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A-level Economics Macro > Pack 2 Macro (yr12) > Flashcards

Pack 2 Macro (yr12) Flashcards

1
Q

What is inflation?

A

increase in the general price level

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2
Q

What is disinflation?

A

fall in rate of inflation

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3
Q

What is deflation

A

fall in general price level

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4
Q

What is good and bad deflation?

A

good deflation: costs of production are falling. Good for the economy as there is growth in the economy and a more internationally competitive export sector

bad deflation: when price falls are caused by falling demand in the economy, associated with falling growth and rising unemployment

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5
Q

What are the different measures of inflation?

A

RPI and CPI

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6
Q

What are the differences between RPI and CPI?

A
  • RPI includeshousing costs
  • in times of house prices falling, the CPI will be higher than the RPI due to housing depreciation
  • CPI geometric mean and RPI arithmetic, making CPI generally lower than RPI
  • RPI excludes high income households and pensioners whereas CPI included all households
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7
Q

How do you calculate the rate of CPI inflation?

A
  • measured by trying to calculate how much on average a representative basket of goods and services costs in the UK

Step 1. Use of Price Surveys
- to find average price
Step 2. Use of annual expenditure survey
- different items of basket of goods are weighted using the amount we all spend n them
- updated each year
3. Creating a weighted price index:
- calculated by comparing the price in the current time period compared to the base year

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8
Q

What are the limitations of using CPI to measure inflation?

A
  1. Only an average rate of inflation
  2. Weightings only changed annually
  3. Index cannot indicate changes in the quality of goods, only the price
  4. Sampling issues
  5. CPI does not include housing costs
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9
Q

What are the three causes of inflation?

A
  1. Demand Pull inflation
  2. Cost push inflation
  3. Growth of the Money Supply
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10
Q

What is demand pull inflation?

A
  • businesses in the economy will be increasing prices when there is greater willingness and ability to pay for good/services
  • could rise in an economy due to:
  • rising consumption (influenced by disposable incomes, consumer confidence, change in interest rates)
  • Rising investment
  • Rising government spending
  • Rising net exports
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11
Q

What is cost push inflation?

A
  • increase in general price level, caused by higher costs of production
    caused by:
  • higher commodity prices
  • higher labour costs
  • increase in indirect taxation
  • fall in exchange rate
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12
Q

What is growth in money supply inflation?

A
  • If Central Bank lowers the base rate, there is likely to be increased borrowing by firms and consumers
  • result in an increase in consumption and investment
  • likely to lead to a form of demand-pull inflation
  • as people have more money available
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13
Q

What are the effects on consumers from inflation?

A
  • Impact on living standards - rising rates of inflation = reduced purchasing power of money and reduce real incomes. reduce living standards as they are able to purchase fewer goods/services
  • Impact on savers and borrowers - savers won’t be able to purchase less in future, borrowers will benefit
  • Shoe leather costs - consumers may spend longer shopping around
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14
Q

What are the effects on firms from inflation?

A
  • Rising costs of production: may have to increase prices or reduce profit margins to maintain consumer demand
  • Reduced international competitiveness- may need to rise prices to cover higher costs
  • Reduced confidence and investment
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15
Q

What are the effects on workers from inflation?

A
  • impact on employment and job security - rising costs, workers made redundant
  • Impact on wages - look to bargain higher prices to maintain higher living standards
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16
Q

What are the effects on the government from inflation?

A
  • Impact on UK macroeconomic objectives:
  • Economic growth: demand-pull inflation may indicate growth in economy
  • Unemployment - demand pull inflation improves employment, cost-push inflation lead to redundancies
  • Political costs: people feel they are worse off, less chance of re-election
  • Reduced value of national debt in real terms
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17
Q

What is employment and how do you calculate rate of employment?

A
  • total number of people with a job, including working for firms or other organisations and the self-employed

Level of employment/Population of working age x100

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18
Q

What is unemployment and how do you calculate rate of unemployment?

A
  • people who are without a job who are able and willing to work at current wage rates

Level of unemployment/Active workforce x100

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19
Q

What is economic inactivity and what are the reasons for it?

A
  • those people of working age who are not in employment and not looking for work for a variety of reasons such as student

Reasons:
- full-time students not looking for work
- sick and disabled unable to work long-term
- early retirement, not looking for work
- homemakers

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20
Q

How do you calculate rate of inactivity?

A

Level of inactivity/Population of working age x100

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21
Q

What is underemployment?

A
  • where an individual is employed but are not fully utilised in terms of their skill or hours worked

Reasons:
- skills and job vacancy mismatch
- changes in the business cycle: in times of recession companies cannot afford to hire full time workers
- technological change

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22
Q

How do you work out the rate of underemployment?

A

Level of underemployment/active workforce x100

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23
Q

What is claimant count unemployment and claimant count measure?

A
  • number of people claiming unemployment-related benefits

Involve people:
- aged between 18 and retirement age
- registered at a job center
- required to seek work and are ready to start immediately

24
Q

What is the ILO measure?

A
  • number of people aged 16-65 who are unemployed based on the internationally recognized Labour force survey
24
Q

What are the limitations of the claimant count measure?

A
  • open to government manipulation (as employment benefits controlled by the government)
  • not internationally recognizable (hard to compare)
  • inaccuracies in the data
25
Q

How does the ILO define unemployed?

A
  • without a job, have been actively seeking work in the past four weeks and are available to start work in the next two weeks
  • out of work, have found a job and are waiting to start in the next two weeks
26
Q

What are the limitations of the ILO measure?

A
  • sampling issues ( limits accuracy as only sample of population)
  • out of date (6 weeks out of date when published)
27
Q

What are the overall limitations of measuring unemployment?

A
  • may underestimate unemployment as they exclude:
  • impact of underemployment of workers, such as wanting to work more hours
  • those on government training schemes who would prefer to be in work
  • people not actively seeking work or on benefits but would take a job if offered one
  • unemployed workers who have been taken off the unemployment register by moving them onto sickness and disability benefits
  • may overestimate unemployment:
  • include people who will never be able to get a job and are unemployable unless they become inactive (e.g ex criminals)
28
Q

What are the difference between CC and ILO measures?

A

Claimant count may be lower than ILO:
- youth unemployment not included in CC
- unemployment benefits may be harder to obtain
- workers do not claim benefits even when entitled (stigma)
- other groups not entitled to unemployment benefit but counted as unemployed on ILO

Claimant count may be higher than ILO:
- time lags associated with the ILO measure
- people claiming benefits but not counted as ILO unemployed

29
Q

What are the 5 causes of unemployment?

A

Structural unemployment
Frictional unemployment
Seasonal unemployment
Cyclical unemployment
Real wage inflexibility

30
Q

What is structural unemployment?

A
  • occurs when there is a change in the structure of the economy ,such as the loss of a certain industry
  • can be a cause of long term unemployment
  • because workers may be unable to switch to a region where there are jobs in this industry (geographic immobility) or unable to find work in a new profession due to lack of transferable skills (occupational immobility)
31
Q

What is frictional unemployment?

A
  • short term cause of unemployment when workers are looking for work and are between jobs
  • length of time will be greater if there are generous unemployment benefits and redundancy packages
  • governments can help fund job centers
32
Q

What is seasonal unemployment?

A
  • when workers are unemployed at certain times of the year, such as agriculture workers in winter
  • little can be done by governments, however provision of skills to allow workers to gain bibs in the off-season will help
33
Q

What is cyclical unemployment?

A
  • caused by fall in aggregate demand
  • with lower GDP, firms will produce less output and so reduce their demand for workers
  • gov needs to try boos aggregate demand in the economy - e.g reducing interest rates , cutting tax
34
Q

What is real wage unemployment ?

A
  • caused by real wages being too high and becoming too costly for businesses to employ workers
  • could be due to presence of trade union over, high minimum wage
35
Q

What is the importance of skills for employment and unemployment?

A
  • when workers become unemployed, need appropriate skills for vacancies in the economy
  • lack of skills can lead to long-term unemployment or structural unemployment if there are no jobs in sectors where workers used to be employed
36
Q

What is the significance of migration on employment/unemployment?

A

Employment:
- immigrants usually fill vacancies that the local citizens cannot or will not fill so direct boos to employment ( usually manual Labour/low skilled jobs)
- increased supply of labour may push down wages in economy, especially for low skilled jobs
lower average wages are an incentive for employers to hire more workers
employment may increase as a result

Unemployment:
- immigrants may displace some local workers increasing level of unemployment
- dependents of immigrants may be unable to find work and register as unemployed

37
Q

What do you need to consider when evaluating the impact of migration?

A
  • may have no impact on employment or unemployment (may be unable/unwilling to work)
  • need to consider net migration
  • magnitude arguments
  • long-term arguments
38
Q

What are the effects of unemployment on consumers?

A
  • lower living standards
  • reduced consumer choice

Benefits:
- lower inflation and lower prices ( fall in demand-pull inflation)

39
Q

What are the effects in firms from unemployment?

A
  • falling revenue and profits (lower demand, so may need to lay off more workers)

Benefits:
- impact on recruitment costs : may not to pay as high wages as larger pool of unemployed

40
Q

What are the effects on workers from unemployment?

A
  • loss of income
  • loss of self respect
  • loss of skills and issues of long-term unemployment

For those who remain in a job:
- reduced job security
- impact on wages (businesses with lower profits)

41
Q

What are the effects on society from unemployment?

A
  • increased crime (people need necessities)
  • areas become run down (if businesses close)
42
Q

What are the effects on the government from unemployment?

A
  • higher government spending (benefits)
  • lower tax revenue (less people pay taxes)
  • impact on budget balance (inc gov spending and fall in tax revenues)
  • political costs
43
Q

What things do you need to consider when evaluating the effects of unemployment?

A
  • long term vs short term
  • unemployment will vary by region and sector of the economy
  • issues of inactivity and underemployment (current low levels of unemployment have been caused by higher levels of inactivity and so although unemployment is falling, not necessarily an increase in employment)
  • issue of falling real income for the employed
44
Q

What is the balance of payments (BoP)?

A

Record of all the financial transaction’s that occur between it and the rest of the world

45
Q

What are the two main sectors of the BoP?

A
  • the current account: all transactions related to goods/services along with payments related to the transfer of income
  • the financial and capital account: all transaction related to savings, investment and currency stablisation
46
Q

What is included in the current account of the BoP?

A
  • balance of trade in goods
  • balance of trade in services
  • investment income
  • transfers
47
Q

What is the structure of the balance of payments?

A

Current account
Financial and capital Accounts:

Financial Account:
Tracks transaction in financial assets e.g foreign direct investment

Capital account:
Minor account tracking one off changes in financial assists e.g writing off debt to LEDCs

48
Q

What is a current account deficit?

A
  • when more money is flowing out of the current account than coming in
  • net withdrawal
49
Q

What is a current account surplus?

A
  • if more money flows into the current account than flows out
  • net injection

These flows could be:
trade in goods
trade in services
investment income
transfers

50
Q

What are the causes of Current Account Surpluses and Deficits?

A
  1. The exchange rate
    Strong Pound Imports Cheap Exports Dear
    Weak Pound Imports Dear Exports Cheap
  2. International competitiveness : will determine demand for imports/exports
  3. Economic growth and savings: rate of economic growth will determine levels of income available to import
  4. Changes in investment income and transfers
51
Q

When will the current account cause an increase in GDP?

A
  • reduction in current account deficit as there will be a smaller net withdrawal
  • increase in the current account surplus as there will be a greater net injection
51
Q

When will the current account cause a reduction in GDP?

A
  • increase in the current account deficit as there will be a greater net withdrawal
  • decrease in current account surplus as there will be a smaller net injection
52
Q

How would a decrease in the UK’s current account deficit affect the macroeconomic objectives?

A

Increase economic growth
Reduce unemployment
Higher demand-pull inflation

53
Q

How would an increase in the UK’s current account deficit affect the macroeconomic objectives?

A

Reduction in growth
Reduction in inflation
Rise in unemployment

54
Q

What are the effects of an increasing current account deficit?

A

a) Reduced economic growth
- as higher importing of goods into UK = reduction in GDP
b) Reduced inflation
- current account deficit causing a fall in GDP due to high net withdrawals
- less demand pull inflation as lower consumption when GDP/living standards fall
- more spare capacity due to lower demand, less cost push inflationary pressure
E.g wages may be lower as more workers to employ

c) increased unemployment
- fall in revenue and profits for UK exporters
- if businesses struggle, need to lay off workers, causing rise in UK unemployment

A-level Economics Macro (7 decks)

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