section 3 Flashcards
how do we measure size of the economy
through national income (gdp)
what is uks gdp
£2 trillion
what is gdp
the total value of good and services produced within the boundaries of an economy in a given time (usually one year)
three ways to measure gdp
output measure
expenditure measure
income measure
output measure
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
expenditure measure
the value of the goods and services bought by households and by government, investment and the value of exports minus imports
income measure
the value of income generated mostly in terms of profits and wages
how to measure economic growth
measured by % change in real gdp over a period of time (usually 3 month / quarter or a year)
formula to convert nominal gdp to real gdp
nominal gdp % change - inflation %
recession
two consecutive quarters of negative real gdp
real gdp per capita and formula
real gdp per person indicating living standards
real gdp / population
change in real gdp per capita formula
nominal gdp % - rate of inflation % - change in population %
short run economic growth
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
things that impact sras
cost of production
aggregate demand
long run economic growth
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
difference between ppf and lras curve
both shifting outwards represent an increase in productive capacity of an economy
lras- normal (sustainable) capacity
ppf- maximum productive capacity
what causes short run economic growth versus long run economic growth
sras - aggregate demand
lras - aggregate supply
the economic cycle
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)
different stages of the economic cycle
recession; 2 consecutives quarters of negative real gdp
peak; top of the cycle
trough; the bottom of the cycle
demand side factors that cause a change in the economic cycle
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
supply side factors that cause a change in the economic cycle
changes in costs of production
supply side shocks (increases in the price of oil / energy)
output gap
the difference between the actual output and potential output
positive; real gdp > trend gdp
negative; real gdp < trend gdp
macroeconomic disequilibrium
ad > as
as > ad
main macro objectives during boom
gdp up
unemployment down
inflation up
balance of trade down
main macro objectives during bust
gdp down
unemployment up
inflation down
balance of trade up
benefits of economic growth
higher living standards / fall in poverty, fiscal dividend, long run growth helps control inflation, higher investment
downsides of economic growth
trade off between short term growth and inflation
new growth not shared equally
environmental impacts
policies to promote economic growth
monetary policies (short run)
fiscal policy (short run and long run)
supply side policies (long run)
monetary policies
bank rate
exchange rates
money supply and credit
fiscal policies
taxation
government spending
borrowing
supply side policies
industrial policy measures
financial and capital market measure
labour market measures
low interest rates impact on cyclical instability
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)
asset price bubble
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
how do assets price bubbles contribute to cyclical instability
when house prices rise people feel wealthier, confidence increases and spending increases, increasing ad
opposite happens when house prices fall
other causes of cyclical instability
interest rates too low
asset price bubbles
destabilising speculation
animal spirits
herding
difference between economically active and economically inactive
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)
unemployment
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
how to measure unemployment
the labour force survey
the employment rate formula
(number employed / the working population) x 100
the unemployment rate formula
(number unemployed / economically active) x 100
economic inactivity formula
(economically inactive / the working population) x 100
issues with unemployment data
doesnt show geographic inequality
doesnt show age inequality
doesnt show underemployment
full employment
4.5% unemployment
cyclical / demand deficient unemployment
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
frictional unemployment
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
factors leading to frictional unemployment
lack of incentives to find work
taxes too high
welfare benefits too high
insufficient information on job availability
structural unemployment
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)
factors leading to structural unemployment
de-industrialisation
globalisation
technology
changes in pattern of demand (not fall in ad)
geographic immobility
occupational immobility
impact of supply side unemployment on a diagram
causes a shift to the left of lras
other types of unemployment
casual unemployment
seasonal unemployment
costs of unemployment
lower economic growth
lower standards of living
lower investment
negative impact on gov finances
higher inequality
loss of skills
hysteresis
benefits of unemployment
helps to control inflation
why is it important to identify the type of unemployment
whether unemployment is demand side or supply side effects how it can be fixed (monetary policy or supply side policy + always fiscal policy)
fixes to structural unemployment
improve occupational immobility
improve geographic immobility
improve labour market flexibility
investment
fixes to frictional unemployment
improve info on jobs
incentivise people to find work quicker (fiscal policies)
real wage unemployment
if real wages are too high (above equilibrium) there will be excess supply of labour (unemployment)
causes of real wage unemployment
trade unions
national minimum wage
welfare benefits
inflation
sustained increase in the general price level in an economy (cpi is positive)
how is inflation measured
consumer price index (cpi_
impact of inflation on real value of money
reduces the value of nominal values
deflation
a sustained fall in the general price level
impact of deflation on real value of money
increases the value of nominal values
disinflation
when the rate of inflation is falling but still positive, prices rising but at slower rate; cpi still positive
hyper inflation
excessively high rates of inflation (over 50%)
inflation targetting
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)
price stability meaning
when inflation remains broadly constant over time
demand pull inflation
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
causes of demand pull inflation
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
cost push inflation
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
causes of cost push inflation
higher wages / labour costs
rise in vat
increase in commodity prices
war (ukraine)
weaker exchange rate
demand pull on a diagram
ad shifts to the right
cost push on a diagram
sras shifts to the left
costs of inflation
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
benefits of inflation
lubricates the wheels of the economy
buffer to stop us slipping into deflation
the real value of debt falls
malevolent (bad) deflation
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
what is benign (good) deflation
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
negative consequences of deflation
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
positive consequences of deflation
increase in international competitiveness
increase in the real value of savings
an increase in real incomes
policies can be used to control inflation
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
policies for malevolent deflation
expansionary / looser fiscal policy (direct tax down, gov spending up, borrowing up)
expansionary / looser monetary policy (interest rates down or quantitative easing)
quantitative easing
a form of printing money which increases the money supply and so increases ad; also pushes down long term interest rates
