Theme 2 Flashcards
what is GDP?
a measure of the total output for a country. It indicates living standards for a country.
what is GDP per capita
The total output divided by the estimated population
What is the difference between Real GDP and Nominal GDP?
Real GDP is the GDP adjusted for Inflation whereas Nominal is an economy’s output produced in a year as a whole and not adjusted for inflation.
what is PPP?
Purchasing power parity which is a ‘basket of goods’ approach to indicate living standards through identifying how much of a households income take up items out of the basket
disadvantages of using GDP?
not considering quality, inequality, non market production like growing food in your own back garden.
Disadvantages of PPP
Basket needs to be updated every year
what is HDI?
It shows an alternative indicator of measuring living standards through Health, job satisfaction, diversity to convey the ‘human Developement index’
What is inflation?
the general rise in price level over a period of time
what is deflation?
the general fall in price level over a period of time
what is disflation?
the slowing down of the rate of inflation
what is an index?
Its a number with an economic data figure with a standard or base value
What is a measure of inflation?
Consumer price index (CPI) is when you take a basket of consumer goods and measured against how much of the households income is taken out when buying itens that are split into categories like water, transport, footwear. It also helps indicate monetary policies made and interest rates.
What is RPI
Retail price index is the measure of goods in a basket that include council tax, mortgage payment and is therefore different to CPI
limitations of CPI
doesnt take into account substitutes when prices rise, doesnt consider all production and consumption in the economy
what are the types of inflation?
Cost push
demand pull
what is cost push inflation?
This is when inflation occurs due to rising costs and changes in supply side of the economy
what are key factors leading to Cost push?
Wages- can lead to rise in cost of production
Imports- such as commodities or taxed goods
Draw the diagram for Cost push inflation
AD and SRAS curves. SRAS-> SRAS 2 while decreasing
What is demand pull inflation?
when there is increased AD and not a lot of AS making it be rationed and raising the price.
Why does Demand pull inflation occur?
-increase in consumer spending
-rise in investment and spending by firms
-govt spending more on population or reducing taxes
draw the diagram for demand pull inflation
AD and SRAS curves. AD-> AD2 increasing
name the effect of inflation on the 3 economic agents?
Firms - less likely to take risks and may stop investing
Govt - exports may become less competitive and effect balance of payments
Consumers- lowers consumer confidence and leads to less consumption.
What does Unemployment mean?
The act of willing to work and looking for work but not finding it.
What is the claimant count?
records those who collect unemployment benefits and can prove they are looking for work
what is the LFS?
Labour force survey is a study researched on the population to identify the employment and unemployment statistics which around 40,000 households participating.
what is frictional unemployment?
this is when someone is in between jobs meaning they aren’t working for 2 weeks since their new job hasn’t started yet.
what is Seasonal unemployment?
this is when firms demand workers during different times of the year due to demand like during Christmas times
What is structural unemployment?
This is when workers have to retrain for their jobs as their current job isn’t in demand therefore giving them a skills gap known as occupational immobility.
What is cyclical unemployment?
AKA demand deficient, this is when AD falls and firms cant really afford to keep employees therefore are laid off during recession times but pick up during booms.
What is real wage inflexibilty?
This is when wages aren’t adjusted for inflation meaning they are a bit too high for firms to afford therefore are unable to employ due to factors like minimum wage
What links migration to employement?
when migrants come to the UK they believe the work is good value for money, they can take the low required skills and close skill gaps. But also increase the population and leads to housing becoming a problem
What is the Balance of Payment?
the record that shows the flow of money into and out the economy through trading
What is the current account?
This is the account that officially indicates the UKs trade in goods and the trade in services.
What is the current account deficit/ surplus?
if negative its a deficit meaning negative balance of trade.
Surplus is when the account is at a positive balance of trade and can increase consumption.
What is the Balance of trade?
This is exports minus imports (X-M)
What is AD?
Aggregate demand is the total demand in the economy.
What is the formula for AD
AD= C+I+G+(X-M)
What is consumption?
This refers to the spending of households on goods and services and is influenced by interest rates.
What are other factors influencing consumption?
Wealth effect- when consumers feel wealthier due to things like house prices increasing in the short term it increases their level of consumption
Consumer confidence - in the economy if they feel its doing well and inflation is low they will spend more
Interest rates.
What is Average propensity to consume?
This is the measurement of how much of incomes are purely spent on consumption alone.
What is Average propensity to save?
This is the measurement used by economists to calculate how much of income is saved which is influenced due to inflation, age, consumer expectation.
What is marginal propensity to consume?
This is the measurement of how much households will spend on consumption when there incomes also rise.
Formula for APC, APS, MPC
MPC=Δ in consumption/ Δ in income
APC=consumption/ income
APS=Saving/income
how are consumption and income linked?
Consumption is dependent on the amount of income households are willing to spend this is AKA disposable income
What is investment?
Investment is when there is an addition to the capital stock of the economy.
What is gross and net investment?
Gross- before the depreciation value is deduced to the investment
Net - when deprecation value of investment is deduced.
What factors influence investment?
-Demand for exports
-the rate of economic growth
-business expectation and confidence
-animal spirit
What is animal spirit?
John Maynard Keynes created the phrase animal spirit when referring to the mood and attitudes towards firms level of investing in the economy and brings psychological thinking into perspective rather than solely depending on logical thinking.
how does the government influence investment
-Regulations -> increases costs for a business
-Grants-> offer them to businesses to help with environmental, social or ethical causes
-Taxation-> Corporation tax determining level of investment.
What is Government spending
This is when the govt spends on areas like healthcare, infrastructure, and education to help increase AD. GS is independent to any influence made by interest rates, inflation or exchange rates
government taxation
Taxation can increase on other factors that may be causing negative externalities and therefore the government tax revenue turns into government spending/ subsidies into areas that are prioritised
What is Government budget?
This can either be in deficit or surplus depending on whether spending is < or > than taxation
What is the trade cycle
This represents whether the economy is in a Recession, Slump, Recovery or Boom
what is Net trade
This is (X-M) and it contributes to the national income when goods and services are purchased abroad or sent abroad. This is influenced due to exchange rates, interest rates, quality of the product.
What is an exchange rate?
This is the comparing of one country’s currency to another country’s currency
What is SPICED and WPIDEC?
Strong Pound Imports Cheaper Exports Dearer
Weak pound Imports Dearer Exports Cheaper
What is the degree of protectionism?
Introducing barriers to trade like tariffs and quotas to reduce the amount of imports into the country.
What is AD on a curve
it is the exact same as demand in microeconomics, its downward sloping and can shift left or right.
What is AS?
Aggregate supply is the total supply within the economy
What is SRAS?
Short run aggregate supply is the amount of output in the short run which usually is more than LRAS. It is basically when a factor of production changes but the rest of the events like price level are slower to adjust into the changes
What effects SRAS?
internal factors=
-wage costs
-Production efficiency
-taxation
-Import prices
External factors=
-natural disasters
-food prices
-energy prices
-oil prices
-exchange rates
Why does more get produced in SRAS?
Because the short run price rise doesnt lead to increased costs of raw materials etc since there will be other producers incentivised to increase their profit which the suppliers can sell to therefore increasing overall output of a good.
What is LRAS?
Long run aggregate supply shows that GDP isnt determined on price changes like SRAS is and only changes when the output of productivity changes
Classical Vs Keynesian
Classical is a straight line down to show that resources are being efficient and there is full capacity.
Keynesian is a horizontal then curved up line to show that at the horizontal part, factors of production are at spare capacity and demand is elastic but as it curves resources are becoming efficient but prices rise as well then turn fully vertical to show similar views of the classical curve.
Factors influencing LRAS
competition policy ->the CMA
Technological advancements-> helps with trade
change in relative productivity->can attract investment
education & skill->improves labour in the future
demographic changes and migration
government regulations
SRAS turned into LRAS
Over time, as wages and prices adjust the economy reaches its full capacity, and the SRAS curve becomes vertical at the natural level of output, which is where LRAS is.SRAS is when one factor of production changes but turns to LRAS as all factors of production have adjusted to the change and are all now at full capacity
What is the circular flow of income
shows
the injections: government spending, investment & exports
the withdrawls: taxes, saving, imports
around households and firms
how is economic activity measures in the circular flow of income?
through national income = national expenditure = national output
What is the multiplier effect?
This is when one injection into the economy has a positive effect and builds onto the amount of consumption until the MPC occurs and there is a new equilibrium point which leads to the injection not showing growth
Formula for multiplier effect
1/1-MPC ( the higher the MPC = The higher the multiplier effect but when its goes round again its value is less than before)
Multiplier linked to AD
as the multiplier effect occurs consumers want to spend since there is more injects into the economy and consumers feel that they can consume more and inject their own income into the economy
What are the causes of growth?
There are 2 types of growth:
actual growth and potential growth these show that there is an increase in productivity
what is actual growth?
This is what the economy is currently producing and depends on how well we are using existing resources. This is SHort run economic growth
how can actual growth occur?
can be done through
AS—–> fall in prices of oil, wage rates, taxation OR rise in exchange rates
AD——> an increase in investment, consumption, government spending or exports
what is potential growth?
this is when the economy could be better if existing resources where used at its full capacity and full efficiency or increased in a way like investment. This is Long run economic growth
how can potential growth occur?
can be done through an increase in factors of production like:
increase in technological advancements, investment in infrastructure, growth in innovation and enterprise.
what is an output gap?
this is the difference between actual growth and potential growth if both aren’t in sync then it creates gaps . It shows whether the economy is underperforming or over performing to help decide if there should be changes made in policies like tax
what is a Negative output gap?
Occurs in a recession when actual growth is less than it should be and is less than potential growth due to factors like high unemployment, low business and consumer confidence
What is a positive output gap?
This occurs when actual growth is higher than potential output usually during a boom when resources are being used more like labour using overtime.
how can outputs be shown on a diagram?
SRAS MOVES to SRAS2 and falls equilibrium price higher so less output is produces= Negative output gap (opposite for positive output gap)
AD increases from AD1—> AD2 while SRAS and LRAS stay the same but more output is produces= positive output gap( opposite for negative output)
what are the characteristics of a boom?
rising wage rates
high tax revenue
high consumption and investment
full employment
Rising imports
What are the characteristics of a recession?
A rise in welfare benefits whilst tax revenue is low
low inflation
low consumption
high unemployment
low business profits
why does the trade cycle occur?
house market
interest rates
stock market crashes
rises and falls in tax
benefits of economic growth?
higher incomes and wages
improved literacy rate with higher education
improved balanced of payment
higher life expectancy
better housing and sanitation
better health
drawbacks of economic growth?
production cant keep up with demand and causes high inflation
increased negative externalities
deficit on the balance of payments
greater inequality
damage to the environment increases
living standards can drop
What are macroeconomic objectives?
Economic growth
low and stable inflation
balance of payment equilibrium
low unemployment
balanced government budget
protection of the environment
greater income equality
What are the demand side policies that help the economy?
fiscal policy - done by govt
monetary policy - done by bank of england / central banks
What is the monetary policy?
this is when central banks like the Bank of England, try to keep the economy balanced through setting interest rates depending on the economy’s current position and try to control inflation
what is the base rate of interest?
This is the interest rates and how it can effect borrowing and saving into the circular flow of income
What is Quantitative easing?
This is the increase in supply of money to help boost AD when interest rates are already very low and arent effective.
How does Quantitative easing work?
This is when the central banks buy assets like bonds to increase the amount of money they can pump into financial systems which they can use to help give loans to businesses and consumers
what is fiscal policy?
when the government uses its taxation and spending to stimulate demand into the economy to reach macroeconomic objectives
How does fiscal policy work?
its split into 2 types which are expansionary fiscal policy and contractionary fiscal policy.
what is expansionary fiscal policy?
when the economy is experiencing slowdown or recession the government cuts taxes and increases government spending. These factors stimulate the demand
what is contractionary fiscal policy?
when the economy is overheating with inflation being too high, the govt cuts govt spending or rises taxation to slowdown demand and let production catch up
what is supply side policy?
this is when there is an aim to increase the potential output through investment in infrastructure, education , healthcare etc to help markets work efficiently.
What are the types of supply side policies?
market based policies
Interventionist policies
Market based policies
these are strategies to improve the efficiency and productivity of the economy by reducing govt interventions like taxes ( corporate or income) and other barriers
interventionist policies
strategies that are government led to address market failures and improve productive capacity. Usually associated with command and mixed economies
