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Economics Yr12 > Macro Theme 2 > Flashcards

Macro Theme 2 Flashcards

1
Q

What are the ways to measure economic performance?

A

Economic growth
Unemployment
Inflation
The current account balance

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2
Q

Distinction between real and nominal?

A

Real - adjusted for inflation
Nominal - market value

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3
Q

Distinction between total and per capita?

A

Total means all.
Per capita means average per citizen.

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4
Q

What is gross national product (GNP)?

A

The value of final services and product by uk owned businesses

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5
Q

What is gross national income (GNI)?

A

Total money earned by individuals and firms.

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6
Q

Definition of inflation:

A

A sustained general rise in prices across the economy.

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7
Q

Definition of deflation:

A

A sustained general fall in prices across the economy.

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8
Q

Definition of disinflation:

A

A fall in the rate of inflation ( there is still inflation in the economy, prices still rising but at a slower rate.

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9
Q

Definition of hyperinflation:

A

Where the inflation levels are extremely high.

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10
Q

Definition of stagflation:

A

When inflation is high during a recession, the economy is staggering but prices are still rising.

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11
Q

Inflation is measured in index.
What one the two ways to measure inflation?

A

CPI - consumer price index
RPI - retail price index

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12
Q

How to identify a set of goods to measure from?

A

Prices of a ‘basket’ of representative goods are recorded on a regular basis from the result of a livig cost and food survey.
Each year a few thousand house holds are asked to record their expenditure for one month. From this data it is possible to calculate what the ‘average’ household spends its money on.
Each year, some goods are added and some goods are removed, in an attempt to keep the measure relevant.

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13
Q

How is inflation calculated?

A

The figures are the weighted based on the proportion of total house hold income that they take up.
Prices are recorded in different areas of the country and retailers like cornershops and supermarkets, these result are averaged out and put into index form.
Surveys are sent out each month to record prices for the mix of goods and services shown in the survey.

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14
Q
  1. What does competitiveness lead to in inflation?
  2. What is shoe leather cost?
  3. What is menu costs?
A
  1. Higher prices in the uk lead to less exports and more imports
  2. The cost of time and effort that people expend by holding less cash
  3. Retailers have to change ‘menus’ (sinage, pricetags)
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15
Q

What is purchasing power parity?

A

PPP exchange rates can be used to measure the relative cost of a typical basket of goods and services in different countries and thus the relative spending power of people in different countries give their incomes

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16
Q

What is unemployment?

A

People who are willing and able to work but who do not have a job and activity seeking a job.

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17
Q

What is underemployment?

A

Workers that are highly skilled but working in low paying jobs, workers that are highly skilled but work in low skill jobs and part-time workers that would prefer to be full time

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18
Q

What is economic inactivity?

A

This occurs when people are not in the labour force, they are neither in work nor looking for work.

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19
Q

What is claimant count

A

Unemployment statistics which are produced based on the number of people claiming benefits.

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20
Q

What is frictional unemployment?

A

Unemployment which reflects job turnover in the labour market, caused by people moving between jobs

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21
Q

What is the working age?

A

16 - 65

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22
Q

What is the inactive population?

A

Includes students, stay at home parents, early retirees, unable to work due to disabilities or sickness

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23
Q

What is under employment?

A

Workers that are highly skilled but working in low paying jobs, workers that are highly skilled but work in low skill jobs and part-time workers that would prefer to be full time

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24
Q

What is the labour force?

A

The active population including the unemployed (people of working age)

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25
Q

What is long term unemployment?

A

In the ie people who are out of work for 12 months. Generally they find it much harder to find jobs.

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26
Q

What is the labour force survey (LFS)?

A

The enter national labor organisation runs the survey which directly asks people if they meet the following criteria:

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27
Q

What is structural unemployment?

A

This unemployment is due to a mismatch of skill in the labour market it can be caused by occupational and geographical immobilities.

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28
Q

What is frictional unemployment?

A

Unemployment which reflects job turnover in the labour market, caused by people moving between jobs

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29
Q

What is real wage unemployment?

A

This occurs when wages in a competitive labour market are pushed above the equilibrium

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30
Q

What is cyclical unemployment?

A

This occurs when there is insufficient demand in an economy for all workers who wish to work at current wage rates to obtain a job

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31
Q

What is seasonal unemployment?

A

Jobs which are seasonal in nature

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32
Q

What is full employment?

A

Where there is no cyclical unemployment, some workers will be fractionally or structurally unemployed even at full employment levelof GDP.

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33
Q

What is balance of payments?

A

Records of all financial transactions between the on and rest the world, it shows receipts from trade and is equal current account.
The difference in total value between payments into and out of a country over a period.

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34
Q

What is current account balance?

A

Primarily concerned with the balance of trade in goods and services.

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35
Q

What is current account deficit?

A

The value of imports is greater than the valve of exports.

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36
Q

What is current account surplus?

A

The value of exports is greater than the value of imports.

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37
Q

What is the deterioration of the current account?

A

We get a bigger deficit and we go from a surplus to a deficit.

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38
Q

What are the accounts of the balance of payments?

A

Current account
Financial account
Capital account

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39
Q

Components of aggregate demand:

A

Consumption+Investment+Government Spending+(Exports-Imports)

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40
Q

What is disposable income?
Influences on consumer spending?

A

Disposable income is the income left after taxes.
Influence:
Real disposable income
Employment and job security
Household wealth
Market interest rates

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41
Q

How does interest rates affect consumer spending?

A

Affects both incentive to save and the cost of borrowing.

42
Q

How does consumer confidence affect consumer spending?

A

Makes consumers look at their financial positions to make major purchases.

43
Q

How does the wealth effect affect consumer spending?

A

A rise in wealth can increase consumer demand.

44
Q

What’s the difference between gross and net investment?

A

Gross investment is calculated by calculating the total expenditure done on acquiring capital goods

Net investment is calculated by subtracting depreciation from the gross investment

45
Q

What are the influences on investment?

A

The rate of economic growth
Business expectations and confidence
Keynes and ‘animal spirits”
Demand of exports
Interest rates
Access to credit
The influence of government and regulation

46
Q

What is animal spirits?

A

Is a mix of confidence, trust, mood and expectation

47
Q

What are the influences on government spending?

A

The trade cycle
Fiscal policy

48
Q

What is the trade balance?

A

The difference between a country’s imports and exports

49
Q

What are the benefits of government spending?

A

It’s a key component of AD
Has a regional economic impact
Important on providing public and merit goods
Can help achieve a greater equality in society

50
Q

What is fiscal policy?

A

Is the use of government spending and taxation to influence the economy

51
Q

What are the influences on net trade (x-m)

A

Real income
Exchange rates
State of the world economy
Degree of protectionism
Non-price factors

52
Q

How does real income affect net trade?

A

If domestic real income is high then demand for imports is likely to rise

53
Q

How does exchange rate affect net trade?

A

A stronger currency makes exports more expensive and imports cheaper
A weaker currency makes exports cheaper and imports more expensive

54
Q

What are some non-price demand factor that affect net trade?

A

Design and branding, product quality, after-sale service.

55
Q

How does state of the world economy affect net trade?

A

This can be affected by domestic inflation, shipping/transport costs, fluctuations in the world’s commodity prices.

56
Q

How does degree of protectionism affect net trade?

A

A tariff is a tax on import
A quota is a physical limit on the number of imports allowed into a country
There may also be non-tariff barriers. E.g restrictions on product quality

57
Q

What are the factors that affect long run aggregate supply?

A

Technological advances
Changes in relative productivity
Changes in education and skills
Changes in government and regulations
Demographic changes and migrations
Competition policy

58
Q

How does technological advance’s influence AS?

A

As it gets better the cost of production decreases and production increase in the aggregate supply curve.

59
Q

How does change in relative productivity affect AS?

A

The aggregate supply curve shifts to the right as productivity increases.

60
Q

How does change in education and skill affect AS?

A

A more skilled workforce will be more employable and work quicker and more efficiently within thru jibs so the output per worker will increase, which will shift the LRAS to the right.

61
Q

How does change in the government regulation affect aggregate supply?

A

Affects the firms’ production process, decreasing the final output and creating a leftward shift in AS

62
Q

How does demographic changes and migration affect AS?

A

Increases the countries productive potential causes an outward shift.

63
Q

What is the circular flow of income

A

It demonstrates how money moves from produces to households and back again in an endless loop.

64
Q

What’s the difference between income and wealth?

A

Income is:
Wages and salaries from jobs
Rental income from properties
Interest from savings

Wealth is:
Savings in bank account
Ownership in properties
Shares/stocks in business

65
Q

What are the impacts of injections and withdrawals into the circular flow of income?

A

When the injections are greater than the withdrawals then there is economic growth. If withdrawals are greater then there is a fall in real GDP.

66
Q

What is the concept of equilibrium real national output?

A

It is when injections = withdrawals or I+G+X = S+M+T
We can also say equilibrium occurs when AD=AS

67
Q

What is the multiplier ratio?

A

Total change in real GDP = injections x multiplier

68
Q

What is the multiplier process?

A

The multiplier effect is the proportional amount of increase or decrease in final income that results from injections or withdrawal of spending

69
Q

What is the multiplier effect?

A

The multiplier effect occurs when an initial injection into the circular flow causes a bigger final increase in real national income.

70
Q

What is the marginal propensity to consume?

A

The proportion of additional income that is spent in the domestic economy.

71
Q

What is the marginal propensity to import?

A

The proportion of additional income that is spent on imports.

72
Q

What is the marginal propensity to save?

A

The propensity of additional income saved.

73
Q

What is the marginal propensity to tax?

A

The proportion of additional income that is paid to the government as tax

74
Q

What is the formula to calculate the multiplier?

A

1/ (1-MPC)
1 / MPW
MPW = MPS+MPT+MPM

75
Q

What is the significance of the multiplier to the shift in AD?

A

It affects consumption, imports, saving

76
Q

What are the factors that could cause economic growth?

A

Short run factors:
Changes in the interest rates
Fiscal policy - government spending and taxation
Commodity such as oil, gas, oil and food
Exchange rates

Long run factors:
Investment
Productivity
Labour supply
Research and development
Innovation

77
Q

What is the importance of international trade for (export-led) economic growth?

A

Export led growth is where a significant part of the expansion of real GDP, jobs and per capita income flows from the successful exporting of goods and services from one country to another

78
Q

What is the distinction between actual growth rates and long-term trends in growth rates?

A

Actual growth is the percentage increase in a country’s real GDP and it is usually measured annually. It is caused by increases in AD. The long-term trend in growth rates is the long run expansion of the productive potential of an economy.

79
Q

What are positive and negative output gaps and the difficulties of measurement?

A

Positive output gap is where actual GDP is above potential GDP
Negative output gap is where the economy has large margin of spare capacity of factor resources.

The difficulties:
Productivity
The size of the labour force with any accuracy
Business output and confidence
Underemployment

80
Q

What is the trade cycle?

A

The wave-like movement of the fluctuations in the general business activity spread over a number of years.

81
Q

What are the characteristics of a boom?

A

Boom is a period when the rate of growth of real GDP is fast and higher than the long term trend.
Some characteristics are:
Rising income
Rising household and business confidence
Rising wages
Rising employment

82
Q

What the is a recession and some characteristics?

A

A recession is a period of at least 6 months when an economy suffers a fall in aggregate output.
Some characteristics are:
Falling income
Falling household and business confidence
Rising unemployment

83
Q

What are the benefits of economic growth on consumers, firms, the government?

A

Higher living standards
Employment effects
Fiscal dividend
Accelerator affect
Greater business profits

84
Q

What are the downsides of economic growth on consumers, firms, the government?

A

Risk of higher inflation and higher interest rates
Environmental effects
Inequalities of income and wealth

85
Q

What are some possible macroeconomic objectives?

A

Economic growth
Low unemployment
Low and stable rate of inflation
Balanced government budgets
Greater income equality

86
Q

What is a demand side policy?

A

An economic policy focuses on increasing or decreasing aggregate demand to influence unemployment, real output, and the general price level in the economy.

87
Q

What is the difference between monetary and fiscal policy?

A

Fiscal policy: policies that involve government spending, taxation, and or/or borrowing to affect AD.
Monetary policy: polices relating to interest rates, the money supply, and/or exchange rate

88
Q

What are the monetary policies?

A

Contractionary- increasing interest rates
Expansionary- quantitive easing

89
Q

What are fiscal policies?

A

Increase or decrease taxes
Increase or decrease government spending

90
Q

What is the difference between government deficit and surplus?

A

A deficit is where the government spends more than they collected in taxes.
A surplus is where the government spends less than they collected in taxes.

91
Q

What is the difference between direct and indirect taxation?
And some examples:

A

Direct tax: levied on income, wealth and profit
Examples: income tax, inheritance tax, national insurance corporation tax
Indirect tax: are taxes on spending
Examples: fuels, cigarettes and alcohol and VAT

92
Q

What is the Bank of England’s Monetary policy committee’s role?

A

Setting of the main policy interest rate (base rate)
Quantitive easing
Exchange rate intervention

93
Q

What are some strength and weaknesses of demand-side policy?

A

Advantages:
Increases the rate of economic growth
Disadvantages:
They are only effective in the short run

94
Q

What are supply-side policies?

A

These are polices that increase the productive potential of an economy: usually in relation to increases the quantity and/or quality of an economy’s factors of production.

95
Q

What’s the difference between market-based and interventional methods for supply side policies?

A

Market-based: to make the market work better and give the private sectors more freedom.
State/Government intervention: in markets to overcome failures

96
Q

What do supply side polices do?

A

Increase incentives
Promote competition
Perform the labour market
Improve skill and quality of the labour force
Improve infrastructure

97
Q

What are some interventionist supply-side polices?

A

Spending on education and training
Industrial Policy
Subside research and development

98
Q

What are some market-based supply side policies?

A

Tax cuts
Privatisation
Free trade
Flexible Woking
Deregulation

99
Q

What are the strengths and weaknesses of supply-side policies?

A

Advantages:
Can help reduce inflationary pressure
Help the balance of payments
Disadvantages:
It can take a long time to work
It is very expensive

100
Q

What are some potential conflicts and trade-offs between the macroeconomic objectives?

A

Unemployment and inflation
Economic growth and inflation - an overheating economy with excess AD can see accelerating demand-pull inflation
Economic growth and the balance of payments - a consumer boom may cause the trade deficit to rise as demand for the spending on imports grows faster than income from exports.

101
Q

What are potential policy conflicts and trade-offs?

A

Fiscal policy - if there is a concern over the size of the budget deficit or the national debt, the government may reduce spending and raise taxes.

Monetary policy - this may raise the potential output of the economy and increase the short term growth and reduce unemployment.

Supply-side policy - this may raise the potential output of the economy and increase the long term growth rate.

Economics Yr12 (3 decks)

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