Macroeconomic Objectives Flashcards
What is microeconomics?
The study of the economy on a small scale
What is macroeconomics?
The study of the economy world wide
What is a macroeconomic objective?
Aims that a government wants to achieve
Name 5 macroeconomic objectives
- Inflation
- Unemployment
- Economic growth
- Protect the environment
- Balance of payments
Describe the macroeconomic objective inflation
To have a stable inflation rate
Describe the macroeconomic objective unemployment
To keep unemployment levels low
How can inflation be prevented?
By putting caps on prices
Describe the macroeconomic objective economic growth
To ensure an increase in national income over time
Describe the macroeconomic objective protect the environment
To promote environmentally friendly activities
Describe the macroeconomic objective balance of payments
To ensure a positive balance of payments (more exports than imports)
How is balance of payments calculated?
Exports - imports
What is balance of payments recorded on?
The current account
What is a deficit?
Imports > exports
What does GDP stand for?
Gross Domestic Product
What is GDP?
It measure the total value of goods and services produced in an economy over a period of time
Measures economic growth
What does per capita mean?
For each person
Why is growth important? Name 3 reasons
- Improvements in living standards
- Attracts foreign investments
- Encourages domestic enterprise
How does growth improve living standards?
Incomes can rise and poverty can be reduced = increased income generates tax = the government can invest in public goods and services
Name 5 limitations of GDP
- Population changes
- Statistics errors
- Hidden economy
- GDP and living standards
- Inflation
Explain why inflation is a limitation of GDP?
Increases in prices are not taken into account when using GDP as measurement of economic growth. E.g. If an economy grows by 5% and the prices increase by 5%, the economy has not grown.
Explain why population changes is a limitation of GDP?
If population increases faster than growth = there’ll no be real increase in growth. Extra income is shared between more people.
Explain why is statistic errors a limitation of GDP?
Gathering data to calculate national income is huge task. Errors are coming e.g. Information can be entered inaccurately or left out
Explain why the hidden economy is a limitation of GDP?
Sometimes paid work goes unrecorded e.g. If a friend drives a family for £25, it will not be recorded
Explain why GDP and living standards are a limitation of GDP?
If GPD rises, it doesn’t mean living standards have also risen. Income distribution gap could be huge.
What is the economic cycle?
It shows the fluctuation of economic growth (through GDP) for an economy over a period of time
What is a boom?
- Peak of the economic cycle
- Where GDP is growing at its fastest
What is a downturn?
- When rate of economic growth (GDP) is slowing down
- Period after a boom
What is recession/depression?
- A decline in economic activity, when the GDP growth rate is negative
- Bottom of the economic cycle
What is recovery?
- Economic activity starts to increase
- When the economic cycle begins to rise
Draw a economic cycle
State how the following are affected during a boom:
- GDP
- Unemployment
- Inflation
- Economic growth
- Balance of payments
- Environmental standards
- GDP = increase
- Unemployment = decrease
- Inflation = increase (demand increases)
- Economic growth = increase
- Balance of payments = positive
- Environmental standards = decrease/poor
State how the following are affected during a downturn:
- GDP
- Unemployment
- Inflation
- Economic growth
- Balance of payments
- Environmental standards
- GDP = start to decrease
- Unemployment = start to increase
- Inflation = increase but slowly
- Economic decline (slowly)
- Balance of payments = slowly lean towards negative
- Environmental standards = may slightly increase
State how the following are affected during a recession:
- GDP
- Unemployment
- Inflation
- Economic growth
- Balance of payments
- Environmental standards
- GDP = decrease a lot
- Unemployment = rises sharply
- Inflation = remain the same or slightly decrease
- Economic decline will occur
- Balance of payments = negative
- Environmental standards = will increase
State how the following are affected during a recovery:
- GDP
- Unemployment
- Inflation
- Economic growth
- Balance of payments
- Environmental standards
- GDP = start to rise
- Unemployment = start to decrease
- Inflation = may begin to rise
- Economic growth = begin to increase
- Balance of payments = positive
- Environmental standards = decrease
What are the benefits of economic growth (name & explain 4 briefly)?
- Increased income
- Increases in GDP means on average more people will have more income
- More leisure time
- As economy grows, it’s possible to spend less time working = because of significant improvements in efficiency
- Greater life expectancy
- People can live longer = advances in medical technology
- Better public services
- Government can collect more tax revenue (linked to increased income and spending) = spend more on health care education, transport, etc
What are the problems with economic growth? Name 5
- Increase in the income distribution gap
- Unsustainable growth = lack of resources
- Inflation = prices will rise
- Environmental damage = more goods are produced
- Rapid economic growth = recession
What is economic growth?
The increase in national income over time
What is national income?
The income of an nation over a period time
What is an income distribution gap?
The difference between high income earners and low income earners
What does it mean to if a person is unemployed?
They are without a job but are seeking work but cannot find it
How is unemployment measured? Name 2 method and briefly explain them
- International Labour Organisation (ILO) survey
- Involves asking people whether or not they are in work
- Claimant count
- Counts people who claim the unemployment benefit
Define off-peak season
A time during the year when demand is low
Define economically inactive
People who are out of work but don’t meet criteria of unemployment
Define redundant
To be let go from work
Name the 5 types of unemployment
- Cyclical unemployment
- Structural unemployment
- Frictional unemployment
- Seasonal unemployment
- Voluntary unemployment
What is cyclical unemployment?
Linked to economic cycle - during downturn = business activity slows & worker laid off
What is structural unemployment?
Over time, structure of economy changes = workers to slow to switch from one job or region to another
Why may structural unemployment persist?
May persist if labour mobility is poor
Define labour mobility
The ability of workers to move from one job to another
Name the 3 types of structural unemployment
- Sectoral
- Technological
- Regional
What is sectoral unemployment?
When a particular industry declines
What is technological unemployment?
When machinery is used instead of labour
What is regional unemployment?
When a geographical area declines
What is frictional unemployment?
Short-term unemployment that occurs when people move between jobs
How long is someone considered frictionally unemployed?
Periods up to eight weeks
What is seasonal unemployment?
Unemployment at particular times of the year
What is voluntary unemployment?
People who choose not to work
Define unemployment
The amount of people don’t have job but actively seeking one
Name 5 effects of unemployment
- Increased government expenditure on social welfare
- Lowers the standard of living
- Less AD = lowers GDP
- Increase in hidden market jobs
- Reduced tax revenue
- Less foreign investors
- Increase in crime rate
- Lower national income due to less people earning income
- Government may to increase its borrowing
Define an open economy
An economy that trade with other countries
Define imports
Goods and services brought from overseas
Define exports
Goods and services sold overseas
Define visible trade
Trade of physical goods
Define invisible trade
Trade of services
Define balance of payments
Record of all transactions relating to international trade
Define the current account
Shows the value of all imports and exports over a period of time
Define the capital account
Records flows of money between countries that result from transactions relating to savings, investments and speculation (included in balance of payments)
Define current account deficit
Imports > Exports
Define current account surplus
Exports > Imports
Name 4 effects of a current account deficit
- Higher external debt
- Declining industries (due to overseas competition)
- Rising imports and unemployment
- Falling exchange rate
Name 4 effects of a current account surplus
- Rising exports, employment & growth
- Higher currency reserves
- Rising exchange rates
- Shortages of domestic goods
Name 5 method of protecting the environment
- Taxation
- Subsides
- Compensation
- Recycling
- International Targets
- Road Pricing and Charging
- Environmental Agencies
- Government Regulation
- Pollution Permits
Explain how pollution permits can protect the environment
Allow firms to release a limited amount of emissions into atmosphere
Explain how taxation can protect the environment
Governments tax on those that damage environment
Explain how subsides can protect the environment
Government offers grants, allowances to forms as an incentive to reduce activities that damage the environment
Explain how compensation can protect the environment
Those who cause environmental damage are forced by law to pay compensation to victims
Explain how recycling can protect the environment
Involves collecting waste materials and producing a new raw material from that waste
Explain how international targets can protect the environment
Have been set to reduce global warming
Explain how road pricing and charging can protect the environment
Charge road users for causing congestion and pollution
Explain how environmental agencies can protect the environment
Take action against those who break law or give advice to firms about protecting the environment
Explain how government regulation can protect the environment
Legislation and regulation designed to protect the environment
What is the definition of inflation?
The general persistent rise in prices over a given period of time
What is the affect of inflation on the value of money?
It decreases the value of money - “Inflation means that your money won’t buy as much today as it could yesterday”
What does inflation mean for the cost of living?
An increase in the cost of living.
What is deflation?
The general fall in price levels in an economy (opposite of inflation)
What is hyperinflation?
A situation where inflation rates are very high
How is inflation measured? Name 2 methods
- Consumer price index (CPI)
- Retail price index (RPI)
What does both CPI and RPI measure?
The general change in prices - changes in the cost of living
How is CPI and RPI measured?
- Every month the government records the prices of about 600 goods and services purchased by over several thousand families.
- Then an average price change is calculated & converted into index number.
What are causes of inflation? Name 3
- Demand Pull Inflation
- Cost Push Inflation
- Increase in Money Supply
What is aggregate demand?
The total demand in the economy
What is aggregate supply?
The total supply in the whole economy
What is demand pull inflation?
When aggregate demand is more than aggregate supply in the economy i.e. too much aggregate demand
Give 4 causes of demand pull inflation?
- Rising consumer’s disposable incomes
- Increase in government spending
- Increase in demand for exports
- Investment by firms
What is cost push inflation?
Inflation caused by an increase in cost of production (business costs)
Explain cost push inflation
When firms incur high production costs, they will rise their prices to maintain their profits i.e. rising costs
Name 5 causes of cost push inflation
- Rising costs of oil/raw materials
- Increase in indirect taxes
- Rising wage costs
- Rising interest rates
- Currency depreciation as imports become expensive
Illustrate a cost push inflation curve
Illustrate a demand pull inflation curve
What is money supply inflation?
Inflation caused by rapid growth in the money supply
What does the money supply refer to?
The stock of notes and coins, bank deposits and other financial assets in the economy
Where does an increase in the money supply occur?
Where interest rates are too low, encouraging borrowing which increases demand and prices rise
What are the consequences of inflation? Name 7
- Lost purchasing power of money
- Discourages savings
- Increased government spending
- Balance of payments/reduced export competitiveness
- Unemployment
- Debtors gain as creditors lose
- Increased business costs
Explain how inflation causes lost purchasing power of money
High inflation, people with fixed income (do not change with inflation) = real purchasing power of their income will buy less than before
Explain how inflation discourages saving
Purchasing power of money saved falls = savers lose out = discourages savings
Explain how inflation increases government spending
High unemployment levels = government expenditure on social welfare increases
Explain how inflation balance of payments/reduced export competitiveness
When rate of inflation in country is higher than its trading partners = its exports become expensive + unattractive in global market. Imports will increase at higher rate than exports = balance of payments deficit.
Explain how inflation causes unemployment
Inflation reduces demand for country’s products locally and aboard = because local goods are more expensive then imports. Force firms to cut down on output = lay off workers.
Explain how inflation causes debtors gain as creditor lose
- Debtors benefit from inflation, real value money have to repay will fall.
- Creditors will lose, especially if they lend out their money at a fixed interest rate.
What is the difference between how CPI and RPI measured?
RPI includes house prices and Council Tax
Explain how inflation causes increased business costs
- Higher production costs
- Higher wage demands and conflict
- Searching for cheaper goods
Name four functions of money
- Medium of exchange
- Store of value
- Unit of account
- Standard for deferred payments
Explain how high inflation can affect the function of money - medium of exchange
Hyperinflation = money may cease to medium of exchange. People may find other ways of trading.
Explain how high inflation can affect the function of money - store of value
Money is poor store of value during inflation. Value of savings falls if inflation is higher > than interest rates.
Explain how high inflation can affect the function of money - unit of account
Money may not function as unit of account bc monetary values may become distorted & there is uncertainty about values of goods
