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macroeconomics > section 3 > Flashcards

section 3 Flashcards

1
Q

how do we measure size of the economy

A

through national income (gdp)

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2
Q

what is uks gdp

A

£2 trillion

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3
Q

what is gdp

A

the total value of good and services produced within the boundaries of an economy in a given time (usually one year)

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4
Q

three ways to measure gdp

A

output measure
expenditure measure
income measure

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5
Q

output measure

A

this is the total value of the goods and services produced by all sectors of the economy: agriculture, manufacturing, energy, construction, the service sector and government

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6
Q

expenditure measure

A

the value of the goods and services bought by households and by government, investment and the value of exports minus imports

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7
Q

income measure

A

the value of income generated mostly in terms of profits and wages

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8
Q

how to measure economic growth

A

measured by % change in real gdp over a period of time (usually 3 month / quarter or a year)

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9
Q

formula to convert nominal gdp to real gdp

A

nominal gdp % change - inflation %

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10
Q

recession

A

two consecutive quarters of negative real gdp

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11
Q

real gdp per capita and formula

A

real gdp per person indicating living standards

real gdp / population

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12
Q

change in real gdp per capita formula

A

nominal gdp % - rate of inflation % - change in population %

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13
Q

short run economic growth

A

increase in real output mainly caused by increases in ad

the impact upon output and the price level will depend upon how close the economy is to full capacity

the closer to full capacity the steeper the sras curve

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14
Q

things that impact sras

A

cost of production
aggregate demand

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15
Q

long run economic growth

A

an increase in productive capacity of an economy (outward shift of lras)

improving the supply side of the economy is essential for long run economic growth

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16
Q

difference between ppf and lras curve

A

both shifting outwards represent an increase in productive capacity of an economy

lras- normal (sustainable) capacity
ppf- maximum productive capacity

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17
Q

what causes short run economic growth versus long run economic growth

A

sras - aggregate demand
lras - aggregate supply

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18
Q

the economic cycle

A

short run fluctuations in economic activity and long run trend rate of growth - changes in actual gdp

these fluctuations represent changes in short run economic growth - mainly caused by changes in ad (but sometimes by as)

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19
Q

different stages of the economic cycle

A

recession; 2 consecutives quarters of negative real gdp

peak; top of the cycle

trough; the bottom of the cycle

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20
Q

demand side factors that cause a change in the economic cycle

A

consumer business confidence
changes in wealth factors (house prices or stock market)
government policy / change in fiscal policy
central bank policy / changes in monetary policy (interest rates)
globalisation
exchange rate shocks
demand side shocks
the accelerator and the multiplier
excessive growth in debt and credit

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21
Q

supply side factors that cause a change in the economic cycle

A

changes in costs of production
supply side shocks (increases in the price of oil / energy)

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22
Q

output gap

A

the difference between the actual output and potential output

positive; real gdp > trend gdp
negative; real gdp < trend gdp

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23
Q

macroeconomic disequilibrium

A

ad > as
as > ad

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24
Q

main macro objectives during boom

A

gdp up
unemployment down
inflation up
balance of trade down

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25
Q

main macro objectives during bust

A

gdp down
unemployment up
inflation down
balance of trade up

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26
Q

benefits of economic growth

A

higher living standards / fall in poverty, fiscal dividend, long run growth helps control inflation, higher investment

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27
Q

downsides of economic growth

A

trade off between short term growth and inflation
new growth not shared equally
environmental impacts

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28
Q

policies to promote economic growth

A

monetary policies (short run)
fiscal policy (short run and long run)
supply side policies (long run)

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29
Q

monetary policies

A

bank rate
exchange rates
money supply and credit

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30
Q

fiscal policies

A

taxation
government spending
borrowing

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31
Q

supply side policies

A

industrial policy measures
financial and capital market measure
labour market measures

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32
Q

low interest rates impact on cyclical instability

A

low interest rates increase borrowing
borrowing up means investment up means ad up
but at some point borrowing has to be paid so consumption down so ad down
some may borrow too much and default on repayments
leading to cyclical instability ( or crisis like gfc 2008)

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33
Q

asset price bubble

A

occurs when asset prices rise very quickly, exceeding prices justified by fundamentals, making a sudden collapse likely (at which point the bubble ‘bursts’)

typically seen in property markets

34
Q

how do assets price bubbles contribute to cyclical instability

A

when house prices rise people feel wealthier, confidence increases and spending increases, increasing ad

opposite happens when house prices fall

35
Q

other causes of cyclical instability

A

interest rates too low
asset price bubbles
destabilising speculation
animal spirits
herding

36
Q

difference between economically active and economically inactive

A

economically active; those aged 16 and over who are either in employment or unemployed
economically inactive; those people not actively seeking work (looking after family, sick, discouraged workers, students, retired)

37
Q

unemployment

A

those without a job, have been actively seeking work in the past four weeks and are available to start work in the next two weeks; or out of work, have found a job and are waiting to start in the next two weeks

both are economically active

38
Q

how to measure unemployment

A

the labour force survey

39
Q

the employment rate formula

A

(number employed / the working population) x 100

40
Q

the unemployment rate formula

A

(number unemployed / economically active) x 100

41
Q

economic inactivity formula

A

(economically inactive / the working population) x 100

42
Q

issues with unemployment data

A

doesnt show geographic inequality
doesnt show age inequality
doesnt show underemployment

43
Q

full employment

A

4.5% unemployment

44
Q

cyclical / demand deficient unemployment

A

unemployment when people are out of work as a result of a lack of ad - labour is derived demand so as ad falls output falls so unemployment rises

45
Q

frictional unemployment

A

where people are out of work because they are switching between jobs people are searching for another job - it is called search or transitional unemployment (shorter term unemployment) caused by supply side factors, people not supplying labour quickly enough

46
Q

factors leading to frictional unemployment

A

lack of incentives to find work
taxes too high
welfare benefits too high
insufficient information on job availability

47
Q

structural unemployment

A

occurs when there is a mismatch of skills between unemployed and available jobs which leaves some unemployed workers unable to find work in new industries with different skill requirements, unaffected by strength of economy and long term unemployment caused by supply side factors (e.g. de-industrialisation / closing of mines)

48
Q

factors leading to structural unemployment

A

de-industrialisation
globalisation
technology
changes in pattern of demand (not fall in ad)
geographic immobility
occupational immobility

49
Q

impact of supply side unemployment on a diagram

A

causes a shift to the left of lras

50
Q

other types of unemployment

A

casual unemployment
seasonal unemployment

51
Q

costs of unemployment

A

lower economic growth
lower standards of living
lower investment
negative impact on gov finances
higher inequality
loss of skills
hysteresis

52
Q

benefits of unemployment

A

helps to control inflation

53
Q

why is it important to identify the type of unemployment

A

whether unemployment is demand side or supply side effects how it can be fixed (monetary policy or supply side policy + always fiscal policy)

54
Q

fixes to structural unemployment

A

improve occupational immobility
improve geographic immobility
improve labour market flexibility
investment

55
Q

fixes to frictional unemployment

A

improve info on jobs
incentivise people to find work quicker (fiscal policies)

56
Q

real wage unemployment

A

if real wages are too high (above equilibrium) there will be excess supply of labour (unemployment)

57
Q

causes of real wage unemployment

A

trade unions
national minimum wage
welfare benefits

58
Q

inflation

A

sustained increase in the general price level in an economy (cpi is positive)

59
Q

how is inflation measured

A

consumer price index (cpi_

60
Q

impact of inflation on real value of money

A

reduces the value of nominal values

61
Q

deflation

A

a sustained fall in the general price level

62
Q

impact of deflation on real value of money

A

increases the value of nominal values

63
Q

disinflation

A

when the rate of inflation is falling but still positive, prices rising but at slower rate; cpi still positive

64
Q

hyper inflation

A

excessively high rates of inflation (over 50%)

65
Q

inflation targetting

A

a target is set for inflation and action is taken to achieve the target (the bank of englands monetary policy committee is responsible for achieving the target)

66
Q

price stability meaning

A

when inflation remains broadly constant over time

67
Q

demand pull inflation

A

an increase in the average price level caused by an increase in ad

impact depends on where the economy is in the economic cycle

inflationary pressure occurs in a positive output gap - little spare capacity means limited supply so an increase in ad puts upwards pressure on the price level

68
Q

causes of demand pull inflation

A

credit boom (too much lending, consumption up)
increase in property prices / wealth effect
increased consumer and business confidence
increased government spending
economic performance in trading partners economies (impact demand for exports)
weaker exchange rate

69
Q

cost push inflation

A

increase in the average price level caused by sustained increase in firms cost of production

higher costs mean lower profit margins so firm supply less

higher costs are passed onto consumers in the firm of higher prices

can lead to wage - price spiral

70
Q

causes of cost push inflation

A

higher wages / labour costs
rise in vat
increase in commodity prices
war (ukraine)
weaker exchange rate

70
Q

demand pull on a diagram

A

ad shifts to the right

71
Q

cost push on a diagram

A

sras shifts to the left

72
Q

costs of inflation

A

real value of wages down
standards of living down
real value of saving down
lenders may reduce lending
consumption down ad down
reduces international competitiveness
distorts consumer behaviour
increases inequality
menu costs
shoe leather costs
breakdown in the functions of money

73
Q

benefits of inflation

A

lubricates the wheels of the economy
buffer to stop us slipping into deflation
the real value of debt falls

74
Q

malevolent (bad) deflation

A

caused by a fall in ad

this causes output to fall which impacts upon growth and unemployment

japan has suffered from this type of deflation for decades

75
Q

what is benign (good) deflation

A

caused by a fall in costs of production

consider how improvements in technology and higher productivity can lead to lower costs and so lower prices

the impact is higher output and lower unemployment

you could also draw a lras shifting right

76
Q

negative consequences of deflation

A

deflationary spiral; consumption is delayed due to falling prices - ad falls, prices fall, output falls, unemployment increases, incomes fall, ad falls, price level falls further

the real value of debt increases

77
Q

positive consequences of deflation

A

increase in international competitiveness

increase in the real value of savings

an increase in real incomes

78
Q

policies can be used to control inflation

A

demand pull; tighter monetary policies / interest rates + tighter fiscal policy / direct tax up gov spending down

cost push; fiscal policy / cut vat + supply side policies / increase productivity or lower costs of production

79
Q

policies for malevolent deflation

A

expansionary / looser fiscal policy (direct tax down, gov spending up, borrowing up)

expansionary / looser monetary policy (interest rates down or quantitative easing)

80
Q

quantitative easing

A

a form of printing money which increases the money supply and so increases ad; also pushes down long term interest rates

macroeconomics (6 decks)

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