Macroeconomic performance

Question 1

Define economic growth

Answer 1

Economic growth is an increase in real GDP caused by an increase in AD or LRAS

Question 2

Real GDP

Answer 2

Is the total value of all final goods and services in the economy at a given period of time in a year, adjusted to the inflation rate

Question 3

What is an example of a national income statistic?

Answer 3

Real GDP

Question 4

What are the 4 main benefits of using national income statistics

Answer 4

1. Used as a report card for a country
2. Governments use NIS to enact and inform policies
3. Used as a benchmark to evaluate standards of living
4. Used for building forecasting models

Question 5

How are NIS used as a report card?

Answer 5

So the performance of an economy can be analysed overtime. Highly useful for politicians who need them to see whether their macroeconomic objectives of increased growth are being met

Question 6

How are NIS used as a benchmark for living standards?

Answer 6

Rise in national income is interpreted as an increase in living standards for all and if this has been a long term trend then it is a clear indicator of economic prosperity.
Can also be used to compare a country’s statistics and compare the success of policies regarding the assessment of living standards

Question 7

Use of NIS by governments

Answer 7

Use NIS to to evaluate the success of past economic policies in promoting economic growth. This allows the government to be aware of and use again policies that have increased real GDP or to be aware of past policies that have been less successful and failed so that alternatives can be used in the future.

Question 8

Use of NIS as forecasting

Answer 8

Statistics used to by individuals, businesses and governments to build forecasting models to plan future investments and spending.

Question 9

Why is forecasting using NIS important in a globalised economy

Answer 9

In a highly globalised world economy, growth forecasts are also significant for countries whose economic performance is interdependent on others

Question 10

What are 2 limitations of using national income statistics as a measure of economic growth

Answer 10

Informal economy doesn’t contribute to the measure of real GDP. Results in figures that are actually lower

Large data is needed to be collected and can come from different sources so inevitably it leads to inaccuracies so final figures are not perfect when released

Question 11

Why should real GDP not be used to measure living standards

Answer 11

Its a single measure of living standards only taking into account income when in fact there are a number of different factors that contribute to living standards including, healthcare and education, infrastructure, freedom and equality in determining living standards. Therefore other measures like HDI would be a more appropriate indicator of living standards.

Question 12

impact of MNCs on GDP measures of standards of living

Answer 12

Profits are repatriated and not reinvested into the business or into job creation
Poor working conditions and poor pay for workers
Instead suing profits for improving the incomes of managers and shareholders.
MNCs cause increases in real GDP but without having noticeable effects on standards of living and if anything worsening living standards even when real GDP rises

Question 13

What are short run growth (actual growth)

Answer 13

Is growth caused by an increase in AD

Question 14

Diagram showing short run growth

Answer 14

Question 15

Actual growth increases

Answer 15

Actual growth increases from Y1 to Y2. Tis is because as there is more demand in the economy then producers increase their output which closes the negative output gap, exhausting the spare capacity in the economy. Y2 is closer to the full employment level of output, this increase in output signifying the increase in real GDP (economic growth)

Question 16

Causes of short run economic growth

Answer 16

A cut in interest rates
Governments reduce the level of corporation tax or income tax
Government spending increases
Weaker exchange rate

Question 17

Impacts of a cut in interest rates

Answer 17

Reduce cost of borrowing for consumers
Reduce cost of borrowing for firms
Reduces the rate of return of savings
Reduce monthly payments for people with variable rate to tracked mortgages

Question 18

How could governments increase short run growth? (tax)

Answer 18

Governments could reduce the marginal rate of income tax in lower income tax bands or increase the income tax free allowance for those on lower incomes

Question 19

What is long run growth

Answer 19

Referred to as potential growth of the economy and is caused by an increase in LRAS

Question 20

What does an increase in long run aggregate supply mean?

Answer 20

Means that there has been an increase in the productive capacity of the economy

Question 21

Diagram showing Long run economic growth

Answer 21

Question 22

Causes of long run growth

Answer 22

Government spending on education

Governments offering subsidies or lower tax allowances to firms to incentive investment

Reducing corporation tax

Deregulation and trade liberalisation

Question 23

Why does LRAS shift

Answer 23

Changes in the quantity of FOP
Changes in the quality of FOP
Changes in the productive efficiency

Question 24

Define productive efficiency

Answer 24

This is when there is a reduction in long run costs or a firm

Question 25

Reinvestment impact on long run growth

Answer 25

Increases long run growth
Improvements in current capital and tech or buying new capital increases quality and quantity of FOP
Improved capital, lower long run costs so leads to productive efficiency

Question 26

Lower corporation tax impacts on long run growth

Answer 26

Increased incentive for firms to reinvest
Greater levels of retained profits to finance investment
Investment improves both quality and increased quantity of FOP
As well as this then lowering long run costs so leads to productive efficiency gains

Question 27

Deregulation effect on long run growth

Answer 27

Reduction in government imposed standards or laws
Reduction in costs for firms
Lower legal barriers to entry so increases competition.
Incentive to maximise efficiency to lower costs and charge lower rices than rivals.
Results in productive efficiency

Question 28

What is trade liberalisation

Answer 28

Involves thew removal of trade barriers like tariffs or quotas to promote free trade and competition

Question 29

Trade liberalisation diagram

Answer 29

Question 30

Trade liberalisation on long run growth

Answer 30

Due to fierce and intense nature of the global market firms want to achieve profit maximisation objectives whilst being competitive as possible so there is an incentive to maximise efficiency where firms lower their costs of production, increasing productive efficiency increasing long run growth

Question 31

2 Costs of Growth

Answer 31

Unrestrained growth can accelerate demand pull inflation if AD is increasing faster than AS, pressure on existing factors of production, increasing their costs to use, filtering through higher prices to consumers
Loss of international competitiveness

High AD leading to unsustainable growth where firms scrap sustainable slow ways of producing in order to meet demand, leads to negative externalities like resource depletion and degradation. Future incomes lost out, less goods and services made with those resources resulting in lower material living standards. Impacts future trade

Question 32

3 benefits of growth

Answer 32

Greater fiscal dividend for the government
Higher profits for firms
Low unemployment

Question 33

Explain fiscal dividend for gov

Answer 33

Increased economic growth
Increased tax revenues from taxes
More imports sucked in so increased tariff revenues also
More money to spend on public services
Fund welfare payments to those who need it

Question 34

2 costs of LFS

Answer 34

Doesn’t account for disparities
Official data thinks the underemployed are fully employed

Question 35

2 costs of unemployment

Answer 35

Worsening ion government finances
Lost output

Question 36

2 benefits of unemployment

Answer 36

Makes it easier for firms to find workers
Can help keep inflation under control

Question 37

cost of anticipated inflation

Answer 37

can create consumer driven price-spirals but also wage-price spirals

Question 38

2 costs of inflation

Answer 38

Anticipated inflation creating inflation spirals
Reduced international competitiveness

Question 39

2 benefits of inflation

Answer 39

Workers receive higher pay in line with inflation
Government finances improve

Question 40

Cost of deflation

Answer 40

Can cause delayed spending so less AD