section 1 Flashcards
what is an economy
an inter-related system of production and consumption activities, conducted by economic agents
what are economic agents and what do each of them do
households (consumption, create demand, supply labour), firms (production, demand labour, supply of goods and services), governments (set laws, demand taxes, supply public services)
command economies
the means of production are publicly, or socially owned, via the state
the government determines what, how and for whom
free market economies
the means of production are privately owned by individuals in a system of private enterprise
the free market (the price mechanism) determines what, how and for whom- without government intervention
what was the first country to industrialise
England in the 18th century
what position is the uk in world largest economies
6th
what is the uk economy/market based on
services rather than goods (especially financial services)
macroeconomic performance
how well an economy meets its macroeconomic objectives
what are the main macroeconomic objectives
strong,sustainable, balanced economic growth
full employment/low unemployment
price stability (low, stable inflation)
satisfactory balance of payments current account
macroeconomic indicator
a statistic that tells us something about the macroeconomic performance of an economy
has an objective been met?
how is the economy performing over time?
how is the economy performing compared to other countries?
does the government need to implement policies to address any concerns
macroeconomic indicator for economic growth
% change in real gdp and real gdp per capita
macroeconomic indicator for price stability
% change in the cpi
full employment
the labour force survey (%)
macroeconomic indicator for balance of payments
exports - imports as a % of gdp
what is a lag indicator
data about the past
e.g. economic growth, unemployment, inflation, trade
what is a lead indicator
expectations about the future
e.g. consumer and business confidence surveys
other macroeconomic objectives
improving government finances (reducing borrowing)
reducing inequality
dealing with economic shocks
improving productivity
improving public services
environmental objectives
fiscal surplus
tax revenue > government spending
fiscal deficit
tax revenue < government spending
fiscal deficit can be reduced by…
increasing taxes
reducing spending
economic shocks
global financial crisis, brexit, covid, ukraine war
production
the total amount of output
productivity
the rate of output/measure of efficiency
uk productivity
The UK is less productive than our main competitors
we have a ‘productivity gap’ where productivity has failed to increase in line with the trend
what has been the macroeconomic priorities since 1990s onwards
controlling inflation (at the expense of unemployment)
since 1992 the uk has started ‘inflation targeting’ as its main macro objective
macroeconomic conflicts
when it is not possible to achieve two objectives at the same time- this can occur especially in the short run
trade off
the achievement of one objective may be at the expense of another objective
example of macroeconomic conflict
high economic growth vs high inflation
dealing with a crisis vs increase in the fiscal deficit
reducing the fiscal deficit vs impact upon public services
index numbers
a way of simplifying data to compare relative but not absolute changes through percentage changes compared with the base value- index numbers have no unit
index number formula
index number y2 = (figure in y2/figure in base year) x index number base year
calculating actual figures from index numbers formula
figure in y2 = (figure in base year/index number in base year) x index number y2
what is cpi and what does it measure
consumer price inflation / average cost of living (without housing costs)
how is cpi constructed
the office of national statistic selects a basket of around 750 consumer goods and services and compares to the average increase in prices compared to 12 months before
indexation
a technique to adjust payments by mean of a price index
real gdp using index numbers formula
real gdp = (current year nominal gdp / current year price index) x price index in comparison year
how to measure living standards
real gdp per capita
limitations of using national income data to asses changes in living standards over time
data collection can be flawed
distribution of income
non-market activities (such as volunteering, and unpaid work) are not counted
informal/black economy is not accounted for
access to education and healthcare not accounted
quality of life
environmental factors (like pollution)
sustainability
purchasing power parity (ppp) exchange rates
measures the value of a currency in terms of the goods and services it will buy in different countries (e.g. big mac index)
