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Economics > The National Economy > Flashcards

The National Economy Flashcards

1
Q

How is short-run (actual) growth achieved?

A

Bringing idle resources into production to increase real GDP/capita.

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2
Q

How is long-run (potential) growth achieved?

A

Increase in the productive potential of the economy.

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3
Q

Define the trend growth rate.

A

The rate at which output can grow on a sustained basis without putting pressure on inflation.

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4
Q

List three common policies used to stimulate AD.

A
  • Lower income or corporation tax
  • Higher government spending
  • Lower interest rates
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5
Q

Define fiscal dividend.

A

Higher economic growth will raise tax revenues and reduce government spending on unemployment and poverty related welfare benefits.

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6
Q

Why do Keynesian economists argue that short-run growth may not be inflationary?

A

The economy can be at equilibrium below full employment.

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7
Q

List some possible causes of long term growth.

A
  • Improvements in technology
  • Increase in size of labour force
  • Education and training
  • Enterprise and entrepreneurship
  • Improving mobility of FoP
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8
Q

List four benefits of economic growth.

A
  • Improved standard of living
  • Reduction in inequalities in the distribution of income and wealth
  • Positive impact on government finances
  • Cumulative impact
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9
Q

List four costs of economic growth.

A
  • Potential inflationary impacts of short-run growth
  • Widening inequality gap
  • Depletion of natural resources
  • Increased negative externalities (e.g. pollution)
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10
Q

Define unemployed.

A

Someone of working age, willing and able to work and actively seeking work but can’t find a job.

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11
Q

Define economically inactive.

A

Someone who is of working age but is neither in work nor actively seeking work.

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12
Q

What are the issues with using the claimant count and Labour Force Survey to measure unemployment?

A

Claimant Count:
- Difficult to compare across countries
- Some people out of work don’t claim unemployment benefits

Labour Force Survey:
- Sample may not be representative

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13
Q

Define long-term unemployment.

A

People who have been out of work for at least one year.

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14
Q

Define under-employment.

A

Workers willing to supply more hours of work than their employers are prepared to offer.

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15
Q

Define hidden-employment.

A

People who have stopped looking for work (demotivated) or work less than they want to. Not counted in government reports.

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16
Q

List the cost to individuals of unemployment.

A
  • Low incomes
  • Lower standard of living
  • Marginalised and social exclusion
  • Physical and mental health impacts
  • Increased risk of debt and depleted savings
  • Impact on savings and pension
  • Pushed into relative poverty
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17
Q

List the cost to economic performance of unemployment.

A
  • Waste of human capital
  • Loss of income tax revenue and higher government spending on unemployment benefits
  • Rising inequality
  • Possibility of hysteresis
  • Lower incomes and spending power
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18
Q

What is meant by full employment?

A

The number of people wishing to work at the going market real wage rate equals the number of workers employers are willing to hire at that wage rate.

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19
Q

Which types of unemployment occur at full employment (equilibrium unemployment)?

A

Frictional and structural

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20
Q

When and why does frictional unemployment occur?

A

Time between a worker switching jobs.

Caused by:
- Immobilities of labour
- Imperfect information
- Generous welfare benefits

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21
Q

What is the replacement ratio?

A

The ratio between money received out of work divided by the wage an unemployed worker could receive in work.

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22
Q

What is structural unemployment?

A

The decline of industries unable to compete or adapt in the face of:
- Changing demand conditions
- The development of new products
- Increased competition from more efficient competitors overseas

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23
Q

When does real wage unemployment occur?

A

When real wage rates are too high to clear the labour market (excess supply of labour).

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24
Q

When does cyclical unemployment occur?

A

When the economic is operating below its trend rate of growth.

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25
Q

How can frictional unemployment be reduced?

A
  • Reduce unemployment benefits
  • Improve job information available
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26
Q

How can structural unemployment be reduced?

A
  • Better/ compulsory education
  • Retraining programmes
  • Subsidies for cheap rented accommodation, government spending on social housing
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27
Q

How can cyclical unemployment be reduced?

A
  • Low interest rates
  • Increased government spending
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28
Q

How can real wage unemployment be reduced?

A
  • Reduce national minimum wage
  • Reduce trade union power
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29
Q

Which types of unemployment are voluntary?

A
  • Frictional
  • Structural
  • Seasonal
  • Real wage (classical view)
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30
Q

What is the natural rate of unemployment?

A

The percentage of workers who are voluntarily unemployed.

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31
Q

Why does the government aim for low and stable inflation?

A
  • Little impact on the day to day decisions of firms and consumers.
  • Precondition for sustained growth (Mervyn King, 2008).
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32
Q

What is the CPI?

A

A ‘basket’ of weighted goods meant to represented typical household spending on different goods and services.

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33
Q

How is weighted index number calculated?

A

Weighted index number = sum of (price x weight) / sum of weights

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34
Q

List 5 limitations of CPI.

A
  • What is a ‘typical’ household?
  • Weightings may differ
  • Doesn’t account for regional differences
  • Doesn’t account for changing quality of goods and services
  • Can be slow to respond to emergence or decline of goods and services
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35
Q

List some of the consequences of high inflation.

A
  • Fall in standards of living and increased inequality
  • Wage-price spiral
  • Loss of confidence in money
  • Favours borrowers at the expense of savers
  • Disrupts planning, leads to uncertainty
  • Associated with high interest rates which reduce economic growth
  • Can lead to increases in unemployment
  • Impact on competitiveness of economy
  • Menu costs and shoe leather costs
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36
Q

Evaluate the costs of inflation.

A
  • Rate of inflation
  • Temporary or persistent
  • Rates of inflation in trading partners/ competitors
  • Central bank tolerance
  • Wage bargaining power
  • Confidence
  • Anticipated or not
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37
Q

List some of the consequences of malign deflation.

A
  • Holding back on spending
  • Increase in value of debts
  • Real cost of borrowing rises
  • Lower profit margins
  • Falling confidence (falling asset prices)
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38
Q

What is monetarism?

A

The belief that inflation is solely caused by increases in the money supply. (Links to Fischer Equation)

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39
Q

List and define the 5 different types of taxes.

A
  • Indirect - can be shifted by the person legally liable to pay the tax onto someone else. Levied on spending.
  • Direct - can’t be shifted. Levied on income and wealth.
  • Progressive - as income rises, a larger proportion of income is paid in tax.
  • Regressive - as income rises, the proportion of income paid in tax falls.
  • Proportional - the proportion of income paid in tax stays the same as income increases.
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40
Q

What is the purpose of demand-side fiscal policy?

A

Boost AD to return to trend rate of growth and use up spare capacity (Keynes).

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41
Q

What is the purpose of supply-side fiscal policy?

A

Improve the economy’s productive potential.

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42
Q

Give an example of demand-side fiscal policy.

A
  • Higher government spending and lower taxes.
  • Spending on infrastructure projects.
  • Increase public sector spending.
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43
Q

Give an example of supply-side fiscal policy.

A
  • Income tax rates cut, personal tax thresholds increased, unemployment benefits cut (incentivises working).
  • Subsidies and cuts in corporation tax to incentivise firms to invest in new technology or capital.
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44
Q

What are the benefits of using demand-side fiscal policy?

A
  • Stabilises the economy and achieves full employment
  • ‘Fine-tune’ the economy
  • Initial injection benefits from multiplier
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45
Q

What are the potential drawbacks of using demand-side policy?

A
  • Conflicting macro objectives; fall in unemployment leads to rising inflation.
  • Can have time lags.
  • Chancellor suffers from imperfect information.
  • Economy doesn’t always behave as expected.
  • Impact on national debt.
46
Q

What are the benefits of supply-side fiscal policy?

A
  • Improves the economy’s productive capacity.
  • Could lead to good deflation which offsets demand-pull inflation.
  • Can improve productivity, efficiency and competitiveness.
  • No conflict of macroeconomic objectives.
47
Q

What are the potential drawbacks of supply-side fiscal policy?

A
  • Time lags.
  • Potential impact on budget position and national debt.
  • No guarantee of success.
48
Q

What is active/ discretionary fiscal policy?

A

The deliberate manipulation of government expenditure and taxes to influence the economy.

49
Q

What are automatic stabilisers?

A

Policies which dampen the multiplier effects resulting from change in aggregate demand within the economy and don’t require active implementation or manipulation by the government.

50
Q

List some examples of automatic stabilisers.

A
  • Welfare benefits
  • Progressive taxation
  • VAT on non-essential goods
51
Q

List and define Adam Smith’s 6 canons of taxation.

A

Equity - fair system, based on taxpayer’s ability to pay.
Economical - cheap to collect in relation to revenue it yields.
Efficient - achieve desired objectives with minimum undesired side effects or consequences.
Flexible - easy to change to meet new circumstances.
Convenient - convenient to pay
Certain - taxpayers should be reasonably certain of amount of tax they will be required to pay

52
Q

State the benefit principle of taxation.

A

Everyone who receives government spending should contribute towards it. People should be taxed in proportion to the benefits they receive from goods and services provided by the government.

53
Q

Why is the benefit principle of taxation hard to apply in practice?

A

Many of those in need of government benefits (old, sick, unemployed) are the least likely to be able to pay. A general principle more commonly used is the ability to pay.

54
Q

Define hypothecation.

A

The process of assigning tax revenues to a specific end (e.g. spending all receipts from motoring taxes on improving public transport infrastructure).

55
Q

What are the 4 categories of government spending?

A
  • Current - providing public services
  • Capital - new public infrastructure
  • Transfer payments - welfare spending
  • Debt interest repayments
56
Q

What is meant by the cyclical budget deficit?

A
  • Increases and decreases with the downturn and upswings of the economic cycle.
  • If all the growth of the budget deficit was cyclical, it would disappear during periods of economic growth.
57
Q

What is meant by the structural budget deficit?

A
  • Budget deficit caused by changing structure of UK economy.
  • Won’t go away when economy recovers.
  • Seen to be more problematic.
58
Q

Explain why the budget deficit increases during a recession.

A
  • Increased government spending on unemployment benefits
  • Reduced income and corporation tax revenue
  • Lower consumption so less indirect tax revenue
  • Increased government spending overall
59
Q

List some causes of structural budget deficit.

A
  • Banking sector bail out
  • Ageing population
  • More single parent families (larger benefit burden)
60
Q

What 4 problems are associated with larger budget deficits?

A
  • Crowding out
  • Adds to national debt
    • Future generations foot the bill through tax rises
    • Impact on credit rating and cost of government borrowing
  • Possibility of tax rises/ spending cuts on merit and public goods
  • Could be inflationary if high G and low T - economy is overheating
61
Q

List 4 causes of a falling budget deficit.

A
  • Economic growth leading to more employment and higher employment tax revenues.
  • Economic growth means less need for government to stimulate economy or spend on unemployment benefits.
  • Discretionary tax rises.
  • Austerity measures.
62
Q

List 3 benefits of a budget surplus.

A
  • Use towards reducing the national debt.
    • Reduce burden on future generations.
    • Improvement in government credit ratings and debt interest.
  • Reduce crowding out.
  • Possible reduction in inflation.
63
Q

List 5 drawbacks to a budget surplus.

A
  • Less public and merit goods.
  • Negative long-term impact - less spending on supply-side of economy.
  • Negative impact of higher taxation on consumption and investment.
  • Negative multiplier effects.
  • International impact of higher taxes.
64
Q

Define the national debt.

A

The amount of accumulated debt, resulting from past government borrowing, that is owed by the government.

65
Q

What is reproductive debt?

A

Debt used to finance spending for large, lasting projects - interest payments on debt will be paid out of contribution to future national output.

66
Q

What is deadweight debt?

A

Debt used to finance current spending - doesn’t cover any real asset. Interest payments end up being a burden on current and future generations and taxpayers.

67
Q

How is the budget deficit financed?

A

Via the issue of government bonds:
- Short term - treasury bills
- Long term- government bonds

68
Q

What does renewing or ‘rolling over’ the national debt entail?

A

Each year, part of the national debt matures. If the government runs a deficit, it must sell new debt in order to raise funds to repay the maturing debt.

69
Q

What is the DMO?

A

Debt Management Office - auctions gilts and bills to finance government spending.

70
Q

List 3 likely positive impacts of increased government borrowing.

A
  • May be necessary to respond to external shock and prevent deep recession/ hysteresis.
  • Could be self-financing if it supports LR growth.
  • Provision of infrastructure, healthcare and education promotes development, increases productive capacity and increases living standards.
71
Q

List the likely negative impacts of government spending

A
  • Future austerity policies.
  • High debt may lead to defaulting on interest and debt repayments.
  • Opportunity cost of servicing debt.
  • May reduce confidence of lenders.
  • Increase the cost of borrowing in future.
  • Could lead to crowding out.
72
Q

What are the 2 types of crowding out?

A
  • Financial crowding out
  • Resource crowding out
73
Q

What is sovereign debt, and why is it such a huge issue?

A
  • Sovereign debt is public sector debt issued in a foreign currency and sold abroad.
  • A sovereign debt crisis emerges when the country is unable to repay the debt and the annual interest payments.
  • Currency becomes negatively impacted, required debt restructuring.
74
Q

List the issues with increasing taxes, including specific consequences with direct and indirect.

A
  • Higher direct taxes reduces disposable income and retained profits - negative impact on incentives, brain drain
  • Higher indirect taxes - higher prices, regressive impact affecting equity and living standards.
  • Lower AD, negative multiplier effect
  • Impact on tax revenue
  • Wage-price spiral
75
Q

What are the issues with reducing government spending in the three main categories?

A
  • Capital: limits increases in productive capacity of economy
  • Transfer: negative impact on living standards
  • Current: poorer quality/ provision of merit and public goods, lower wages for public sector workers
76
Q

What 5 monetary policy instruments are available to the Bank England?

A
  • Money supply
  • Interest rates
  • Control over bank lending and FSL
  • Exchange rates
  • Forward guidance
77
Q

What is the purpose of forward guidance?

A
  • Attempts to send signals to markets, businesses and individuals about future Bank policy
  • Tries to increase credibility of monetary policy
  • Reduces uncertainty and alters expectation
78
Q

Why might forward guidance be ineffective?

A
  • Relies on accurate predictions
  • Ineffective if keep moving goal posts
  • Susceptible to external shocks
79
Q

How does funding for lending work?

A

BoE swaps Treasury bills for loans, which commercial banks can use to back borrowing in wholesale financial markets from other lenders.

80
Q

Outline how a rise in the Bank Rate affects inflation through the monetary policy transmission mechanism.

A
  • Increase in market rates and exchange rate
  • Fall in asset prices and expectations
  • Lower domestic demand, greater external demand
  • Deflationary effect
81
Q

Evaluate the effectiveness of changing the exchange rate.

A
  • Depends on how big the change
  • Confidence in the economy
  • What are interest rate currently?
  • Time lags
  • Liquidity trap
  • Zero lower bound
82
Q

What is the purpose of pre-emptive monetary policy

A
  • If the MPC’s 2 year forecast for the rate of inflation is different from the target rate, they will alter interest rate to keep the economy on track.
  • They will also alter rates to head-off likely adverse effects of external shocks.
83
Q

What sorts of things does the MPC consider when setting the Bank Rate?

A
  • Financial markets
  • Exchange rates
  • Confidence
  • Global developments
  • AD
  • Fiscal policy
  • Housing market
  • Household savings
84
Q

Why does the BoE use quantitative easing?

A

When interest rates are already at the zero lower lower bound.

85
Q

How does quantitative easing work?

A
  • Central bank creates money
  • Bank uses money to purchase government debt from financial institutions
  • Interest rates decline because cost of borrowing falls
  • Businesses and consumers borrow more, commercials banks lend more
  • Increase in consumption and investment
86
Q

What are some possible drawbacks to increasing the money supply?

A
  • High, unpredictable inflation
  • Cyclical instability
  • Asset price bubbles
  • Inequality
  • Malinvestment
  • Possible future increases in interest rates
87
Q

What are some possible benefits of increasing the money supply?

A
  • Increased output and growth
  • Increased employment
  • Increased consumption and investment
  • Possible multiplier effects
  • Increased income/ wages
  • Increased confidence
88
Q

What is hysteresis?

A

When workers remain unemployed for so long during a deep recession that they are deemed ‘unemployable’ and lose their skills, lowering the trend rate of growth of the economy.

89
Q

What are the 4 benefits of free trade?

A
  • Wider choice of goods and services
  • Increased specialisation
  • Increased competition
  • More and larger markets
90
Q

What is absolute advantage?

A

When a country can produce more of a good than other countries from the same amount of resources.

91
Q

What is comparative advantage?

A

When a country has the least opportunity cost when producing a good.

92
Q

What does free trade and specialisation allow countries to do?

A

Consumer beyond their PPFs.

93
Q

Evaluate the assumptions of the model of comparative advantage.

A
  • 2 goods, 2 countries
  • Perfectly mobile factors of production
  • Labour is homogenous
  • Constant returns to scale
  • Full employment
  • No externalities
  • No transport costs
  • Identical goods
  • Similar tastes for goods in each country
  • Not dynamic
  • Ignores ‘strategic industries’
94
Q

What are 4 sources of comparative advantage?

A
  • Factor endowments
  • Levels of technology
  • Differences in climate and natural resources
  • Specialisation and economies of scale
95
Q

List some benefits of free trade.

A
  • Benefits of comparative advantage
  • Economies of scale
  • Increased competition
  • Lower prices
  • Access to more diverse markets
  • Trade creation
  • Export-led growth and employment
  • Encouraging FDI
  • Increase product and process innovation
  • Welfare gains
  • Improving international relations
96
Q

List some drawbacks of free trade.

A
  • Loss of domestic industry
  • Structural unemployment
  • Potential loss of infant/ sunset industries
  • Leakages to the circular flow of income if a net importer
  • Environmental damage due to transportation
  • Potential trade of demerit/ illegal goods
97
Q

What are trade barriers?

A

Measures polices or restrictions that governments put in place to regulate and control the flow of goods and services across international borders.

98
Q

State the causes of protectionism.

A
  • Protect domestic industries
    Avoid dependency on one industry
  • Respond to changes in demand or cost conditions
  • Anti-dumping
  • Self sufficiency
  • Employment and job protection
99
Q

State the 4 forms of protectionism.

A
  • Import tariff
  • Import quota
  • Subsidy
  • Non-tariff barrier
100
Q

List a benefit and drawback of protectionism for domestic producers.

A
  • Higher output, sales and profits for domestic firms.
  • Higher prices on imports subject to tariffs, so increased costs.
101
Q

List a benefit and drawback of protectionism for workers.

A
  • Could protect jobs.
  • Workers in the long run may have been better off if firms closed down and market reallocated resources into industry where country could compete (new jobs, more security).
102
Q

List a benefit and drawback of protectionism for the government.

A
  • Benefit in short-term from higher tax revenues.
  • In the long-term, government can lose out if the economy is inefficient and growth is restricted.
103
Q

List a benefit and drawback of protectionism on the standard of living.

A
  • May protect living standards by protecting jobs in the short term.
  • Less freedom of choice, lower consumption and lower long run growth.
104
Q

What do protectionist measures generally lead to?

A
  • Higher prices and lower levels of domestic demand
  • Loss of economic welfare
  • Productive inefficient
  • Opportunity costs
  • Worsening of international relations and retaliation
105
Q

What is meant by the pattern of trade?

A

The mix of goods and services that a country imports and exports, as well as the mix/ range of countries that are most important for a nation in their trade relationships.

106
Q

What is the Hecksher-Ohlin theory?

A
  • Differences in factors of endowment among countries is the basis for trade.
  • Capital rich countries are likely to industrialise and export manufactured goods.
  • Labour rich countries specialise in labour-intensive primary products.
107
Q

What are the issues with primary product dependency?

A
  • Country’s macroeconomic performance is vulnerable to fluctuations in global commodity prices and demand.
  • Can lead to economic instability and hinder the overall development of a nation’s economy.
108
Q

List some causes of changes in the pattern of trade.

A
  • Changes in absolute advantage
  • Changes in policies in other countries
  • Joining/ changing membership of trading blocs
  • Exchange rate changes
  • Changing quality/ reputation
  • Government intervention distorting markets
  • De-industrialisation
  • Causes and changes in globalisation
  • External shocks
  • Economic development
  • Factor enrolment and exploitation resources
  • Innovation and invention
109
Q

What is the purpose of the World Trade Organisation?

A
  • To help its members use trade as a means that to raise living standards, create jobs and improve people’s lives.
  • Ensure trade flows as smoothly and predictably as possible.
  • Help developing countries build their trade capacity.
  • Facilitate negotiations of trade agreements and resolve trade problems among members.
110
Q

What is economic integration?

A

The process whereby countries coordinate to reduce trade barriers and harmonise monetary and fiscal policy.

Economics (4 decks)

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