Theme 2: The UK economy - performance and policies Flashcards
What are purchasing power parities? (3) (2.1)
-Purchasing power parities are exchange rates used to compare the cost of living in different
countries
-You get an identical basket of goods in 2 countries, and compare the basket price to one another
-PPP’s are more reflective of cost of living, and are less likely to be government manipulated
What are the issues of using GDP to compare living standards in countries? (7) (2.1)
-Methods of calculation/reliability
-Income inequality/distribution
-Population issues/GDP per capita
-Developed countries may have high GDP’s at the cost of stress, longer working hours
-Developing countries may sacrifice health and safety for GDP growth
-Only legally traded goods count
-Doesn’t take into account other factors (happiness)
What is GDP and GNI? (4) (2.1)
-GDP = Gross Domestic Product
-GDP is the total market value of output of all goods and services in a country in a year
-GNI = Gross National Income
-GNI = GDP + income earned abroad on investments - income people from abroad made on investments here
Does a rise in GDP mean higher living standards? (6) (2.1)
-Higher GDP means higher incomes, meaning people can buy more goods and services, and raise their standard of living
-People may work longer hours
-Inflation may mean real incomes fall
-negative environmental externalities
-GDP per capita may fall
-disproportionate distributions of income
What are the 2 types of economic growth (3) (2.1)
-Actual economic growth is growth in GDP
-Potential growth is the growth in the productive capacity of the economy
-An increased ability to produce more, even if the economy is currently not doing so
What are problems when comparing rates of GDP growth? (5) (2.1)
-Don’t account where each country started
-Accuracy of statistics may vary
-Is this growth due to defence expenditure (types of government spending)
-Inflation / exchange rates will change the real growth
-How much output is self consumed
What are issues of using GDP to compare living standards over time? (5) (2.1)
-Methods of calculation/reliability of statistics may change over time
-Types of government spending
-Population may rise as GDP does
-Prices may fall as quality of goods rises
-Income distribution gap widens as GDP grows
What is inflation, deflation and disinflation? (3) (2.1.2)
-Inflation is a sustained rise in the general price level over time (2%)
-Deflation is a sustained fall in the general price level over time (-2%)
-Disinflation is when the price level is rising, but at a lesser rate than before (5% –> 1%)
What are the effects of inflation for consumers and workers (7) (2.1.2)
-People on low fixed incomes may experience a loss of real living standards
-Consumers in debt/borrowing will gain
-Real value of savings fall
-Shoe leather costs (time and inconvenience of people trying to get by with less money)
-Costs of shopping around, transferring money
-Workers could experience a loss in wages (index linked or not?)
-Workers may find it difficult to get into work, as firms may not invest
What are the cons of inflation indices (2.1.2) (5)
-CPI doesn’t include housing costs
-May not be representative of atypical spenders (vegetarians)
-Basket of goods changes once a year, but fashion and trends change quickly
-May be regional differences not represented
-Doesn’t account for the quality of goods
What are 3 causes of inflation (2.1.2) (3)
-Demand pull inflation is when aggregate pressures in the economy pull the price level up, as there is too much money chasing too few goods
-Cost push inflation is when increases in the cost of production force firms to raise prices
-An increase in the money supply causes people to have more money, so therefore they spend more and AD rises
What is the wage price spiral (2.1.2) (4)
-An initial rise in inflation will cause workers to ask for higher wages
-These higher wages increase a firms costs of production, causing cost push inflation
-These higher wages allow workers to spend more, causing demand pull inflation
-This subsequent inflation yet again leads to workers asking for higher wages
What is the main positive and negative of using the CPI (2.1.2) (2)
-The EU also uses the CPI (HICP), so therefore international comparisons can occur
-The CPI does not account for housing costs such as mortgage interest repayments or rent, which poses a significant chunk of the cost of living
What are the 3 main price indicies
-The Consumer price index creates a weighted basket with the 700 most popular goods, and records the changes in price in them
-The official UK measure with a target of 2%(±1)
-The retail price index is similar to the consumer price index, but also includes housing costs such as council tax or mortgage interest repayments
-The RPIX is the retail price index excluding mortgage interest repayments
What are the effects of inflation for firms and the government? (2.1.2) (7)
-An increase in costs of production decreases total supply
-Menu costs, which are costs of changing prices on menus
-Loss of international export price competitiveness
-Firms may be able to rise prices higher than inflation
-Uncertainty may decrease investment
-Government debt becomes cheaper to pay back
-Benefits, being index linked, rise
What is the consequence of unemployment for individuals (2.1.3) (4)
-Loss of real living standards, due to a loss of income
-Loss of marketable skills, and decreased chances of future employment
-Loss of motivation
-Health risk of stress and social exclusion
What are the pros and cons of using the claimant count (2.1.3) (8)
-Cheap and easy to produce, all data already compiled
-Can show regional/age differences
-No sampling error, takes all data into account
-Compiled every month with figures up to date
-Definition of claimant count inflation changes over time
-u18s and over 65s unable to be represented
-Unemployed may not be able to claim due to having rich partners or savings
-People may be employed yet still manage to claim NI or JSA
What are the consequences of unemployment for businesses (2.1.3) (7)
-Lower demand for their goods, so less revenue
-Fall in demand for businesses further down the supply chain
-Firms selling inferior goods may gain
-Firms selling inferior goods may gain
-Workers less likely to demand higher wages/go on strike
-Larger pool of surplus labour
-Firms could use as an opportunity to lower costs
What is inactivity, and how can it affect levels of unemployment (2.1.3) (1,5)
-Inactivity is a measure of people of working age who are unwilling and unable to work
-Inactivity can make levels of unemployment look lower than they are
-A full time student may want to work to supplement their current income
-Someone written off work with injury may want to work
-Full time carers may be looking for work, to provide an income
-All of these people are willing, able and actively seeking work, yet do not count in unemployment statistics
What is unemployment (2.1.3) (3)
-Unemployment represents a waste of scarce resources
-Unemployment is vital at measuring spare capacity in an economy
-The unemployed are those who are willing and able to work, and are actively seeking employment, yet do not have a job
What are 7 types of unemployment (2.1.3) (7)
-Frictional
-Seasonal
-Cyclical
-Structural
-Real wage
-Voluntary
-Technological
What are 2 measures of unemployment (2.1.3) (2)
-The claimant count is a measure in which you measure the amount of people claiming unemployment related benefits, such as Jobseekers allowance or National insurance
-The labour force survey is a survey in which 100,000 people are asked about their current job prospects, and if they are actively seeking work etc
What impact does migration have on employment and unemployment (2.1.3) (3,3)
-Migration leads to increased employment due to migrants taking up work positions
-Migrants lead to increased employment by creating demand in the economy
-Increased supply of labour may push down wages and create demand and jobs
-Migrants, if taking other peoples jobs, can lead to a rise in unemployment
-Migrants, by increasing the supply of labour, can cause real wage unemployment
-Migrants may become unemployed by not having the jobs they are looking for
What are real wage and cyclical unemployment (2.1.3) (2,2)
-Real wage unemployment is when wages are artificially kept above equilibrium point, leading to excess supply of labour
-This can be combatted by reducing union power, reducing unemployment benefits and reducing the minimum wage
-Cyclical unemployment is unemployment caused by low levels of demand causing low spending and less jobs in the economy
-This can be combatted by expansionary fiscal/monetary policy
What are structural and frictional unemployment (2.1.3) (5,2)
-Structural unemployment is unemployment caused by the long term decline in a sector
-This can be the most challenging type of unemployment to deal with, due to the immobility of labour
-Occupational immobility of labour is when workers are unable to move jobs due to not having the skills required
-Geographical immobility of labour is when workers don’t want to move areas, and therefore are limited to certain jobs
-Leads to a mismatch of skills supplied and skills demanded
-Frictional unemployment is the unemployment between leaving one job and joining another
-Sign of a healthy labour market with workers willing to trade jobs
What are the unemployment, employment and inactivity rates (2.1.3) (2,2,2)
-Unemployment is the proportion of the labour force not in work
-Calculated with unemployed population / unemployed + employed
-Employment is the amount of the working age population currently in employment
-Calculated with employed / working age population
-Inactivity is the amount of people in the working age population not actively seeking work
-Calculated with inactive / working age population
What is underemployment (2.1.3) (3)
-Underemployment is when workers on zero/part time contracts want to be working full time
-When a workers job doesn’t truly represent their skill level
-Typical in recessions, when firms want to decrease costs and output without having to make anyone redundant
What are seasonal, technological and voluntary unemployment (2.1.3) (2,2,2)
-Seasonal unemployment is when workers are only employed for certain times in the year, typically in the agricultural and tourism sectors
-Can be combatted by improving the mobility of labour
-Technological unemployment is the substitution of capital for labour
-Firms may decide its cheaper to become capital intensive, and therefore the workers are no longer needed
-Voluntary unemployment is when people don’t want to work at the current wage rates
-May have savings to fall back on, or none of the available jobs appeal to them
What are the consequences of unemployment for the economy (2.1.3) (5)
-A potential budget deficit may occur
-Increased benefits spending and deceased tax revenue
-Rise in poverty and inequality
-Loss of potential output, as the unemployed leave the workforce
-Loss of GDP as the economy is not performing at full output + AD falls
Why may/may not the current account deficit be a problem (2.1.34) (3,3)
-The UK has historically, and currently, ran a current account deficit
-This is not a problem if the deficit can be financed by other parts of the balance of payments
-This can represent a high standard of living, with imports for the consumers
-It is a problem if the budget deficit is a result of decreased productivity in an economy
-A long term money outflow could cause a depreciation in the exchange rate, and imported inflation
-Reserves of a foreign currency run low
How are countries reliant on another through international trade (2.1.4) (4)
-Countries rely on incomes through exports
-Countries get goods through imports
-If there is a recession in one country, this will have knock on effects on anyone who imports there
-If a deficit becomes consistent, net incomes continue to leave, reducing domestic demand and possibly creating unemployment
What is the balance of payments, and the current account (2.1.4) (2,1)
-The balance of payments records the economic transactions between one country and the rest of the world
-This comprises of the current, financial and capital accounts
-The current account represents the trade in goods, trade in services, investment income and income transfers between one country and the rest of the world
How do key macroeconomic objectives impact the current account (2.1.4) (4)
-Economic growth = Higher incomes = Higher imports = (X-M) worsens
-Export led growth, however, leads to an improvement in the current account
-Low unemployment = higher incomes = higher imports = (X-M) worsens
-All of these are at the cost of inflation
What factors impact investment (2.2) (8)
-Higher interest rates lead to higher borrowing costs and therefore decreased investment, also making saving more attractive, although investment demand isn’t too fluctuant on interest rates
-Future sales increase confidence, leading to increased investment
-Economic growth leads to increased demand, and firms increase investment to cope with this
-Tax breaks and grants make it more profitable to invest
-A lower exchange rate will increase demand for exports, and therefore increased investment will occur
-Firms’ ability to invest depends on their access to credit
-Animal spirits, since naive optimism leads to risk taking
-Lower costs of production allow firms more profits to invest with
What are net exports (2.2) (5)
-The value of exports (X) is the value of the flow of money into the country
-The value of imports (M) is the value of the flow of money out of the country
-The value of net exports is (X-M)
-The UK typically has a negative value of net exports
-Net exports in the UK only accounts for about 5% of AD
Why is the AD curve downwards sloping (2.2) (3)
-Net exports effect: At higher prices, exports are less competitive, and therefore (X-M) goes down, and therefore AD falls
-Interest rate effect: At higher prices, the MPC is more likely to raise interest rates, however this leads to decreased consumption and investment, and therefore decreased AD
-Real wealth effect: As prices fall, people real wealth rises, and therefore people become more confident, consumption rises and therefore AD does to
How does the exchange rate impact net exports (2.2) (3)
-An appreciation in the exchange rate means the pound can now buy more foreign currency, and foreign currency can buy less pounds
-This leads to imports becoming cheaper and rising, and exports become less competitive and falling, leading to decreased net exports
-However. the impact of this depends on whether countries are locked into trade contracts
How does government expenditure get impacted by the business cycle (2.2) (2,4)
The business cycle is the pattern of economic growth which changes from boom to recessions or slow growth
-Discretionary fiscal policy is the deliberate manipulation of spending and taxation
-In a boom, government spending on benefits falls, and tax revenue rises
-The government will typically run a budget surplus, to try to pay back some of the national debt
-In a recession, government spending on benefits rises, as tax revenue falls
-The government will run a budget deficit, to try to pump money into the economy
What is consumption, and what factors impact it? (2.2) (1,5)
-Consumption is the spending by households on goods/services, roughly 60% of the UK economy
Factors which impact consumption are:
-Higher disposable incomes lead to higher consumption
-Lower interest rates mean mortgage interest repayments fall, people are less incentivised to save, and consumption financed by borrowing becomes cheaper
-Future job prospects and anything that increases confidence will cause a rise in consumption
-Higher house prices create a positive wealth effect, as well as allowing people to take out loans against their house
-Saving is anything which is not spent, so decreased savings leads to increased consumption
