Theme 2 Flashcards
1
Q
What is national economic performance?
A
This is how a country is doing economically and is used to compare today with the past e.g. How much has economic growth increased/decreased from last year?
2
Q
What are some measures of economic performance?
A
- economic growth e.g. If output is increasing, if consumers are spending
- levels of employment: if there are more workers in an economy output is increase and production is more efficient
- inflation: if inflation is too high it will discourage spending
- current account: if there’s a large deficit
- inequality gap: if there is a big difference in income groups with the country
3
Q
What is aggregate demand?
A
The total of all demands or expenditures in the economy at any given price. It is also called national expenditure.
4
Q
What is the national expenditure (AD curve) made of?
A
- consumption
- investment
- govt spending
- exports minus imports
It’s can be calculated using this formula:
C+I+G+[X-M]
5
Q
Why is the AD curve downward sloping?
A
This is because if a household is one a fixed budget and inflation occurred, this means they cannot buy the same amount of good they could before.
The higher the price, the fewer goods will be demanded.
6
Q
What is the wealth affect?
A
It is how a consumer feels about their wealth due to certain factors e.g. if price levels increases but the households income of fixed, they would feel less wealthy. This is called the negative wealth effect.
Households react to changes in house prices as well as stocks and share value.
7
Q
What are “animal spirits”?
A
This is a concept created by John Maynard Keynes. Animal spirits is another way of saying business confidence. Keynes believed that if firms had more confidence it would lead to higher investment.
Confidence can decrease if interest rates are high or there is a recession.
8
Q
What the difference between durable and non durable goods?
A
Durable goods are good which continue to provide service over a long period of time e.g. cars.
Nom durable goods are good used up immediately or over a short period of time e.g. food.
9
Q
What is marginal propensity to consume (MPC)?
A
It is the proportion of a change in income spent and can be calculated:
MPC= Change in consumption/change in income
10
Q
What is the average propensity to consume (APC)?
A
It’s measures the average amount spent on consumption out of total income. It can be calculated:
APC= consumption/income
11
Q
What can affect consumption?
A
- interest rates
- consumer confidence
- wealth effects
- availability of credit
- inflation
- composition of households (age)
12
Q
What is investment?
A
Investment is the addition to the capital stock of the economy.
13
Q
What is the difference between gross and net investment?
A
Gross investment measures investment before depreciation.
Whereas net investment is gross investment - the value of depreciation.
14
Q
What is the difference between human and physics capital?
A
Investment in human capital is investment in workers and their training.
Investment in physical capital is machinery and factories.
15
Q
What is the accelerator theory?
A
The idea that investment is linked to changes in output or income in an economy e.g. If the economy is expanding, investment increases to cater for increased demand and produce more goods.
16
Q
What affects investment?
A
- business confidence
- the world economy (e.g. If the world economy is booming exports will increase)
- access to credit
- retained profit (70% of investment is financed through retained profit)
- govt regulations
17
Q
What affects the level of imports in a country?
A
- real income: as 10% of spending are on imported goods
- exchange rate: if goods are cheaper in other countries
- degree on protectionism with the country: if there’s tariffs or quotas, this can limit imports
18
Q
What affects level of exports?
A
- the exchange rate: if gone value of the punt decreases, it is cheaper for foreigners to buy our goods
- state of the world economy: its trade partners are doing well, exports are likely to rise
- degree of protectionism: almost all countries limit goods and services coming into their economies
19
Q
What does it mean if a good is less competitive?
A
When a good is less competitive it means that people will not look to buy that good from a specific seller because there are cheaper substitutes.
20
Q
Why is the AS curve upward sloping?
A
This is because in the short run, if a firm wanted to increase their output, they would not employ more workers. Instead they would just make their current employees work for longer while paying them by the hour. This will have an affect on the price as the cost of production has increased.
Therefore an increase in quantity causes an increase in price.
21
Q
What causes a shift in the SRAS curve?
A
- wage rates
- cost of raw materials
- exchange rates: if imports are or expensive, this will cause an increase in price across the economy meaning supply increases
- productivity: high productivity cause cost of production to be lower.
- taxation: high tax burden leads to an increase in prices
22
Q
What is the difference between the SR and LR AS curve?
A
In the short run at least one factor of production is fixed. Whereas in the long run, all factors are variable.
23
Q
Why (in the classical model) is the LRAS curve vertical?
A
This is because in the long run their is a limit to how much firms can increase supply due to capacity constraints. Capital equipment is fixed in supply etc.
Therefore it can be argues that AS is fixed at a given level of output.
24
Q
What is the LRAS curve associated with?
A
The PPF as it shows the maximum level of output within an economy once all resources are used efficiently.
It is also associated with the trend of growth on the economy. If output is above or below this level, there are output gaps.
25
What causes shifts in the LRAS?
Changes to the quality and quantity of a good shifts the LRAS curve:
- Technological advancement
- incentives
- factor mobility
- competition policy
- govt regulations
- changes in productivity in competing economies
26
What does changes in govt regulations do to the LRAS?
If regulations are looser, it can encourage firms to set up a form in an industry. As a results jobs and output will increase.
27
What is demographic changes and migration?
Demographic changes are changes to the population that are currently working.
If the ageing population is increasing faster than the working population, this will reduce the LRAS in the long run.
However if there was an increase in working immigrants, this in the long run with increase the LRAS.
28
What is competition policy?
This is when policies are implemented that make Gemma more competitive as a way to increase output. By increasing competition it will make firms more productive and efficient.
However it's can discourage firms from opening up.
29
What is factor mobility?
This is how easy it is for a person to find a job in a industry different to the one they are working in now.
If there is an increase in factor mobility, then LRAS will increase.
30
What is the difference between the Classical and Keynesian model of the LRAS curve?
The classical model is based on the idea that markets tend to correct themselves when there is a shift due to a supply side shock.
Keynesianism however believe that govt intervention is needed to correct market failure and to reverse shifts.
31
What does it mean is wages are "sticky downwards"?
This means that people will not accept lower wages even if the unemployment has increased. This idea is used as an argument because the classical model says that the market will correct itself by people accepting lower wages as a way to increase supply again.
32
How can you calculate national income?
You can calculate national income through measuring national output as well as national expenditure;
I = E = Y
33
What does a closed economy mean?
This is when there is no foreign trade. Therefore in the economy only households and firms spend their income and revenue.
34
What is an injection in the circular flow of income?
This is when money flowed into the economy. This can happen through:
- investment
- govt spending
- exports
35
What is a withdrawal in the circular flow of income?
This is when money flows out of the economy. This can happen through:
- taxation
- saving
- imports
36
What causes an inflation in the Classical LRAS curve?
An shift in demand leads to inflation as the LRAS curve shows max productive capacity, so even if demand does increase, supply does not.
37
What causes an inflation in the Keynesian LRAS curve?
Again inflation occurs when the the economy is at max productivity.
However the difference with this model is that the whole curve is not vertical meaning that before a certain point, an increase in demand does have an impact on output (but price does not change).
38
What is Phillips curve?
This is the part of the Keynesian model in which an increase in demand increase output and price.
39
What does a rise in LRAS mean for the Classical and Keynesian model?
A rise in LRAS means the potential output of the economy has increased.
- The Classical model: higher output and lower prices at current demand
- the Keynesian model: at full employment or a little less, higher output and lower prices. At a point before the Phillips curve, nothing changes
40
What are the difference in ideas put forwards by the Classical and Keynesian model?
The Classical model shows that the only way to get back from a depression is to adopt supply aide shocks (e.g. Cutting welfare benefits, reducing trade union power).
Where's Keynesians believe recessions are caused by lack of demand.
41
What is the multiplier effect?
This is the idea that if money is injected into the economy, it will generate more money to flow into the economy than that initial amount as it would've been multiplied.
42
How to calculate the multiplier effect?
1/(1 - MPC)
OR
1/MPW
43
What are the drawbacks with the multiplier effect?
- it is difficult to measure the exact size of the multiplier
- the multiplier effect is not instantaneous, there is a time lag.
- the multiplier is considered to be relatively low in countries such as the UK
44
What are some measurements of national income?
- GDP: the total market value of all goods and service in a period of time. (Can be heavily affected by inflation)
- GNI: GDP plus net overseas interest payments
- GNP: GDP through the labour or property supplied by citizens of the country both domestically and overseas.
45
What are transfer payments?
Types of income that do not cause an increase in output and so are not included in the final calculation of national income:
- govt pays national insurance with nothing in return so no increase in output.
- a car dealer selling a second hand car with receive money, but no car is made so again it increase in output.
46
Why is NI measured?
- to forecast changes in the economy
- to make comparisons over time and between countries
- to make judgements in economic welfare
47
Are NI statistics accurate?
They are inaccurate for a no. if reasons:
- statistical inaccuracies
- the hidden economy: black market where taxes are evaded and so cannot be traced. As a result the national income is underestimated
- self produce: subsistence farming is not counted in NI as it is not traded
- productivity: increased productivity can cause workforce size to decrease which looks like a decrease in output, when in fact it hasn't changed.
48
Problems with comparing NI over the years?
- prices increase over time so an increase in GDP doesn't mean an increase in output
- despite quality of a product increasing, the price of it might have decreases showing as a fall in GDP and therefore living standards
- an increase in defence and related expenditures would increase GDP
- no account of externalities
- even if NI increases it doesn't mean nationally everyone's income has increase.
49
Problems comparing NI in different countries?
- different countries can have different accounting system to work out NI
- quality of data differs e.g. poorer countries spend less producing such data
- the size of the unrecorded part of economies differ between countries
- geography distorts comparisons as counties might need to produce more of something giving off the impression of high standard of living
50
What are purchasing power parities?
An exchange rate that takes into consideration the cost of living in each country. This is a more accurate as the market exchange rate undervalue the value of local currency in poor countries.
51
What is wealth?
Wealth is a stock of assets which produce a flow of income.
52
What is the Easterlin Paradox?
It describes our happiness is associated with income.
At low levels of income where basic needs are not being met, happiness is associated with it.
However when basic needs are being met and income is at a higher level, happiness has little correlation with wellbeing.
53
What is the difference between a downturn and a boom?
When an economy is at a boom, NI is high. It is likely the economy is beyond full employment.
When an economy is at a downturn, output and income fall causing a decrease in consumption and investment.
54
What is a recession on a long run trend growth rate?
This is when economic activity is lower than the trend rate of growth for more than 2 consecutive quarters of the year. There's few inflationary pressures in the economy.
55
What are demand side shocks?
Shocks which affect AD:
- the housing market bubble: when house prices increase so much and suddenly there's a sharp fall. This will decide consumer confidence
- the central bank may sharply raise interest rates
- the world economy might go into recession affecting UKs exports
- sharp rise in the pound reducing competitiveness of exports
56
What are supply side shocks?
Shocks that affect AS:
- a large rise in world commodity prices will cause cost of production to increase and rise in import value if demand for such goods are price inelastic
- more power to trade unions as this will increase cost of production, causing price levels to increase slowly.
57
What is an output gap?
The gap between estimated and actual level of real GDP.
When the trend growth rate is higher than average it is called a positive gap.
58
What is hysteresis?
This is the idea that after a recession, the economy does not bounce back to the previous trend level of growth. Instead the level of growth decreases and remains that way.
59
Why might hysteresis take place?
There is permanent loss in human capital e.g. Some take early retirement and some due to lack of work for a long period of time become deskilled.
There is lack of physical capital e.g. Firms cut back on investment so there's less machinery than would otherwise be the case.
60
What causes long run economic growth to increase?
- land: natural advantages can increase supply immensely e.g. Saudi Arabia with oil supply
- labour: increase in quantity or quality of workers e.g. increase in immigration or changes in demography
- capital: must be sustained investment for stock of capital to increase
- technology: cuts average cost and creates more products
- efficiency
61
What is export led growth?
This is when a country rises their exports to increase AD rather than AS. A permanent increase in exports will force firms to increase investment and labour to satisfy demand. This cause an increase in productive potential of the economy but also the competition and efficiency.
Greater efficiency leads to an increase in LRAS and economic growth.
62
What is the difference between economic growth and real GDP?
Real GDP is a measure of volume of goods and services produced. It's is equal to the quantity produced in an economy .
Economic growth is a rise in output. It is changes in real GDP.
63
What are the benefits of economic growth?
- people's living standards increase
- the quality of houses increase
- the quality of goods and services increase
- school attendance and literacy rates increase
- health care tends to be better e.g. people live for longer, woman do not die during childbirth
64
Why is growth sometimes seen as unsustainable?
It is not sustainable because fossil fuels are being used up as growth increases and not only does this limit the resources people have in the future but it leads to global warming. While the govt do listen to the advice given by scientists, they take a long time to actually follow up on it.
65
How does economic growth affect the environment?
NI increasing usually leads to a cleaner environment with less pollution. Environmental activists will try to persuade the govt to spend money on technologies that will help the situation. However in poor countries usually a lot of pollution is produce as a result of economic growth instead,
66
What is the difference between deflation and disinflation?
Disinflation is when inflation increase but by a lower amount than before during the last year for example. Whereas deflation is when price levels actually fall.
67
What is hyperinflation?
This is a situation in which inflation is very high.
68
How can inflation be measured?
Inflation can be measured using the Consumer Price Index (CPI) and the Retail Price Index (RPI).
69
What is the Consumer Price Index?
- A virtual basket of goods and services is created using the Expenditure survey completed by thousands of households.
- The goods are ones household spend a lot of their income on.
- Afterwards, a survey is taken to get the average retail price for those goods, which are converted into index form.
- The figures are then weighted according to how much the average household spends on that good.
- finally a base year is assigned and changes inflation are measured
70
What are the two types of inflation?
- demand pull inflation
| - cost push inflation
71
What is demand pull inflation?
This is when AD increases without increasing AS. It is usually caused by excess demand. For example:
- consumer spending increasing excessively
- firms may invest more due to large demand
- govt might increase it's spending or cut tax
- world demand for U.K. exports might rise because of a boom in world economy
72
What is quantitative easing? UPDATE THIS
This is when the Central bank influence the amount of borrowing and lending within an economy.
73
What is cost pull inflation?
This is when growth occurs due to changes in supply because if rising costs e.g.
- wages and salaries will increase COP
- imports can also rise prices because of COP,
- govt can increase indirect tax and reduce subsidies
74
What are the costs of inflation?
- unemployment as high inflation can affect the supply of goods due to consumers being more careful with purchases.
- menu cost rise as firms have to keep changing prices.
- shoe leather costs as you would feel more inclined to look around for all possible options when there has been an increase in price.
- competitiveness decreases as the value of the pound increase compared to other currencies.
75
What is the cost of deflation?
- consumer confidence decreases
- consumption decreases and saving increases
- lower investment
- asset value changes with inflation
76
What are the benefits of low inflation?
It isn't seems as high inflation or deflation and so avoids the problems associated with those price levels.
It acts like a signal for the economy and so gives room for policy makers to adjust policies according to the current financial situation.
77
What makes some unemployed?
If they are not in work but are actively seeking it.
78
What makes someone underemployed?
When the person works but it doesn't match their ability or wants e.g. Working for a job that doesn't require the level of qualifications the person has or someone working part time even though they prefer to work full time
79
What is long term unemployed?
This is when some one is out of work for more than 12 months.
80
What is frictional unemployment?
When workers who lost their jobs quickly find new ones. These people are not a priority for the govt as it is regarded as a serious problem
81
What is seasonal employment?
When workers work on a seasonal basis because demand for labour varies through the year in certain industries.
82
What is structural unemployment?
- technological unemployment: when workers are put off due to new technology.
- sectoral unemployment: when sectors have declined causing workers to have skills that are no longer needed. With no training they cannot adapt to changes in demand.
- regional unemployment: when certain regions are have high unemployment
83
What is cyclical unemployment?
Unemployment that occurs when the economy is in a recession. Due to insufficient demand all workers cannot get a job.
84
What is Classical/real wage unemployment?
This is when real wage rates are stuck to a level above that needed to reduce unemployment e.g. People may be willing to work for less that minimum wage, which is better as they will still have an income.
85
What is balance of payments?
This is the records of all financial dealings over a period of time between economic agents of one country and all other countries.
86
What are the two components of the balance of payments account?
- current account: where payments for the purchase and sale of goods are recorded
- capital and financial: where flows of money associated with saving, investment, currency stabilisation are recorded
87
What's the difference in trade in visibles and trade in invisibles?
- Trade in visibles: trade of goods
e. g. Machinery
- Trade in invisibles: trade of services e.g. Financial services
88
What are the macro economic objectives?
- economic growth
- employment
- 2.0 inflation
- balance of payments
- income distribution
- govt budget deficit
- the environment
