paper 3 Flashcards
What does the acronym POPSICLE stand for in the context of micro and macro economics?
POPSICLE stands for price, output, productivity, structure of the market, inefficiency, competition, labour market, externalities
DIGESTIF
Development: Human development, sustainability
Inflation: Cost push / demand pull factors, expectations
Growth: Impact on short run / long run growth paths
Employment: Jobs, natural rate of unemployment
Structure of Economy: Pattern of GDP, jobs, investment, incomes
Trade: Trade balance, current account, capital flows
Inequality: Effects on income and wealth inequality
Fiscal Balance: Impact on state borrowing, debt, tax burdens
explain why productivity is measured by ‘GDP per hour worked, nominal values at PPPs’.
Productivity must be GDP / input (or per hour worked)
to have sense of output relative to input (1) sense of
relative efficiency (1)
* Nominal values meaning e.g. inflation is included in
the figures (1) so useful firms when calculating how
much revenue they have earned (1)
* PPPs means e.g. that the relative cost of living is taken
into account, or the figures are adjusted according to
the relative purchasing power (1)
* Makes comparison easier across countries (1) and
time (1) and meaningful in the same currency (1)
US produces 28% more per hour (1) than the UK (1)
topics likely to be examined in paper 3
- inflation
- economic growth
- unemployment
- market failure and government intervention
- interest rates
- globalisation
- exchange rate flucuations
- wage differentials
- income and wealth inequality
- national minimum wage
- FDI
micro causes/effects of inflation
Wage-Price Spiral
What happens: Higher wages lead to higher production costs, which firms pass on to consumers as higher prices, leading to more wage demands.
Cause: When workers demand higher wages to keep up with increasing costs of living, firms raise their prices to cover the additional wages.
Example: Workers in the textile industry demand higher wages because of rising living costs, and the company raises prices to cover the wage increases.
Effect: This leads to a cycle where prices continue to rise, pushing wages higher, and fueling inflation.
macro causes
Monetary Policy (Demand-Side)
What happens: An increase in the money supply or lower interest rates leads to more money circulating in the economy, boosting demand.
Cause: When central banks increase the money supply or reduce interest rates, consumers and businesses have more money to spend, raising aggregate demand and pushing prices up.
Example: A central bank lowers interest rates, making borrowing cheaper. As a result, more people take out loans to buy cars and houses, increasing demand.
Effect: More spending leads to higher prices across the economy.
Expansionary Fiscal Policy
What happens: Government spending and tax cuts boost aggregate demand, potentially leading to inflation.
Cause: When a government increases its spending (on infrastructure, welfare, etc.) or cuts taxes, households and firms have more disposable income, boosting demand.
Example: A government increases spending on public services or reduces taxes, leading to higher consumer demand for goods and services.
Effect: Increased demand can outstrip supply, leading to higher prices.
Global Supply Chain Issues (Imported Inflation)
What happens: Price increases in other countries for raw materials or finished goods cause inflation domestically.
Cause: If there are global shortages or increased prices in the supply of key imports (such as oil or semiconductors), it raises production costs for businesses.
Example: A spike in oil prices globally increases transportation and production costs for domestic businesses, which they pass on to consumers.
Effect: Higher prices for imported goods lead to an overall increase in inflation.
Exchange Rate Depreciation
What happens: A depreciation of the national currency leads to higher import prices, which may be passed on to consumers.
Cause: If a country’s currency weakens relative to other currencies, it becomes more expensive to import goods and services.
Example: A depreciation of the pound leads to more expensive imports, including fuel, electronics, and food.
Effect: The rising cost of imports leads to higher overall price levels in the domestic economy.
- cost push and demand side
micro effects of inflation
Reduced Purchasing Power
What happens: Inflation erodes the real value of money, meaning consumers can buy less with the same income.
Cause: As prices rise, the amount of goods and services people can afford with their income decreases, reducing their standard of living.
Effect: Consumers might need to spend more on essentials, cutting back on non-essential items or services. This could lead to a reduction in overall consumer welfare.
Income Redistribution
What happens: Inflation can benefit debtors while harming creditors.
Cause: If people owe money (e.g., mortgages or loans), they are repaying their debt with money that is worth less than when they borrowed it.
Effect: Debtors benefit from inflation, while creditors suffer, leading to a redistribution of wealth from lenders to borrowers. This can cause financial instability in the economy.
Menu Costs
What happens: Businesses must constantly adjust their prices, which incurs additional costs.
Cause: Firms face costs of updating prices on menus, catalogs, or websites and reprinting materials due to frequent price changes.
Effect: These costs, though relatively small per firm, can accumulate across an economy and reduce overall economic efficiency.
Uncertainty in Investment
What happens: Inflation introduces uncertainty, making it harder for businesses to plan for the future.
Cause: As inflation rises unpredictably, businesses are unsure about future input costs, future demand, and price levels.
Effect: This uncertainty may lead to reduced investment, as firms are less willing to take risks in such an unstable environment.
macro effects of inflation
Decreased Real Income and Lower Standards of Living
What happens: Inflation reduces the real income of workers unless wages increase at the same rate.
Cause: If wages do not keep pace with inflation, workers’ purchasing power decreases, leading to lower standards of living.
Effect: Reduced consumer confidence and demand for goods and services can follow, contributing to slower economic growth.
Increased Costs for Firms (Cost-Push Inflation)
What happens: Rising input costs push up the cost of production.
Cause: Businesses face higher prices for raw materials, energy, and wages, leading to increased production costs.
Effect: Higher costs can reduce profitability for businesses, which may pass the costs onto consumers, contributing to even higher inflation.
Wage-Price Spiral
What happens: Inflation leads to higher wages, which in turn leads to higher prices.
Cause: As inflation increases, workers demand higher wages to maintain their purchasing power. Employers then increase prices to cover the higher wages.
Effect: This cycle can continue, leading to escalating inflation that is difficult to control.
Impact on International Competitiveness
What happens: Domestic inflation can reduce the price competitiveness of a country’s goods and services abroad.
Cause: If a country’s inflation rate is higher than its trading partners, its goods become more expensive on the global market.
Effect: This can reduce exports and harm the balance of trade, leading to a worsening of the current account deficit.
Higher Interest Rates (Monetary Policy Response)
What happens: Central banks may increase interest rates to control inflation.
Cause: To curb inflation, central banks raise interest rates to reduce aggregate demand and bring prices down.
Effect: Higher interest rates lead to higher borrowing costs for businesses and consumers, which can reduce investment and spending, potentially slowing economic growth.
Distorted Price Signals
What happens: Inflation makes it harder for businesses to interpret price signals accurately.
Cause: As prices rise, it becomes more difficult for firms to distinguish between price changes due to increased demand or supply constraints and those due to inflation.
Effect: This distortion can lead to inefficient allocation of resources and reduce overall economic efficiency.
Redistribution of Wealth
What happens: Inflation benefits debtors and harms creditors, leading to shifts in wealth.
Cause: As prices rise, people who owe money can repay their loans with “cheaper” money. This redistribution from lenders to borrowers can create instability in the financial system.
Effect: If inflation becomes too high, it can lead to a loss of confidence in the currency, creating uncertainty and instability.
micro causes of unemployment
- Skills Mismatch
What happens: Workers’ skills do not match the requirements of available jobs.
Cause: Changes in technology, industry needs, or shifts in market demand make certain skills obsolete, leaving workers unemployed or underemployed.
- Discrimination
What happens: Certain groups face barriers to entering or progressing in the labor market.
Cause: Discriminatory practices based on gender, race, or age may prevent qualified individuals from being hired or promoted.
- labout flexibility
- geographical area
macro causes of unemployment
Economic Recession
What happens: A significant slowdown in economic activity leads to a reduction in demand for goods and services.
Cause: As consumer spending and business investment fall during a recession, companies may lay off workers or freeze hiring, leading to higher unemployment.
Low Aggregate Demand
What happens: Insufficient demand for goods and services leads to fewer jobs being created.
Cause: When overall spending in the economy is low (due to factors such as low consumer confidence or tight monetary policy), businesses may cut jobs or refrain from hiring.
Technological Change
What happens: Automation and advancements in technology reduce the need for human labor.
Cause: As industries adopt more advanced technologies, workers may be displaced, leading to unemployment, particularly for those with obsolete skills.
Globalization
What happens: Offshoring and outsourcing of jobs to countries with lower labor costs.
Cause: Companies may relocate production or service operations to other countries, resulting in job losses in domestic industries.
Inflationary Pressures (Cost-Push Inflation)
What happens: Rising production costs reduce firms’ ability to hire workers.
Cause: If firms face higher costs (e.g., higher wages, raw material costs), they may cut back on hiring or lay off workers to maintain profit margins.
Policy Mismanagement (Fiscal or Monetary Policy)
What happens: Ineffective government policies can lead to an unfavorable labor market.
Cause: Austerity measures, overly restrictive monetary policy, or poor fiscal management can reduce aggregate demand, leading to higher unemployment.
Seasonal Changes in Demand
What happens: Certain industries experience fluctuations in demand based on the time of year.
Cause: In industries like agriculture, tourism, and retail, employment is often seasonal, leading to unemployment during off-peak periods.
micro effects of unemployment
Lower Standard of Living
What happens: Individuals without jobs may experience a significant reduction in income.
Impact: This leads to a decrease in purchasing power, making it difficult to afford goods and services, lowering their overall standard of living.
Loss of Skills and Human Capital
What happens: Long-term unemployment can result in a loss of job-specific skills and decrease workers’ productivity.
Impact: Individuals may find it harder to re-enter the workforce, even when jobs become available, as their skills become outdated or irrelevant.
Strain on Social Welfare Systems
What happens: Governments may provide unemployment benefits to support those without jobs.
Impact: Prolonged unemployment strains public finances, as more individuals rely on welfare benefits and social support systems.
macro effects of unemployment
Lower Economic Growth
What happens: High levels of unemployment mean that the economy is not utilizing its full potential labor force.
Impact: This leads to a reduction in the overall output of goods and services, slowing economic growth and preventing the economy from reaching its potential.
Increased Government Spending
What happens: Governments may need to spend more on unemployment benefits, welfare programs, and other support measures for the unemployed.
Impact: This diverts resources away from other productive areas, such as infrastructure investment or education, and may increase the fiscal deficit or debt levels.
Inflationary Pressures (Demand-Pull Inflation)
What happens: While some unemployment is associated with low inflation, when certain sectors face skill shortages due to unemployment, this can lead to wage inflation.
Impact: As firms struggle to fill positions, wages might rise in certain sectors, contributing to inflationary pressures in the economy.
Decreased Consumer Confidence
What happens: Widespread unemployment reduces overall consumer confidence and spending.
Impact: As people fear job loss or have less disposable income, they cut back on consumption, leading to decreased demand in the economy, which can further slow economic recovery.
Social Unrest and Political Instability
What happens: High unemployment can lead to frustration and a sense of disenfranchisement among the population.
Impact: This can lead to social unrest, protests, and dissatisfaction with government policies, potentially leading to political instability and even the rise of populist movements.
Increased Inequality
What happens: Unemployment disproportionately affects certain demographic groups, such as youth, minorities, and lower-income individuals.
Impact: This deepens income inequality in society, as wealthier individuals may be insulated from the effects of unemployment, while marginalized groups face long-term hardships.
Loss of Tax Revenue
What happens: With higher unemployment, fewer individuals are paying taxes.
Impact: This leads to a reduction in government revenues, which could result in higher taxes for the employed or cuts in public services.
