section 6 Flashcards
gross domestic product
total value of output and services in a country in one year
stages in a business cycle
growth
boom
recession
slump
recession
when there is a period of falling gdp
growth
when GDP is rising, unemployment is falling and there are higher living standards in the country. Businesses will look to expand and produce more and will earn high profits.
Boom
when GDP is at its highest and there is too much spending, causing inflation to rapidly rise. Business costs will rise and firms will become worried about how they are going to stay profitable in the near future.
Slump
when GDP is so low that prices start to fall (deflation) and unemployment will reach very high levels. Many businesses will close down as they cannot survive the very low demand level. The economy will suffer.
inflation
increase in the average price level of goods and services over time
unemployment
exists when people who are willing and able to work cannot find a job
economic growth
when a country gdp increases - more goods and services are produced than in the previous year
balance of payments
difference between a country exports and imports
real income
the value of income and it falls when prices rise faster than money income
Effects of reducing GDP (recession)
As output falls, fewer workers will be needed by firms, so unemployment will rise
As goods and services that can be consumed by the people falls, the standard of living in the economy will also fall
Effects of high inflation
As cost of living will have risen and peoples’ real incomes (the value of income) will have fallen (when prices increase and incomes haven’t, the income will buy lesser goods and services- the purchasing power will fall).
Prices of domestic goods will rise as opposed to foreign goods in the market. The country’s exports will become less competitive in the international market. Domestic workers may lose their jobs if their products and firms don’t do well.
When prices rise, demand will fall and all costs will rise (as wages, material costs, overheads will all rise)- causing profits to fall. Thus, they will be unwilling to expand and produce more in the future.
The living standards (quality of life) in the country may fall when costs of living rise.
Effects of high unemployment
Unemployed people do not produce anything and so, the total output/GDP in the country will fall. This will in turn, lead to a fall in economic growth.
Unemployed people receive no incomes, thus income inequality can rise in the economy and living standards will fall. It also means that businesses will face low demand due to low incomes
.
The government pays out unemployment benefits to the unemployed and this will rise during high unemployment and government will not enough money left over to spend on other services like education and health.
Effect of a disequilibrium in the balance of payments
If the imports of a country exceed its exports, it will cause depreciation in the exchange rate
If the exports exceed the imports it indicates that the country is selling more goods than it is consuming - the country itself doesn’t benefit from any high output consumption.
Effects of poor income equality
Inequal distribution of goods and services- the poor cannot buy as many goods as the rich- poor living standards will arise.
Fiscal policy
any change by the government in tax rates or public sector spending
exports
goods and services sold from one country to other countries
imports
goods and services bough in by one country from other countries
exchange rate
price currency in terms of another
exchange rate depreciation
the fall in the value of a currency compared with other currencies
direct taxes
paid directly from incomes
ex. income tax
indirect taxes
added to the prices of goods and taxpayers pay the tax as they purchase the goods
ex. vat
disposable income
level of income a taxpayer has after paying income tax
import tariff
tax on an imported product
import quota
physical limit on the quantity of a product that can be imported
Increasing government spending and reducing taxes
more production
increase employment
driving up GDP growth
This is because government spending creates employment and increases economic activity in the economy and lower taxes means people have more money to consume and firms have to pay lesser tax on their profits
Increasing interest rates bad results
will discourage investments and consumption, causing employment and GDP to fall (as the cost of borrowing-interest on loans – has increased, and people prefer to earn more interest by saving rather than spend)
increase in the rate of cooperation tax affect the business
Businesses would have to lower profit after tax. Managers will therefore have less money or finance to put back into the Business. the business will find it harder to expand.
Low profit after tax is also bad news for the owners of the business. there will be less money to pay back to the owners who originally invested in the business.
Government economic objectives (list)
- low inflation
- low unemployment
- economic growth
- balance of payments between imports and exports.
If the value of a country’s imports is greater than the value of its exports
it has a balance of payments deficit
problems if there was a balance of payments deficit
- The country could ‘run out’ of foreign currencies and it may have to borrow from abroad.
- The price of the country’s currency against other currencies – the exchange rate – will be likely to fall. This is called exchange rate depreciation.
How would businesses be affected by an increase in an indirect tax?
- Prices of goods in the shops would rise. Consumers may buy fewer items as a result. This will reduce the demand for products made by businesses.
- As prices rise so the workers employed by a business will notice that their wages buy less in the shops. Businesses may be under pressure to raise wages, which will force up the costs of making products.
How would businesses in a country be affected if the government put tariffs on imports into the country?
- Businesses will benefit if they are competing with imported goods. These will now become more expensive, leading to an increase in sales of home-produced goods.
- Businesses will have higher costs if they have to import raw materials or components for their own factories. These will now be more expensive.
- Other countries may now take the same action and introduce import tariffs too. This is called retaliation. A business trying to export to these countries will probably sell fewer goods than before.
