Theme 2 Textbook Flashcards
Define nominal GDP
Value of GDP based on current prices, taking no account of changing prices through time
Define real GDP
An estimate of the volume of GDP taking account of changing prices through time
Define an index number
Device used for comparing the value of a variable in one period with a base observation
Define economic growth
An expansion in the productive capacity of the economy
Define GDP
A measure of the economic activity carried out in the domestic economy over a period
Define GNI (gross national income)
GDP plus net income from abroad
Define GNI per capita
The average level of GNI per head of population
Strengths of GNI per capita
An agreed international standard
Takes into account the population size
Weaknesses of GNI per capita
Does not consider quality of life
The quality of data collection may vary across countries
Define inflation
A sustained rise in the general price level in an economy
Define CPI (consumer price index)
A measure of the general level of prices in the UK
What are compiled in the CPI and how are they useful
Weights for each item
Allows index to be updated each year and remain representative
What causes inflation
Prices rising due to demand increasing
Prices rising due to increasing costs for firms
What is demand pull inflation
Consumer demand increases, putting upward pressure on prices
What is cost push inflation
Costs for firms increasing, increasing the price
What caused demand pull inflation in 2022
The economy was emerging from the pandemic, increasing consumer demand
What caused cost push inflation in 2022
Supply chains were interrupted during the pandemic
Conflict in Ukraine added more supply side pressure, especially oil and gas supplies
Define deflation
A fall in the average level of prices
Define disinflation
A fall in the rate of inflation
What was the decrease in inflation from 2008 to 2009
2008 inflation = 4%
2009 inflation = -0.5%
Why can deflation be perceived as bad
People expect prices to continue to fall
They may postpone purchases in the expectation of being able to buy at a lower price in the future
Resulting in lower demand, perpetuating the recession
What are the two ways of measuring unemployment
Claimant count of unemployment
ILO unemployment rate
Define claimant count of unemployment
Number of people claiming the Jobseeker’s Allowance each month
Define ILO unemployment rate
A measure of the percentage of the workforce who are without jobs, but are willing and able to work
Disadvantage of ILO measurement
Sample extrapolated up to represent whole UK
Sample not fully representative
Evaluate costs of unemployment on firms
Positive:
Lower demand for their products
So lower sales and revenues so lower profits
Negative:
Less pressure to pay higher wages
Evaluate costs of unemployment on workers
Negatives:
Lower standard of living
Reliant on social security support
Cost in terms of personal worth and dignity
Evaluate cost of unemployment on government
Negatives:
* Earnings lower
So income tax revenue falls
* Less spent on goods and services
So indirect tax revenue falls
* Increase in people claiming social security benefits
So government spending rises
Define balance of payments
Set of accounts showing transactions conducted between residents of a country and rest of the world
Three categories of balance of payments
Current account
Capital account
Financial account
Define current account
Transactions in goods and services between residents of a country and rest of the world
Define capital account
Transactions in capital between residents of a country and rest of the world
Define financial account
Transactions in financial assets between residents of a country and rest of the world
Application example for trade of goods
In 2016 in the UK
Deficit on goods was 7% (£140 bn)
Define exchange rates
Price of one currency in terms of another
Targets of macroeconomic policies
Economic growth
Full employment (low unemployment)
Low and stable inflation
Stable balance of payments
Define money supply
Quantity of money in the economy
Define cost-push inflation
Inflation initiated by an increase in costs faced by firms
Define demand pull-inflation
Inflation initiated by an increase in aggregate demand
Causes of a deficit account
Lack of competitiveness of UK goods and services
Arising from overvalued exchange rate
Define fiscal policy
Decisions made by the government on its expenditure, taxation and borrowing
Examples of government expenditure in UK
NHS
Infrastructure :
Elizabeth line or HS2
What is the effect of government expenditure
Is a component of AD
Thus increase in expenditure moves AD curve outwards
Facilitates economic growth
What does the multiplier of government expenditure depend on
Size of withdrawals from circular flow
If consumers have a high propensity to import, it will weaken the impact of multiplier
How can the fiscal policy of taxation increase AD
Increases government budget deficit
Moves AD curve outwards
Why is the fiscal policy of direct taxes better than indirect taxes
Direct tax (income tax) helps redistribute income between groups in society
Indirect taxes fall heavily of lower income households
Define monetary policy
Decisions made government regarding monetary variables such as money supply of interest rates
How might a monetary policy reduce inflation
Increase interest rates
Cost of borrowing higher
Fall in consumption
AD falls
Relieving pressure of prices
Define Bank of England
UK’s central bank
Define Monetary Policy Committee
Body within Bank of England
Responsible for conduct of Monetary policy
Define bank rate
Interest rate set by MPC
To influence inflation
Evaluation of demand side policies
(Fiscal and monetary)
Fiscal:
+ Stimulates AD
- Government expenditure adds to budget deficit
Monetary:
+ Stimulates AD
- Bailing out failing banks adds to budget deficit
Overall:
Not a long-run solution (inflation + budget deficit)
Define supply-side policies
Measures intended to have direct impact on AS
Define market-based policies
Policies that rely on allowing market to work freely and provide incentives for enterprise and initiative
Define interventionist policies
Policies by which the government intervenes to stimulate AS
Examples of market based policies
Reducing tax on production
Privatisation and deregulation
Improving incentives
What is privatisation and how can it be used as a supply side policy
Enterprises have been sold back into the private sector
Improves efficiency and competitiveness
What is deregulation and how can it be used as a supply side policy
Reducing how much an industry is regulated
Improves efficiency and competitiveness
Example of deregulation in the labour market
Reduce maximum working weeks and minimum holiday pay
How can improving incentives be used as a supply side policy
Lower level of unemployment benefit
Incentivises people to enter labour force
Reduction in unemployment increase labour supply and AS
How can education and training be used as a supply side policy
Education in schools:
Tailored to labour skills or analytical skills
Training of workers:
Retraining available for movement of workers after structural unemployment
Improves human capital and thus productivity
Examples of interventionist policies
Education and training
Plugging information gaps
How can plugging information gaps be used as a supply side policy
Information gaps are a form of market failure
Workers may not have adequate information about job opportunities
Providing information about vacancies encourages mobility of labour
Improves way in which labour market operates
Evaluation of supply side policies
Strengths:
Target specific problems that limit productive capacity of an economy
Effective in long run
Weaknesses:
Not always fast acting ( education and training takes time)
Needs careful balancing of effects of some policies (unemployment benefits)
Why does incentivising the labour market through low unemployment benefits need careful balancing
Too high:
Inhibit labour force participation
Workers have incentive to live on unemployment benefits instead of low paid employment
Too low:
Protection not provided for those who are unable to find employment
Workers unwilling to leave their job to search for better ones (inflexible labour market)
Define consumption
Expenditure on consumer goods and services
Components of AD
C + I + G + (X-M)
