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Economics > Theme 2 > Flashcards

Theme 2 Flashcards

1
Q

What are the three injections in the circular flow of income?

A

Investment, government spending and exports

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2
Q

What are the withdrawals in the circular flow of income?

A

Savings, imports and taxes

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3
Q

What are the three ways of calculating GDP?

A

Output method, expenditure method and income method

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4
Q

What is the AD equation?

A

AD= C+I+G+(X-M)

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5
Q

Wealth definition

A

A large amount of money or valuable possessions and can be held in different ways.

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6
Q

What is capital investment?

A

The spending on capital goods such as plant and equipment and new buildings to produce more consumer goods in the future

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7
Q

What are the 3 factors that influence investment?

A

Rate of interest, level of retained profit, increasing national income, confidence, risk associated, cost of machinery etc.

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8
Q

What is the multiplier effect?

A

When an initial injection into the economy causes a bigger final increase in national income

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9
Q

What is the multiplier equation?

A

1/MPW
1/MPS
1/1-MPC

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10
Q

What are the 3 different types of exchange rates?

A

Fixed - doesn’t change
Floating - it changes
Managed floating - where it is floating but government intervenes to keep it at a certain level

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11
Q

What does SPICED stand for?

A

Strong Pound Imports Cheap Exports Dear

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12
Q

What factors influence the demand for imports and exports(3)?

A

The exchange rate, quality of goods, confidence, price/inflation, logistics/transport, trade agreements, population size/growth.

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13
Q

What are the shock to AD?

A

Rise/fall in exchange rate, recession, slump in housing market, rise in interest rates, change in taxation

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14
Q

What is the output gap?

A

The difference between the actual level of GDP and its estimated potential level (usually expressed as a %)

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15
Q

When is there a positive output gap?

A

High inflation, low unemployment, high demand, actual GDP is greater than the estimated potential GDP,
NEGATIVE OUTPUT GAP IS THE OPPOSITE

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16
Q

What causes a shift in the short run aggregate supply curve (SRAS)?

A
  • Change in production costs and costs per unit
  • Employment costs e.g wages, employment, taxes
  • Costs of other inputs e.g raw materials
  • Impact of government
  • Exchange rates
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17
Q

What factors affect long run aggregate supply (LRAS)?

A

Productivity of labour and capital, labour market participation, gains from innovation and enterprise, capital investment, population growth.

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18
Q

What is the saving ratio?

A

For households, measures the amount of money households have available to save as a % of their total disposable income.

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19
Q

What are the government’s 7 macroeconomic objectives?

A

Economic growth, reduced unemployment, control inflation, improved BOP, close inequality gap, promote sustainability and manage the national debt.

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20
Q

What does fiscal policy aim to manipulate?

A

Aggregate Demand

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21
Q

What is tight/contractionary fiscal policy?

A

Cut government spending and raise taxes (decrease AD)

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22
Q

What is loose/expansionary fiscal policy?

A

Increase government spending and lower taxes (increase AD)

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23
Q

What are progressive taxes (one example)?

A

The marginal rate of tax rises as income rises (e.g income tax)

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24
Q

What are proportional taxes (one example)?

A

The marginal rate of tax is constant leading to a constant average rate of tax (e.g national insurance)

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25
Q

What are regressive taxes (one example)?

A

The rate of tax paid falls as income rises (e.g duties on tobacco and alcohol)

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26
Q

Why does a government tax (3 reasons)?

A

To pay for public services, as an intervention to correct for market failure, to change the final distribution of income and wealth (redistribution)

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27
Q

What is the difference between direct and indirect taxes?

A

A direct tax is levied on income, wealth and profit and cannot be passed on, whereas indirect taxes are taxes on spending and producers may be able to pass it on (e.g fuel duties)

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28
Q

What does tight fiscal policy aim to improve?

A

Reduced inflation, try to improve BOP, reduce the debt, improve sustainability

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29
Q

What does loose fiscal policy aim to improve?

A

Economic growth, reduce unemployment, reduce the numbers facing inequality, increased inflation

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30
Q

What is a neutral fiscal stance?

A

When the govt. runs with a balanced budget

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31
Q

What is a reflationary fiscal stance?

A

When the govt. is running a budget deficit

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32
Q

What is a deflationary fiscal stance?

A

When the govt. runs a budget surplus

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33
Q

What are the 3 problems with fiscal policy as an instrument of demand management?

A

Recognition lags, imperfect information, response lags

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34
Q

What is the laffer curve?

A

It shows the relationship between economic activity and the rate of taxation which suggests there is an optimum tax rate which maximises total tax revenues

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35
Q

What does the Phillips curve show?

A

A relationship between unemployment and inflation. It shows a trade off between unemployment and inflation

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36
Q

What is monetary policy?

A

Influencing the money supply to achieve govt. macroeconomic objectives. By influencing money supply, the govt. influences AD.

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37
Q

What are the 3 tools that are used in relation to monetary policy?

A

Interest rates, credit availability and quantitative easing (QE)

38
Q

What is fiscal drag?

A

The deflationary effect of a progressive taxation system on a country’s economy. As wages rise, a higher proportion of income is paid in tax

39
Q

What is the liquidity trap?

A

When there is a level below which interest rates cannot go and at that point monetary policy may become powerless. Even if interest rates can be lowered, this may have no effect.

40
Q

What is quantitative easing?

A

An unconventional form of monetary policy and the BofE creates new money to buy assets from financial institutions

41
Q

What is deflation?

A

Prices are falling (the inflation rate is negative)

42
Q

What are the advantages of QE?

A
  • Lower long term interest rates have kept business confidence higher
  • An additional policy Instrument other than changing interest rates, good especially if there is a liquidity trap
  • Can lead to exchange rate depreciation- competitiveness for export industries
43
Q

What are the disadvantages of QE?

A
  • Ultra low interest rates
  • Surge in share prices and property values - worsened affordability particularly for younger gen.
  • Unwillingness of banks to lend
44
Q

What are the demand side causes of deflation?

A

Deep fall in AD, Large negative output gap(I.e high level of spare capacity)

45
Q

What are the supply side causes of deflation?

A

Improved productivity, technological advances, significant fall in wage rates

46
Q

What are the consequences of deflation?

A

Real interest rates rise, real level of debt rises, declining business profits

47
Q

What is the happiness indicator?

A

The economics of happiness seeks to relate economic decisions to a wider measure of welfare than traditional measures of income and wealth.

48
Q

What is nominal GDP?

A

Measures a countries GDP using current prices without adjusting for inflation

49
Q

What is real GDP?

A

A measure of the value of economic output adjusted for price changes and adjusted for inflation

50
Q

What is purchasing power parity (PPP)?

A
  • Comparing GDP per capita

- Don’t use official exchange rates

51
Q

What 3 indicators does the HDI use?

A
  • Health
  • Education
  • Income
52
Q

How is Human Development Index shown?

A
  • Number between 0 and 1

- The closer a country is to 1, the wider its economic and social development

53
Q

Advantages of using the Human Development Index:

A
  • Worldwide use
  • Helps govt. polices
  • Looks at wider elements in society
54
Q

Disadvantages of using the Human Development Index:

A
  • Data may not be reliable
  • Does Not measure inequality
  • Countries exaggerate to get economic aid
55
Q

What are the 4 types of unemployment?

A

Frictional, Structural, Cyclical and Seasonal

56
Q

Define Frictional Unemployment

A

Out of work due to personal short term unemployment

57
Q

Define structural unemployment:

A

Your skills no longer relevant

58
Q

Define cyclical unemployment:

A

Economic reasons

59
Q

What is seasonal unemployment?

A

Parts of the year when there is no work in your job

60
Q

What is the claimant count?

A

A measure that includes people who are eligible to claim JSA

61
Q

Name 3 factors included in the claimant count:

A

Out of work, available for work, actively seeking employment, 18 to 66, less than £16,000 in savings

62
Q

Benefits of the claimant count:

A

Up to date, cheap, easy to understand

63
Q

Problems of the claimant count:

A

Misses out on people, not used in Europe

64
Q

What is the Balance of Payments?

A

Measures all international economic transactions between the UK and it’s trading partners

65
Q

What is included in the current account(BOP)?

A
  • Net exports/imports of goods and services (balance of trade)
  • Net income
  • Net transfers
66
Q

What is included in the capital account(BOP)?

A
  • Capital Transfers (purchase and sale of fixed assets such as real estate)
67
Q

What is included in the financial account(BOP)?

A
  • Net foreign investment
  • Net Portfolio Investment
  • Other financial items
68
Q

What is the consumer price index(CPI)?

A

Used in the UK and excludes mortgage interest payments

69
Q

What is the retail price index(RPI)?

A

Included mortgage interest payments

70
Q

What are the 2 causes of inflation?

A

Demand pull and cost push

71
Q

How do we measure inflation in the UK?

A
  • Basket of 650 goods is collected to reflect spending
  • Price survey is carried out across the UK to get and adjusted price for each good (approx 150,000)
  • Weights are attached to each good and basket is updated every year
72
Q

What is benign inflation?

A

Where prices fall due to technological advances

73
Q

What is malevolent deflation?

A

From a significant downturn in the economy

74
Q

Define economic growth:

A

Measures the rate of GDP of a country changes over a year

75
Q

Name 3 benefits of economic growth:

A

Fall in unemployment, higher incomes due to increased demand, rise in the standard of living, more investment in machinery and technological advances

76
Q

Name 3 disadvantages of economic growth:

A

Higher wages could lead to increased stress, finite resources may be used up, industrial expansion has negative externalities

77
Q

What is the Phillips Curve?

A

In the short term, there is an inverse relationship between unemployment and inflation. As the level of unemployment falls due to economic growth the level of inflation will rise, and vice versa. In the long term, there is no trade off - economy reaches full employment

78
Q

How does supply side policies stimulate production?

A
  • Reducing the costs faced by firms (Labour Policies)

- Improving the productivity of human and physical capital (Capital Policies)

79
Q

What 3 things will supply side do if successful?

A
  • Stimulate job creation
  • Create economic growth
  • Allowing output and employment to increase while maintaining a stable inflation level in the economy
80
Q

Give 3 examples of labour policies:

A

Spending on healthcare, increased education and training, reducing the power of trades unions, reducing state welfare benefits, deregulation of labour markets

81
Q

Give 3 examples of capital policies:

A

Privatisation, deregulation, lower tariff barriers, removing unnecessary red tape, improving transport and infrastructure, reduce corporation tax

82
Q

Define trade unions:

A

An organised association of workers in a profession to protect and further their rights and interests

83
Q

What is competitive tendering?

A

An auction process through which large institutional investors purchase newly issued government debt

84
Q

What is a public private partnership?

A

Often defined as a long term contract between a private party and a government agency for providing a public asset or service

85
Q

What is regulation and deregulation?

A

Regulation - introducing new laws

Deregulation - removing old laws

86
Q

Define market based policies:

A

Allow the free market to increase efficiency and output

87
Q

Define interventionist policies

A

Involve an increase in government involvement in an economy

88
Q

What is red tape?

A

Excessive bureaucracy or adherence to official rules and formalities

89
Q

What are the problems with supply side policies?

A

Opportunity cost, time lags, fiscal cost (paid for by taxation), may also need AD policies

90
Q

What is a subsidy?

A

A direct or indirect payment to individuals or firms to improve market price

91
Q

What is the index number calculation?

A

No. in current year/no. In base year x100

Economics (4 decks)

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