input (labor, capital, materials). This increased efficiency can reduce spare capacity by moving closer to full utilization of resources.
what is an imbalance on the bop
It is when one section of the BOP is in Deficit or Surplus e.g there could be a DEFICIT on the Current Account.
how is an imbalanced usually financed
by a SURPLUS on one of the other sections e.g Financial Account. (This is how the USA and UK run such high deficits)
who are the debts owed by when it comes to a deficit
individuals/ businesses to firms abroad
what are the causes of a deficit on the trade in goods and services accounts (3)
rising domestic income levels as imports will exceed exports
appreciation of the exchange rate- imports to become cheaper and exports to become more expensive, which will worsen the current account
fall in income levels of consumers abroad as it decreases demand for exports. As the value of the currency rises, foreign buyers may find domestic products less competitive, reducing export demand.
what are the causes of a deficit on the primary and secondary income (3)
Income earned by foreign residents in the UK is more than income earned by UK residents abroad
Rising profit outflows from FDI (forgein direct investors) compared to FDI profit flows inward
Foreign Aid flows abroad/government social provision e.g pensions sent abroad rises
Income earned by foreign residents in the UK is more than income earned by UK residents abroad explained
When foreign residents earn more income in the UK compared to the income UK residents earn abroad, the net outflow of income increases. This situation leads to a deficit in the primary income section of the current account as remittances (sum of money paid) and investment income outflows exceed inflows.
Rising profit outflows from FDI compared to FDI profit flows inward explained
When profits earned by foreign direct investors in the domestic economy exceed the profits earned by domestic investors abroad, there is a net outflow of capital. This situation causes a deficit in the primary income section of the current account, as the economy pays out more in investment returns than it receives.
Foreign Aid flows abroad/government social provision e.g pensions sent abroad rises explained
Increased foreign aid and government social provisions sent abroad result in higher secondary income outflows. This can contribute to a current account deficit as these transfers are not matched by corresponding inflows, leading to a net negative impact on the current account balance.
what are the policies to correct imbalances on the current account (ad focused)
expenditure switching policies
expenditure reducing policies
Why is it important to maintain a sustainable current account deficit?
Risk of lower AD
Debt burden risk
Rapid depreciation of the currency (cost push inflation)
risk of lower AD explained
As the trade balance is significant part of the Cacct then if it is in a deficit then it will cause (X-M) to be negative, reducing AD and economic growth rates. This could result in higher unemployment as there is less demand for workers to produce domestic goods/services.
Debt burden risk explained
If the rising Cacct deficit is funded by rising household, business (corporate) and government debts this could affect the nation’s credit rating as international finance markets become nervous about the ability of the nation’s economic agents to repay the debt owed. This could mean that lenders restrict/avoid further lending to the nation limiting to maintain its spending, standards of living and government spending.
Rapid depreciation of the currency (cost push inflation) explained
If foreign economic agents (and to some extent domestic) become nervous about the levels of private and public sector debt of a nation they might decide to sell the assets they hold in that nation e.g property, shares, capital (factories/machinery) and moving savings into other nation’s bank accounts. This means that they will have to sell that nations currency to buy a foreign currency. This could result in a large rise in the supply of the domestic currency leading to a significant deprecation and rapid COST PUSH inflation.
A rapid depreciation of the er causes a drastic WPIDEC effect making imports increasingly expensive. This is especially a problem if many of those imports are medicines, food, energy etc as they can be very price inelastic.
expenditure switching policies- meaning
focus is to get consumers to buy domestic g and s and avoid imports.
how is expenditure switching policies achieved (what can gov do)
using trade barriers- tariffs (tax imposed on an imported good), quotas (restriction on the quantity of the good), subsides. depreciating the exchange rate can help improve the current account deficit by making exports cheaper and imports more expensive ensuring a better trade balance
what may be a drawback of expenditure switching policies
depending on the price elasticity of demand, Sudden shifts in policy can cause short-term economic disruption. Industries reliant on imported inputs may face higher costs, and consumers may face limited availability of goods previously imported
what is an expenditure reducing policy
Policies implemented to reduce the demand for imports and discourage investment via imported capital goods reducing the mpm (marginal propensity to import)
how is expenditure reducing policy achieved
through contradictory monetary/ fiscal policies such as higher income taxes/ higher interest rates
drawback of expenditure reducing policy
this harms the economy in terms of lower c and i with cyclical unemployment rising harms competitiveness and incentive to work
what are supply side policy aims (what is it)
aim to shift lras
aim to remove obstructions in the free market that are holding back improvements to the long-run potential
what are some supply side policies that could be used (4)
training
education
labor market flexibility (making modifications to labor- hiring, firing etc in response to changes in the market)
subsides to fund r and d
causes of a deficit on the financial account (2)
individuals investing on companies abroad
individuals and businesses are moving savings abroad e.g hot money- money invested in another country because the value of what they invested in is expected to rise such as property or shares
causes of a surplus in the financial account (2)
foreigners investing money into our economy
foreigners and foreign businesses are moving their savings into our banking systems
examples of where people earn incomes
Employment, capital gains (selling an asset for a profit), rent received, dividends, interest, pension income, shares, stocks
In what ways can people hold wealth?
Saving, gold, property, pension fund, antiques, shares
The more wealth you have, the more income you earn
what is wealth
Wealth is the stock of assets owned by an individuals e.g house, furniture, land, financial investments. However it’s a measurable value when its sold and individuals are not required to keep a record of their assets as wealth itself is not taxed until a person dies when it becomes liable for inheritance tax
what is income
Income is the flow of earnings over a period of time usually a year period
what is wealth inequality
he unequal distribution of assets of population
what is income inequality
refers to which income is distributed in an uneven manner amongst a population
economic and social costs of inequality
social unrest, tensions and civil disobedience
a poverty cycle may be embedded into people
loss of allocative efficiency
social unrest, tensions and civil disobedience explanation
a huge gap in living standards between the rich and the poor can create tensions
this causes external costs e.g spending more on security services e.g police
a poverty cycle may be embedded into people meaning
poorer families have limited access to health care and education which is an underconsumption of merit goods
loss of allocative efficiency
capital investments and production will become tailored towards the preferences of the rich
negative consequences of inequality (2)
Low incomes leads to a cycle of poverty in which a low income leads to a lack of ability to fund education/ healthcare so merit goods are under consumed lead to lower earnings in the future
Inequality leads to more income being redistributed back to higher income earners through savings and wealth
positive consequences of inequality (2)
Increase g spending to combat social unrest, crime, and welfare which represents an opp cost in g spending
Trick down effect- as those on higher incomes/ have wealth own businesses, hire staff and spend a proportion of their incomes so creating other jobs and therefore some have higher incomes than would have occurred without such higher income earners
Factors that influence the distribution of income (income inequality) (5)
Gov fiscal policy- is the tax system progressive? Is there a welfare system?
accumulation of wealth- leads to those with more wealth earning a higher income
level of human capital- a higher educated and skilled worker will demand a higher wage
Discrimination- leading to wage differentials age disability
Age- those retired mostly live on state pension which fallen behind av wage rises so leads to rising differences in purchasing power
Factors that influence the distribution of wealth (wealth inequality) (2)
Inheritance
Incomes lead to the ability to purchase assets e.g property, shares (links between higher wealth and incomes is clear)
methods of calculating gdp- outward approach
Value of final good and services produced in each sector of the economy during the year.
methods of calculating gdp- income approach
income received in same year by people and firms involved in the production of g and s
methods of calculating gdp- expenditure approach
All money spent buying up this year’s output including x but minus m
what are adaptive expectations
economic agents learn from the PAST and use the experience to inform future decision.
what are rational expectations
economic agents learn from PAST AND FUTURE forecasts to inform decisions
