Theme 2 Flashcards
What does economic growth mean?
The rate of GDP of a country changes over a year
What does GDP (gross domestic product) mean?
The value of all goods and services produced within a country in a year (measure of countries output)
What can GDP be measured by?
- total output of all businesses
- total of all spending by individuals and businesses
- total incomes received by a country, home and abroad
What does real GDP mean?
The measure of the value added through the production of goods and services in a country during a period (adjusted for inflation)
What does nominal GDP mean?
The total market value of all goods and services produced in a country’s economy over a given period
What does growth mean?
When the uk is making more goods and services
What does boom mean?
When the uk is making lots more goods and services
What does slump mean?
When the economy is slowing down a lot
What does recession mean?
When the amount of goods and services the uk makes goes into negative figures
What are some of the causes of economic growth?
- improved training
- better education
- motivated workers
- better machines and technology
What are the four types of unemployment?
- frictional
- structural
- cyclical
- seasonal
What does frictional unemployment mean?
Out of work due to personal short term unemployment
What does structural unemployment mean?
Your skills are no longer relevant
What does seasonal unemployment mean?
Parts of year when there is no work in your job
What does claimant count mean?
Records the number of people claiming unemployment-related benefits
What are some benefits of using the claimant count?
- up to date
- cheap to use
- easy to understand/compare
What are some problems with using the claimant count?
- misses out on people (ignores under 18s and over 66)
- some people refuse to claim benefits
- not used in Europe
What does labour force survey mean?
A study of the employment circumstances of the UK population
What some benefits of using labour force survey?
- far more accurate and embracing method
- used in Europe
- good for comparisons
What are some problems with labour force survey?
- expensive
- time consuming to run
What are some macroeconomic objectives?
- achieve economic growth
- reduce unemployment
- improve the balance of payments
- control inflation
- reduce inequality
- reduce the deficit
What does balance of payments mean?
Records of all transactions that the uk makes with the rest of the world
What are parts of the balance of payments?
- current account
- capital account
- financial account
What are parts of the current account?
- net exports and imports of goods and services
- net income
- net transfers
What are parts of the capital account?
- capital transfers (purchases and sales of fixed assets)
What are parts of the financial account?
- foreign direct investment
- net portfolio investment
- other financial items
What does imports mean?
A good/service brought to this country from another country
What does exports mean?
A good/service brought to another country from this country
What does visible trade mean?
A good which you can see
What does invisible trade mean?
A service which you can’t see
How do increase the current account?
- reduce foreign consumption
- invest in productivity
- put a tax on imported goods
What does inflation mean?
An increase in prices
What causes inflation to rise (in demand)?
- time of year
- trend/taste
- reviews/social media
What causes inflation to rise (in supply)?
- increase of prices of raw materials
- taxes
- increase in rent
What does demand pull mean?
When demand for goods and services exceeds the available supply of those goods and services in the economy
What does cost push mean?
Inflation that results from higher production costs and rising prices of raw materials
What does consumer price index mean?
Measures the average change in prices paid by consumers over time
What does retail price index mean?
The rate at which prices for goods and services are rising
What does deflation mean?
Decrease in prices
How to measure inflation?
- base year index x price change (%) = price index
- price index x weighting (then put a decimal place two places to the left)
- answer - base year index
What are some benefits of inflation?
- inflate away debt
- wage increase
- minimum wage increase
- people will feel richer
What are some problems of inflation?
- badly effects low income people
- wages are worth less
- bigger gap of inequality
- decrease in economic growth
What is the Philips curve?
This theory claims that with economic growth leads to more jobs and less unemployment (less unemployment leads to higher inflation, vice versa)
What does economic sustainability mean?
Growing the economy, using natural resources, but without dimishing resources for the future
What are some benefits of economic sustainability?
- better health
- more jobs and training
- better exports and less imports
What are some problems of economic sustainability?
- inefficient use of resources
- bigger gap of inequality
- opportunity cost
- lack of knowledge
What does circular flow of income mean?
The money moving through the economy
What does withdrawals mean?
Variables in an economy that leak out of the circular flow of income, and reduce the size of national income
What does injections mean?
When funds are added to an economy from a source other than households and businesses
What does aggregate demand mean?
The total planned real expenditure on a country’s goods and services produced within an economy each time period
What does consumption mean?
What we buy everyday
What does disposable income mean?
The amount of money a person has left to spend after all taxes are deducted from gross income
What does gross pay mean?
An individual’s total earnings throughout a given period before any deductions are made
What does discretionary income mean?
The amount of money that you have left for spending after you’ve paid your taxes and paid for personal necessities
What does marginal propensity to consume mean?
The amount of additional income that we spend
What is the formula for marginal propensity to save?
The change in savings/The change in income
What does marginal propensity to save mean?
The amount of additional income that we save
What is the formula for marginal propensity to consume?
The change in consumption/The change in income
What are the determinants of saving?
- the wealth effect
- availability of credit
- rate of interest
- expectations
- unemployment
What are the determinants of consumption?
- income
- savings
- expectations
- debt
- availability of goods and services
What does wealth effect mean?
As assets increase in value, spending increases
What is the formula for aggregate demand?
Consumer spending + investment + government spending + (imports - exports)
What does investments mean?
The production of goods that will be used to produce other goods
What does gross investment mean?
The total amount that the economy spends on new capital
What does net investment mean?
The total amount of money that a company spends on capital assets, minus the cost of the depreciation of those assets
What are some factors influencing planned businesses investments?
- interest rates
- business taxes
- actual and expected demand for goods and services
- businesses confidence
What does accelerator effect mean?
When an increase in GDP results in a larger rise in capital investment spending
What are some things that the government spends on?
- transfer payments
- recurring payments
- investments projects
What does output gap mean?
The difference between the actual level of GDP and its estimated potential value
What does positive output gap mean?
A situation where an economy is actual output is above its potential output
What does negative output gap mean?
A situation where an economy is actual output is below its potential output
What does trade balance mean?
The difference between the value of exports and imports
What are some factors influencing exports?
- the exchange rate
- non-price demand factors
- strength of aggregate demand
What are some factors influencing imports?
- growth rates
- exchange rates
- global demand
What does exchange rate system mean?
Rate of which one currency can be exchanged for another currency
What does free floating exchange rate mean?
When exchange rates are determined by demand and supply
What some advantages of free floating exchange rate?
- shock absorption
- trade balances adjustments
What some disadvantages of free floating exchange rate?
- exchange rate volatility
- currency risk
What does fixed exchange rate mean?
Where a country’s currency value is pegged to another major currency or a basket of currencies
What are some advantages of fixed exchange rate?
- price stability
- reduced exchange rate risks
What are some disadvantages of fixed exchange rate?
- lack of flexibility
- balance of payments issues
What does multiplier effect mean?
Where an initial change in spending leads to a bigger increase in total output
What does positive multiplier effect mean?
When an initial increase in an injection leads to a greater final increase in level of real GDP
What does negative multiples effect mean?
When an initial increase in an withdrawals leads to a greater final decrease in level of real GDP
What is the formula for multiplier effect?
1/MPS or MPW
What does marginal rate of withdrawals have in it?
- marginal propensity of savings
- marginal propensity of imports
- marginal propensity of taxation
What causes a higher multiplier value?
- economy has plenty of spare capacity
- marginal rate of withdrawals is low
- lower interest rates
What causes a lower multiplier value?
- higher inflation
- marginal propensity of withdrawals is high
- economy has full capacity
What causes a decrease in aggregate demand?
- cut in government spending
- higher interest rates
- decline in households wealth and confidence
What causes an increase in aggregate demand?
- depreciation of exchange rates
- cuts in taxes
- lower interest rates
What does aggregate supply mean?
Total output of goods and services that firms in an economy are willing and able to supply at a given price level
What does short run aggregate supply (SRAS) mean?
The relationship between planned national output (GDP) and the general price level (one factor of production is fixed)
What are some factors that cause a shift in SRAS?
- business indirect taxes
- costs of imported materials
- supply shocks
What is long run aggregate supply (LRAS) mean?
Maximum output when all factors of production are fully and efficiently used
What does supply shocks mean?
An unexpected event that suddenly changes the supply of a product or commodity
What are some factors that cause a shift LRAS?
- higher productivity of labour and capital
- growing population
- stock of natural resources
What does Keynesian aggregate supply curve mean?
A non-linear where the elasticity of aggregate supply is dependent in part on the level of spare productive capacity at different stages of a nation’s economic cycle
What does fiscal policy mean?
Tax and government spending goes in opposite directions
What does expansionary fiscal/lose policy mean?
When government spending goes up and taxes goes down
What does contractionary/tight/deflationary fiscal policy mean?
When government spending goes down and taxes goes up
What happens in contractionary/tight fiscal policy?
- deficit will reduce as government will receive more revenue
- decrease in economic growth
- more unemployment
- more sustainable as less resources are used up
- decrease in balance of payments as imports decrease
- gap of inequality decreases but more people will face inequality
What happens in expansionary/lose fiscal policy?
- deficit will increase as government will receive less revenue
- increase in economic growth
- less unemployment
- less sustainable as more resources are used up
- increase in balance of payments as imports increase
- gap of inequality increases but less people will face inequality
What are characteristics of recession?
- less spending and consumption
- higher unemployment
- less imports and lower aggregate demand
- lower inflation (demand pull)
- increase in government spending
What does cyclical unemployment mean?
Unemployment due to economic reasons
What does monetary policy mean?
Controlling the money supply
What are parts in the monetary policy?
- rate of interest
- QE (quantitative easing)
- exchange rates
- credit availability
What does monetary policy transmission mechanisms mean?
Changes of interest rates influence aggregate demand, output and prices
What are some factors considered by the Bank of England when setting interest rates?
- GDP growth and spare capacity
- consumer and business confidence
- growth in wages
- unemployment
What does lose monetary policy mean?
Aims to stimulate an economy by lowering interest rates.
What will happen when lose monetary policy happens?
- deficit will decrease as less unemployment
- decline in sustainability
- the gap of inequality will increase, but less people will face inequality
- supply will increase which causes a depreciation of the pound
- in the long term, imports become more expensive and exports become cheaper (increase of balance of payments)
- decrease in interest rates
What does supply side policies mean?
Policies that aim to increase productivity and efficiency in the economy
What happens when supply side policies are successful?
- stimulate job creation
- economic growth
- output and employment increase
What does interventionist policies mean?
Policies that require government intervention to boost the economy
What are some of interventionist policies?
- spending on healthcare
- building business parks
- increased education and training
What does market policies mean?
Regulations implemented to control the production and consumption of goods in order to reduce associated social issues (makes it easier to sell)
What are some market policies?
- lower tariff barriers
- reducing state welfare benefits
- providing better information about jobs
What does tight monetary policy mean?
Aims to control inflation by raising interest rates and reducing the money supply
What happens when tight monetary policy happens?
- increase interest rates and decrease in credit availability
- deficit will increase as there will be more unemployment
- improvement in sustainability
- decrease in inequality but more people will face it
- less imports and exports become more competitive (decrease in balance of payments )
- in the long term, imports will be cheaper and exports will be more expensive
What does quantitative easing (QE) mean?
Way of increasing the money supply and aims to prevent deflation during a recession
How does QE work as an instrument of monetary policy?
- banks creates new money electronically
- this money is then used to buy bonds
- more demand leads to higher prices for bonds
- rise in price of bonds leads to lower yield on bonds
- in the long term, QE can cause a fall in interest rates
- stimulate an increase in government spending
- lower yields on bonds causes a currency depreciation
What are some of the advantages of QE?
- lowers the threat of price deflation (without QE, the fall in real GDP would have been deeper and increase in unemployment)
- lower long term interest rates have kept business confidence higher
What are some of the disadvantages of QE?
- may contribute to rising wealth effect
- inflationary pressure
- low interest rates has reduced the annual incomes from pensions funds making life harder for people who rely on it
What are some evaluation for QE?
- uncertain time lags and impact of QE on the real economy
- Bank of England is now a major holder of UK government debt
- QE has helped to keep interest rates low, but the economy is now to dependent on cheap money
How does QE affect the macroeconomy?
wealth effect -> lower yields leads to higher shares and bond prices
borrowing cost effect -> lower interest rates on long term debt
lending effect -> QE increases lending from banks and spending in the economy
currency effect -> lower interest rates has the side effect of causing the exchange rate to weaken
What does gross national product (GNP/GNI) mean?
The total value of goods produced and services provided by a country during one year (gross domestic product plus the net income from foreign investments)
What does trade unions mean?
An organised association of workers in a profession, it seeks to protect workers pay and rights
What does collective bargaining mean?
The process in which working people negotiate contracts with their employers to determine their terms of employment
What does industrial action mean?
When employees take action against their employers because of a work dispute
What does ‘holding a ballot’ mean?
Union must have a vote that’s properly organised according to legal rules
What does the borrowing cost effect mean?
Lower interest rates on long term debt
What does disinflation mean?
Price are still rising but at a slower rate
Why might deflation be damaging for an economy?
- debts increase
- real cost of borrowing increases
- lower profit margins (reduced revenues which leads to higher unemployment)
Why might deflation be good for an economy?
- makes exports become more competitive (but this comes with a cost)
What does quantitative tightening mean?
Contractionary monetary policy tool applied by central banks to decrease the amount of liquidity or money supply in the economy (opposite of quantitative easing)
What are the main aims of supply side policies?
- improve incentives to work and invest in peoples skills
- increase labour and capital productivity
- increase occupational and geographical mobility of labour
What are the main weaknesses of supply side policies?
- skills shortages
- economic inactivity
- low labour mobility
- ageing infrastructure
- productivity gap
What does privatisation mean?
Selling a state industry to the private sector
What are some benefits of privatisation?
- government receives large lump sum from selling the business
- no longer has to pay for its running costs
- customer gets better service and more innovation
What are some problems with privatisation?
- will prices go up as they are making a profit?
- quality might be as bad as ever
- they are no longer answerable to the tax payer
What does deregulation mean?
The opening up of a state monopoly
What does trend growth mean?
Long term non-inflationary increase in GDP caused by an increase in a country’s productive capacity (average sustainable rate of economic growth over time)
What are some critics of MARKET BASED supply side policies?
- income inequality
- reduced social safety nets
What are some microeconomic supply side policies?
- work visas for occupations
- fiscal supply-side policies
What are some macroeconomic supply side policies?
- income tax and corporation tax changes
- increases in state spending on health & social care
- increased funding of education at different age levels
What are some criticisms to interventionist supply side policies?
- crowding out a private sector
- reduced incentives
What does red tape mean?
Official rules and processes that seem unnecessary and cause delays
What are some limitations to Consumer Price Index (CPI)?
- the index does not incorporate consumer responses to changing relative prices.
- excludes new goods and services.
- quality changes may not be completely accounted for
What does competitiveness mean?
When our economy can produce more produces of better quality and as cost effective as other nations
What does stagflation mean?
High unemployment combined with high inflation
What are some free market supply side policies?
- tax cuts eg corporation and income
- deregulation
- trade liberalisation (reducing the trade barrier)
- intellectual property protection (creators and inventors can profit from their ideas without people copying)
- labour market flexibility (reduce restrictions on hiring and firing)
- privatisation
- competition policy
- immigrant reforms
- gender diversity
What does labour immobility mean?
The difficulty of workers to move from one location to another, due to not having the skills or the job being too far
