Revision Flashcards
Definition of economic growth
An increase in actual or potential output of an economy
Measure of economic growth
Real GDP and real GDP per capita - per person
Causes of economic growth
– Increase Government spending for education – Increase Immigration – Increase Labour productivity – Decrease i/r – Decrease Exchange Rate – Decrease income tax – Decrease Price of raw material – Decrease wages – Decrease VAT
Positive output gap
Actual output is bigger than potential output
Negative output gap
The actual output is smaller than the trend output
Causes of the economic cycle
1, Speculative bubbles
- Changes in inventory - stocks of finished products
- Political cycle
- Outside shocks - unexpected
- Multiplier / accelerator interaction
Speculative bubbles
When people realise the value of their assets is above their true value they sell them
Changes in inventory - stocks of finished products
Firms hold stocks of raw materials and finished goods in order to smooth production with changes in demand
Political cycle
Once elected, they may try to deflate AD to avoid inflation and the economy over-heating
Outside shocks
Unexpected, significant - Natural disaster affecting crops, change in price of oil
Multiplier / Accelerator interaction
A change in one of the components of AD leads to a greater overall change in national income
Benefits of economic growth
- Increase output -> Decrease unemployment -> Increase Yd -> people can buy more -> Increase living standards
- Increase output -> Decrease unemployment -> Decrease Government spending on unemployment benefits -> Increase Tax revenue -> Government Budget improves
- Increase International status and power in organisations
Costs of economic growth
- Increase inflation -> decrease Living standards
- Environmental damage
- Could lead to unemployment if growth is caused by an increase in use of technologies
Unemployment definition
Everyone who is willing and able to work but cannot find a job
Measures of unemployment
- Labour force survey (LFS)
2. Claimant count
Types of unemployment
- Structural unemployment - inexperienced
- Cyclical unemployment - unemployed consumption can’t pay wages
- Seasonal - Ski
- Frictional unemployment
Costs of unemployment
- Decrease Standart of living
- Stress/mental health
- Decrease hygiene increase Fast Food
- Difficulties saving for pension
- Lower AD could lead to recession
- Loss of tax revenue
- Increase in crime
Benefits of unemployment
- Less pressure on wage claims
2. Increased selection - Bigger pool of labour
Definition of inflation
Inflation is a sustained rise in the general price level
Definition of disinflation
Disinflation is inflation with a lower rate
UK inflation target
2% ± 1%
Measures of unemployment
The Consumer Price Index (CPI). 700 Items are measured in price and weighted differently dependent on how important they are. Every month the CPI is checked.
Quantity theory of money / Fisher equation
MV = PQ
V and Q are assumed to be constant. This means money supply has a direct impact on Price level.
Definition of deflation
Deflation is a persistent fall in the general price level
Types of deflation
- Malevolent deflation (Bad)
2. Benign deflation (Good)
Malevolent deflation
- Falling prices resulting from a significant downturn in economic activity
– This causes a collapse of AD, resulting in a fall in output and a rise in unemployment
Benign deflation
– Falling prices from technological advances and improved productivity
– This improves the economy’s supply-side, causing the SRAS and LRAS to increase
– The price level falls but the output and employment rise
Costs of inflation
– Erodes the value of money -> consumers can now afford to buy fewer goods and services -> Standart of living decreases
– There is a loss of international competitiveness -> decrease in exports -> decrease in AD and economic growth -> increase unemployment
Benefits of inflation
– Low and stable demand-pull inflation -> may encourage firms to increase their output as there is demand for their products -> increase overall capacity of the economy
– Workers like increasing in their pay -> even if it is matted by inflation so that their real wages remains unchanged
– Inflation allows firms to reduce real wages -> this can help the efficiency of the labour market
Costs of deflation
– Consumer may postpone purchases which could decrease AD and because of the negative multiplier effect, this could lead to a recession
–Deflation is often associated with a weak economy
– Deflation increases the real value of savings
– Negative impact on debtors like houseowners
Benefits of deflation
– Increase in Standart of living
– Increase in international competitiveness
– Increase potential economic growth
Balance of payment definition
A record of the financial flows between a country and the rest of the world
3 accounts BoP
- Current account
- Capital account
- Financial account
Definition of current account surplus
Trade in goods + Trade in services + Primary income + Secondary income > 0
Definition of current account surplus
Trade in goods + Trade in services + Primary income + Secondary income < 0
Factors affecting the current account
- Productivity
- Relative inflation rate
- Exchange rate
- Economic conditions in other countries
Examples of policy objectives conflicts
- Economic growth –– Current account worsens (Bad for BoP)
- Economic growth ––increase inequality
- Economic growth –– Demand-pull inflation
- Economic growth –– Can cause an increase in structural unemployment
Definition Monetary Policy
The use of interest rates, the money supply and the exchange rate to try to achieve the government’s objectives.
Aim of Monetary policy
Monetary Policy is a demand-side policy as it aims to influence AD
Inflation target
The government states that inflation target 2%+- 1% and the BoE has to achieve it
