Theme 2 Flashcards
GDP
The total output produced by an economy
Circular Flow of income
Money moving from firms to households in an endless circular cycle
3 ways to measure GDP
Expenditure method (all consumer expenditure), Income Method (all total income for firms), Output Method (value of output produced). All should be equal
Injections to the Circular Flow of income
Exports, government spending, investment
Withdrawals from the circular flow of income
Imports, savings, taxes
Relationship with the circular flow of income and the multiplier
The large the multiplier, the larger the size of the circular flow of income
The multiplier
Am initial injection into the economy leading to even bigger increase in national income/ effect on national income and product of an exogenous increase in demand
Multiplier calculation
1 divided by MPW, or 1 divided by 1-MPC or 1 divided by MPS
Negative multiplier
A reduction in injection leads to an even bigger fall in national income
Ways the multiplier can be increased
Increased investment, increased income, decreased price of goods, increased quality
Definite Inflation
A general rise in price level
Define Economic Growth
Rate the GDP of a country changes over a year
Define Unemployment
Total number of people without work as a percentage of the working population
Define Sustainability
Fulfilling the needs of current generations without compromising the needs of future generations
Difference between debt and deficit
Debt - total amount of government borrowing, deficit - annual difference between government spending against money gaines
Balance of payments
A measure of imports and exports
Inequality
Number of people below the required level of income
Phillips Curve
Graph comparing the levels of inflation to unemployment levels
How do growth and sustainability conflict
Increased growth leads to increased production so more C02 pollution
2 measure of inflation
Consumer price index, retail price index
Current rates of inflation and debt
Inflation- 11.1% Debt - 99.6%
Consumption
Our spending in goods and services
How do you calculate Aggregate Demand?
Consumption + Investment(in machinery) + Government spending + (Exports- imports)
4 factors that influence consumption
Disposable income, Wealth, inflation and rate of interest
What % of AD is consumption
65%
Disposable income
Income you have after paying taxes
Investment
Spending in capital goods
Accelerator Theory
Where an investment increases when either demand or income increases (at a faster rate)
3 factors that influence investment
Rate of interest, retained profit, accelerator theory
2 taxes that influence consumption the most
VAT, indirect taxes
How does the government promote investment
Monetary policy changes interest rates
Discretionary income
Income after bills
Imports
Goods that are bought in from another country
Exports
Goods/services that are sold out to another country
Place to measure the value of international trade
Balance of payments
3 sections of account measuring international trade
Trade balance, net primary income, net secondary income
How does the government raise finance
Taxes
How does the government fund borrowing
Selling bonds
3 main areas of government spending
Healthcare, social security, education
Where does the government announce its spending plans?
The Budget
3 benefits the government provides
Pensions, childcare benefits, Jobseeker’s Allowance
5 taxes
Income, property, council, corporate and VAT
Privatisation
Selling a state industry to the private sector
Aggregate Demand
The total demand for goods produced domestically, including consumer goods, services and capital goods
Aggregate Supply
Total amount of goods produced in an economy
Difference between short run AS and long run AS
In the short run, you assume labour is variable. In the long run, assume always return to full employment and all factors of production are fully utilised ( labour and capital are fixed)
Difference between Keyes and classical long run AS
Keynes graph assumes that there are factors that prevent always returning to full emplyment
2 policies that impact AD
Fiscal and Monetary Policy
Exchange Rate Policy
Decrease interest rates, weakens value of currency, cheaper exports
Interest Rates
Cost of borrowing, reward for saving
Fiscal Policy
Governments decisions on its spending and taxation to change AD
2 main tools of Fiscal Policy
Taxation, Government spending
Loose Fiscal Policy
Decreased Taxation and Increased Government spending to increase GDP
Tight Fiscal Policy
Increased taxation and reduced government spending to reduce inflation
How would you reduce inflation using Fiscal Policy
Loos fiscal policy
Negatives of reducing inflation using Fiscal Policy
Negative growth, consumption falls
Which economist promotes FP
Karl Marx
Output gap definition
The difference between potential GDP and actual GDP
Monetary Policy
A way to influence the money supply following round the circular flow of income
4 tools of monetary policy
Reserve requirement, discount rate, interest on reserves, open market operations
Quantitive Easing
Government buying back its own bonds
Yield on bonds
A figure that shows the return you get on a bond
Rising interest rates impact on BoP
Less demand, so a reduction in imports. Improved exchange rates so exports get more expensive and imports get cheaper
Relationship between interest rates and credit available
Increase in interest rates, decreased supply of credit ( and vice-versa )
Hot Money
Flow of funds from one country to another to earn short term profit on interest rates differences
Liquidity trap
When interest rates are very lower, a further decrease will have minimal or no effects on AD
1 trade off from increasing interest rates
Increase in unemployment
Who sets the rate of interest?
Bank of England Monetary Policy Committee (MPC)
Current Rate of Interest
4.5%
Supply side Policy
Measure government takes to increase the availability of goods and services
3 main areas supply side policy tries to improve
Lower inflation, lower unemployment, improved economic growth
3 measure to increase productivity
Specialisation, training, increased wages
3 measure to increase the size of the workforce
Advertisement, increase wage offers, reduce benefits
3 measure to improve product markets
Innovation, skilled workforce, customer loyalty
Geographic Immobility
How difficult it is for a worker to move between different countries and regions to seek new work
Occupational immobility
How difficult it is for a worker to move from one occupation to another
Corporation tax
A percentage of a firms profit which must be paid to the government
2 drawbacks of supply-side policy
Time-lag, expensive
Current rate of VAT
20%
What does the MPC do?
Decides what monetary policy action to take
Relationship between price and yield of a bond
Price increases, yield decreases (and vice-versa)
How do you calculate the multiplier
1/1-MPC or 1/MPS
Negative Equity
When a house/belonging is worth less than the mortgage you took out on it
How does a rise in house price effect AD?
Wealth affect, increase consumer confidence so AD would increase
Automatic Stabilisers?
Automatic fiscal changes as the economy moves through the stages of the business cycle I.e fall in tax during a recession
How would you reduce debt using Fiscal Policy?
Cut government spending, increase taxes
How does hot money help reduce inflation?
Higher exchange rates, making imports cheaper so more supply
Measure to help improve the BoP
Higher interest rates( so higher exchange rates ), higher taxes
3 limitations of QE
Lower value of the pound, causes inflation, hurts savers
What is deflation?
Reduction of the general level of prices in an economy
How can a government avoid deflation?
Lower interest rates, lower taxes, higher government spending
How can the government reduce inequality?
Increase spending on benefits, minimum wage
What policies can increase economic growth?
Increase spending on benefits, minimum wage
Policies to increase economic growth
Fiscal, monetary and supply-side
Economic concerns of deflation
Can contribute to lower economic growth
2 main causes of the financial crisis 2008
Falling house prices, borrowers unable to repay loans, banks went into crisis
3 policies used by the government during the financial crisis
Tax cuts, increase in unemployment insurance, food-stamp benefits
ILO survey
Counts those not in work for 4 weeks, age 16-70, considers those underemployed
Types of unemployment
Frictional (personal short term unemployment), Structural (skills no longer needed), Cyclical (economic reasons), seasonal (no work for parts of year)
Consumer price Index
Basket of goods in a big scale to measure inflation
