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A2 Economics > Macroeconomic Performance - Ch1 Of Piercy > Flashcards

Macroeconomic Performance - Ch1 Of Piercy Flashcards

0
Q

What are the 4 key indicators of macroeconomic performance?

A

Real GDP growth
Inflation
Unemployment
Balance of payments

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1
Q

Describe the state of the UK economy in 2004

A

Economy was doing very well - the OECD said ‘the performance of the UK economy has been impressive in recent years’

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2
Q

Define real GDP growth

A

A measure of the total output, expenditure or income of an economy, after adjusting for changes in the price level. Growth is measured in percentile changes

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3
Q

Define inflation

A

The sustained increase in the general level of prices, measured by the consumer price index

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4
Q

Define unemployment

A

When someone is out of work and actively seeking employment

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5
Q

Define the balance of payments

A

Record of money flows into and out of a country over a period of time

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6
Q

What is the current account?

A

It’s in the balance of payments, includes money flows due to trade, transfers of interest, profit and dividends, and transfers of money by governments and international organisations

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7
Q

Describe the real GDP growth changes from 2000 to 2006

A

A consistent level of growth, at around 2.7%

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8
Q

Describe how unemployment changed over the years from 2000-2006

A

It was falling until 2005, then in 2006 it sharply rose

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9
Q

Give a measure of economic performance in 2007 that provides a positive insight to the UK economy

A

The UK’s GDP per capita had risen from bottom of the G7 league table to 3rd from top

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10
Q

What 3 explanations were given for the UKs strong economic performance in 2007?

A

A willingness to adapt and embrace globalisation
Well managed monetary and fiscal policy
The benefits of economic growth in the economies of the UKs major trading partners

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11
Q

What is short run economic growth? What is it sometimes referred to?

A

The actual annual percentage increase in an economy’s output, sometimes referred to as actual economic growth

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12
Q

What is long run economic growth? What is sometimes referred to as?

A

The rate at which the economy’s potential output could grow, as a result of changes in the economy’s capacity to produce goods and services. Sometimes referred to as potential economic growth.

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13
Q

Define standard of living

A

A measure of the material well being of a nation and it’s people

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14
Q

What type of diagram would distinguish between long run and short run economic growth?

A

A PPC diagram

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15
Q

How is long run and short run economic growth shown on a PPC diagram?

A

Long run is shown by a shift in the PPC curve to the right, as the economies maximum potential output has increased.
Short run is shown by changes in points on the diagram, as long as they’re showing an increase in output, they don’t have to be on a PPC curve.

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16
Q

How does short run economic growth occur?

A

From more of an economy’s resources being used

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17
Q

How does long run economic growth occur?

A

Increases in quantity or quality of a nations factors of production

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18
Q

What is the 72 rule and what does it show?

A

That a real GDP growth rate of 1% per annul results in a doubling of real GDP in 72 years. It shows that if sustained, small differences in growth rates matter.

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19
Q

What is the output gap?

A

The difference between actual and potential GDP

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20
Q

What is spare capacity?

A

When firms in the economy are capable of producing more output than they are actually producing

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21
Q

If there is very little or no spare capacity, what would the result of an increase in actual economic growth be?

A

Inflation

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22
Q

Give a negative to measuring inflationary pressures through the output gap

A

It’s very hard to measure to potential output of an economy accurately, and the output will only ever be an estimate.

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23
Q

What is the trend rate of growth?

A

The average rate of economic growth over a period of time, normally over the course of the economic cycle

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24
Q

What are some causes of economic growth in the short run?

A

Changes in aggregate demand
Short run Aggregate supply
Interaction of multiplier and accelerator
The economic cycle

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25
Q

What are the 5 components of aggregate demand?

A

Consumer spending, investment expenditure by firms, government spending, net exports

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26
Q

Define short run aggregate supply

A

The level of production for the economy at a given price level, assuming labour costs and other factor inputs remain unchanged

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27
Q

What causes short run aggregate supply to shift?

A

Changes in the costs of production

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28
Q

How do changes in costs of production arise?

A

From changes in:
Labour costs - change due to changes in predominantly wage rates
Other input prices
Taxes and regulation

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29
Q

Define the economic cycle

A

Fluctuations in the level of economic activity, as measured by GDP. Typically 4 stages -recession, recovery, boom and bust

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30
Q

Describe the argument that economic stability can affect the rate at which the economy grows

A

Centred on the hysteresis effect of unemployment. Long periods of unemployment lead to the deskilling of the workforce, and hence a loss of human capital. When the economy returns to a period of positive growth, it does so at a slower rate, as there is a loss in productivity and hence it becomes more difficult to raise output.

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31
Q

What are the 4 stages of the economic cycle? Explain each.

A

The recovery - when economic growth becomes positive after a recession
The boom- when the rate of economic growth exceeds the rate of growth of potential GDP so that the output gap has narrowed
The slowdown- when the rate of economic growth begins to fall and approaches zero
The recession - when the rate of economic growth becomes negative and real GDP actually falls

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32
Q

What are the 3 explanations of the causes of the economic cycle?

A

The multiplier and accelerator effects and their interaction

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33
Q

What is the multiplier effect?

A

The process by which any change in a component of aggregate demand results in a greater final change in real GDP

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34
Q

What determines the size of the multiplier?

A

Size of the leakages from circular flow

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35
Q

What is the marginal propensity to withdraw? What is it made up of?

A 
It's the proportion of additional national income that goes to leakages 
Made up of: 
Marginal propensity to save
Marginal propensity to tax
Marginal propensity to import
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36
Q

Define the marginal propensity to save

A

The proportion of additional national income that is saved

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37
Q

Define marginal propensity to tax

A

The proportion of additional national income that is taxed

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38
Q

Define marginal propensity to import

A

The proportion of additional national income that is spent on imports

39
Q

How is the multiplier calculated?

A

1/MPW

40
Q

What is the Accelerator?

A

The theory of investment that states that the level of investment depends on the rate of change of national income

41
Q

What two purposes does investment serve?

A

To replace the capital stock that is wearing out, and to provide new stock to give additional productivity to meet rising demand

42
Q

Why is it unlikely that investment will occur during times of recession?

A

There is no need for firms to undertake investment to raise productive capacity, as demand for output is falling. There may also be no need to replace wearing out capital, if demand has fallen significantly

43
Q

What are ‘ceilings’ and ‘floors’ in an economy?

A

Once actual output approaches potential output, the economy reaches it’s ceiling and growth must slow down.
Similarly, there must be a floor to economic growth, as firms must invest a minimum amount to replace completely worn out capital, and there is a minimum consumption level for firms

44
Q

Give a counter to theories of both accelerator and multiplier

A

They are both theoretical, and in reality the economy never works in the mechanical way that theory predicts, and the economic cycle is not predictable

45
Q

Give limitations to multiplier and accelerator as Explanations of the economic cycle (6)

A

If firms have spare capacity, rising demand can be met without rising investment
The theory of the accelerator ignores the role that confidence and expectations play in investment decisions
Investment decisions are planned well in advance of changes in economic activity, and can be difficult to halt or postpone
Multiplier effect of changes in investment may be small, so although investment is volatile, it doesn’t have a large impact on AD and hence growth
External or random shocks to the economy can be just as important a cause of the economic cycle
Fiscal and monetary policy changes may help out to smooth out the economic cycle, and policy makers may be able to override the accelerator and multiplier effects

46
Q

How do stocks offer an alternative explanation to the economic cycle?

A

With time lags in production, it’s not always possible for firms to immediately increase output in order to meet higher demand. As a result, firms hold stocks of finished and semifinished goods. The amount of stocks held by firms varies over the course of the economic cycle, and hence this fluctuation contributes to the economic cycle itself

47
Q

What will firms do with their stocks in a recession?why?

A

They will sell their stocks of finished goods instead of producing new output, as firms will be reluctant to increase investment when they’re unsure about whether demand will continue to rise in the future

48
Q

What do theories of the economic cycle not explain?

A

Why that the economic cycle is more severe in some economies

49
Q

What is the long run aggregate supply curve?

A

The relationship between total supply and the price level in the long run. The LRAS curve represents the maximum possible output for the whole economy - it’s potential output

50
Q

What do classical economists believe?

A

That markets will ‘clear’, that prices and quantities adjust to changes in the forces of supply and demand so that the economy produces it’s potential output in the long run

51
Q

What do Keynesian economists believe?

A

That market failures will result in price and quantity rigidities,so that the economy’s equilibrium output in the long run may be less than its potential output

52
Q

How do Keynesian economists view the LRAS curve?

A

They believe that there are 3 parts to it - first, LRAS in perfectly elastic, as output can be increased in recession without wages and prices rising, then it’s upward sloping, as firms have to pay higher wages to recruit more labour. Then it becomes vertical, when all factors of production are fully employed.

53
Q

How is long run economic growth shown on a LRAS curve?

A

Shift to the right

54
Q

What are the 3 main causes of long run economic growth?

A

Changes in LRAS
Quality and quantity of labour force
Capital stock

55
Q

What is the limit to output in the long term?

A

The quantity and quality of the factors of production

56
Q

How can increasing the size of the labour force be achieved?

A

Increases in the size of the population
Increases in the labour force participation rate
Increases in the flow of workers into an economy (immigration)

57
Q

What are the problems of population growth?

A

For output per person to grow, output has to grow at a faster rate than production, which is by no means guaranteed. The birth rate is influenced by social and cultural factors and is difficult to influence - the death rate falls as the economy gets richer through economic growth, which itself causes a reduction in population growth

58
Q

Define the labour force

A

All those people of working age who are in employment or actively seeking work

59
Q

What is the labour force participation rate?

A

A measure of the proportion of the population able to work, who are in employment or who are actively seeking work

60
Q

What has proven to provide the biggest increase in labour force participation rate in recent years?

A

Increases in the number of women entering the workforce

61
Q

When increasing the quantity of the labour force, what is a more important factor than population growth?

A

Increasing the labour participation rate

62
Q

How have the UK government increased the labour force participation rate?

A

Increasing incentives of unemployed to join the labour force
Raising the retirement age

63
Q

What is the drawback of immigration as a method to increase quantity of labour force and hence achieve LREG

A

Immigration increases the size of an economy’s labour force, but also the size of the population, so unless immigration contributes to an increase in output over worker, there is little benefit.

64
Q

How can the labour force be made more productive?

A

Through education and training

65
Q

How does education and training make workers more productive?

A

It increases their human capital, by providing them with more skill and technical knowledge

66
Q

As economies grow, how does the balance of production change?

A

Primary and secondary sectors shrink, whilst the tertiary sector grows

67
Q

How have the most demanded employees changed as the economy has developed?

A

They’ve moved from producing physical products, to providing information services, such as marketing

68
Q

What are the difficulties in achieving increases in human capital?

A

The costs of education and training can be very high
The issue of who should provide the education and training - the market or the government?
The issue in deciding what kind of education and training to provide
Who should pay for the Ed and training? The market, the firms, the individuals?

69
Q

What’s the main disadvantage of increasing human capital?

A

Time lags yet the costs are borne immediately

70
Q

What is a capital output ratio?

A

The amount of capital needed to generate each unit of output

71
Q

What does the harrod domar model state?

A

That in order to increase economic growth in the long run, there must be either more saving to fund investment, or technological advance to increase productivity of investment

72
Q

List 4 policies that often increase growth and innovation

A

Gov subsidy of R&D by firms
Promoting, supporting and funding science education in schools and scientific research at university, eg through grants
Increasing supply of highly skilled workers through immigration
Tax incentive to encourage innovation and to reward those that innovate

73
Q

In what situation will economic cause inflation?

A

If the growth is generated by increases in AD, unmatched by AS

74
Q

How can growth be achieved without causing inflation

A

By increasing the AS curve with AD

75
Q

How are economic growth and employment linked? Expand

A

Very closely, recognised to be central In improving macroeconomic performance. As output rises, so does employment due to the increases in demand for labour. Even in the long run, employment benefits from growth

76
Q

How would increasing labour participation rates influence the LRAS curve?

A

It would shift it to the right?

77
Q

How would increasing labour productivity affect employment in both short and long run?

A

In short run, it may decrease it as firms can choose to achieve the same output with less workers. However in the long run it should increase it as the increase in productivity raises AD

78
Q

Why may higher employment not necessarily equal lower unemployment?

A

The labour force is changing, and increases in population of working age people, and the amount of people seeking work may mean that unemployment rises with employment

79
Q

What do the consequences of economic growth for employment depend upon? Explain

A

The nature of the growth, and the causes of unemployment. Economic growth caused by increases in AD will likely reduce cyclical unemployment, but not unemployment derived from the supply of the labour. Job creation should be accompanied by measures to assist the labour force to acquire the necessary skills

80
Q

What does the impact of economic growth on the balance of payments depend on? Give an example to illustrate

A

Depends on the nature of economic growth. Eg if growth caused by increased AD, from increased consumer expenditure, the balance of payments will suffer as imports rise

81
Q

What type of growth will be beneficial/less harmful to balance of payments? Explain

A

Export led growth, with improve, with supply side improvements such as capital investment, productivity increases, will all improve an economy’s international competitiveness and hence reducing impact of growth on imports, raising exports.

82
Q

How is the balance of payments viewed to impact economic growth?

A

It’s viewed as a constraint. This is because the country can only spend more on imports than earned from imports, if their future earning potential is good

83
Q

What is the governments fiscal position?

A

The balance between government expenditure, and revenue from tax receipts.

84
Q

How does government expenditure change as the economy grows?

A

It falls, as less needs to be spent on unemployment benefits and correctional methods.

85
Q

How do tax receipts change as the economy grows?

A

They rise, as typically more employment as economy grows more taxpayers

86
Q

What are automatic stabilisers?

A

Changes in government expenditure and taxation receipts that take place automatically in response to the economic cycle

87
Q

What is the impact of automatic stabilisers on the governments fiscal position over the economic cycle?

A

It means the fiscal position will change over the economic cycle, with a budget surplus in the boom phase, and a deficit in the recession phase

88
Q

Define economic stability

A

The avoidance of volatility in economic growth rates, inflation, employment etc, in order to reduce uncertainty and promote business and customer growth and investment

89
Q

What do macroeconomic policies to promote stability and growth focus upon?

A

A prudent approach to management of the economy
Taking fiscal and monetary policy decisions on the basis of the long term interests of the economy, as opposed to short term political choices
Insuring that fiscal and monetary policies support each other
Bringing openness and transparency to decision making, through putting in place rules and targets
Improving the supply side performance of the economy

90
Q

What issues arise when governments try to spend fiscal surpluses, and recover deficits?

A

The economic cycle becomes more pronounced- automatic stabilisers will soon kick in

91
Q

What is the risk of high government borrowing?

A

It may increase interest rates, which contribute to lower levels of private sector investment

92
Q

When is UK borrowing justified?

A

When it is less than the cyclical deficit, and only if it’s justified through automatic stabilisers, or is to be used for investment

93
Q

What is the golden rule of fiscal policy?

A

That over the economic cycle, it will only borrow to invest and not for current expenditure

94
Q

What are the 3 main principles of fiscal policy?

A

Credibility, flexibility and legitimacy

A2 Economics (7 decks)

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