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Economics > Theme 2: The UK economy – performance and policies > Flashcards

Theme 2: The UK economy – performance and policies Flashcards

1
Q

What are the macroeconomic indicators TIGER?

A

Trade
Inflation
Growth (economic)
Employment
Distribution of income

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2
Q

What are the macroeconomic objectives of each indicator?

A

Trade - balanced, imports = exports
Inflation - low and stable - 2% (range from 1-3%)
Economic growth - steady, sustained, sustainable
Employment - full employment, low unemployment
distribution of income - ‘fair’ distribution

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3
Q

What are leakages in the circular flow of income and give examples.

A

Leakages are ways money is spent :
Savings (s)
Taxation (t)
Imports (m)

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4
Q

What are injections and give examples.

A

Injections are ways money can enter the economy outside of consumer expenditure:
Investment (i)
Government funding (g)
Exports (x)

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5
Q

formula for index number

A

(raw number/ base year raw number) x 100

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6
Q

What are the 4 measures of economic growth?

A

-GDP - value of all goods and services produced in an economy in a year.

-GDP/capita

-GNI (per capita) - gross national income

-Green GDP (Accounts for environmental costs for production)

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7
Q

What are the 4 stages of the economic cycle

A

Boom
Recession
Slump
Recovery

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8
Q

Features of an economic boom

A

AD very high
unemployment decreases
trade deficit more likely
inflation increases

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9
Q

What is Real GDP?

A

The value of all final goods and services produced in an economy in a year adjusted for inflation

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10
Q

Features of economic recession

A

Aggregate demand starts to decrease (bad)
Unemployment increases (bad)
Trade deficit starts to improve
Inflation slows, disinflation (?)

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11
Q

what is disinflation ?

A

When inflation slows down, inflation at a slower rate

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12
Q

Features of economic slump/trough

A

Aggregate demand is very low (bad)
unemployment very high (bad)
trade deficit increases further (worsens)
Inflation very low (bad)

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13
Q

Features of economic recovery

A

Aggregate demand increases (good)
Unemployment decreases (good)
trade deficit starts to get better (?)
Inflation increases (good but depends)

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14
Q

meaning of aggregate demand

A

The total amount of goods and services demanded in the economy at a given time and price level

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15
Q

What is economic growth?

A

An increase in real GDP in an economy in a year caused by an increase in aggregate demand or LRAS

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16
Q

What is the formula for aggregate demand ?

A

AD = C + I + G + (x-m)

aggregate demand = consumer spending + investment + government spending + net exports

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17
Q

What are factors of short run growth?

A
  • Lower interest rates
  • Lower income/cooperation tax
  • Higher consumer/business confidence
  • Higher government spending
  • Weaker exchange rate
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18
Q

**What are the 4 benefits of economic growth?

A

-Higher disposable income - Workers are getting paid more or are more productive so they can demand higher wages

-Higher employment - If a country is producing more goods and services it will need more workers to produce the goods and services

-Higher profit for firms - Firms make more money if people are spending more

-Fiscal dividend for gov (increased tax revenue) - Gov get more money through taxes if people are earning and spending more

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19
Q

4 **Costs **of economic growth

A

-Inflation - It erodes purchasing power
- Income inequality- income isn’t distributed equally because of ; One sector dominance (oil economies), capital intensive, rural vs urban, lack of welfare state and poor quality job
-Environmental costs - destruction to the environment through air pollution or deforestation
-Current account deficit

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20
Q

**Explain Demand pull inflation

A

When demand increases, firms respond by increasing their prices

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21
Q

Explain Cost push inflation

A

When prices increase due to an increase a firms cost of production

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22
Q

What causes demand pull inflation?

A

-Interest rates low - cheaper for consumers to borrow + spend
-Income tax low - increase disposable income
-High consumer/business confidence
-Government spending high
-Weak exchange rate

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23
Q

What causes cost push inflation

A

-High wages
-High raw materials price
-High business tax
-High price of imported raw materials due to exchange rate

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24
Q

Explain how Inflation can cause fiscal drag

A

Higher inflation means higher wages therefore workers are pushed into the next tax bracket meaning they are worse off as they are being taxed more. (tax brackets have to stay fixed for drag to occur)

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25
Q

What are the costs of high inflation?

A

-Lower purchasing power
-Erosion of savings
-Lower export competitiveness
-Wage/consumer price spirals
-Fiscal drag
-Inflationary noise

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26
Q

Explain how high inflation leads to low purchasing power for consumers

A

-Means that people are less able to buy what they need if wages and real incomes dont rise in line with inflation

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27
Q

Explain how high inflation leads to erosion of savings

A

As inflation increases, money in savings decreases in value. Nominal value of savings is eroded. Savings cant grow at the same rate that inflation does.

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28
Q

Explain how low/stable inflation improves gov finances

A

Government get more tax money as workers are earning more money so they are pushed into next tax band (Fiscal drag)

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29
Q

Explain how high inflation leads to lower purchasing power

A

People are less able to buy what they need if wages and incomes dont rise in line with inflation.

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30
Q

Explain deflation

A

Prices are falling, inflation rate is negative

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31
Q

Explain disinflation

A

Inflation at a slower rate

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32
Q

What are the benefits of low/stable inflation

A

-Workers with higher wages - happier workers
-Consumption is natural - consumption isn’t delayed
-Firms encouraged to increase output
-Can keep unemployment low in a recession
-Reduces real value of debt
-Improvement of government finances

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33
Q

Explain how low/stable inflation reduces real value of debt

A

-Debt becomes easier to pay back. Debt is always fixed. The debt is now a smaller percentage of your income because wages are increasing due to inflation

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34
Q

Definition of unemployment

A

Those who are willing, of a working age, able to work and are actively seeking work but do not have a job.

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35
Q

Formula for unemployment rate

A

Unemployed/economically inactive x 100

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36
Q

What are the 6 types of unemployment?

A

Cyclical unemployment - Lack of demand in the economy therefore there is less demand for firms to hire labour

Structural - Occupational - Workers dont have skillset to change profession. Geographical - Workers are not willing to move.

Frictional - People who have just finished a job and are looking for a new one.

Seasonal - Workers have jobs which depend on the season. e.g. Farmers

Casual - Workers that have a contract maybe unemployed till they get a new contract

Real wage - Where wages are fixed above equilibrium rate causing excess supply of labour

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37
Q

What makes up the current account?

A

-Trade in goods
-Trade in services
-Investment income
-Transfers

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38
Q

What causes a current account deficit?

A

When the value of imports > value of exports

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39
Q

Demand side causes of a current account defecit

A

Strong exchange rate - Makes our exports more expensive to buy as another country has to buy more of our currency to buy our g/s which is unattractive.

Recession in another country - Causes exports to decrease as their demand decreases so they will buy less exports from us

Growth domestically - Consumers and firms have higher demand so they import more g/s to satisfy the demand

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40
Q

Supply side reasons of a current account defecit

A

Lack of competitiveness of price and quality. Lack of investment means less efficiency so costs increase. Lack of productivity of inputs and outputs so there is a higher cost per unit

High relative inflation can cause prices of exports to be higher

Poor quality exports -> poor imports

Resource depletion

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41
Q

Demand side causes of a current account surplus

A

High income abroad
Lower incomes at home
Weak exchange rate

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42
Q

Supply side reasons of a current account surplus

A

Low relative inflation
Strong investment
Gains in comparative advantage
New resource discoveries

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43
Q

Consequences of a current account surplus

A

Higher net exports, high AD, increased growth, increased inflation
Appreciation of the exchange rate
Financial account deficit
Sign of an unbalanced economy

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44
Q

5 determinants of consumption

A

Level of real disposable income - Higher disposable income means higher MPC as people have more purchasing power

Lower interest rates - Low cost of borrowing leads to a greater incentive to borrow money to spend

Consumer confidence - High consumer confidence means higher MPC

Asset prices - They link to how wealthy people feel. More wealthy feeling -> higher MPC

Household indebtedness

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45
Q

How do interest rates affect investment?

A

Firms will borrow to invest -> lower interest rates so cost of borrowing is low so there is a greater MPI.

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46
Q

How does business confidence affect investment?

A

Expected profit is high so firms will invest as there us the incentive.

If expected profit is lower then there will be less investment.

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47
Q

Explain the multiplier effect

A

When an initial injection leads to a greater increase in real GDP. Initial injection triggers further spending.

48
Q

Explain the accelerator effect

A

Changes in investment can be directly linked to changes in rate of GDP growth

49
Q

What components make up MPW?

A

Taxation - MPT
Savings - MPS
Imports - MPM

50
Q

Formula for multiplier effect

A

1/1-MPC

51
Q

How does corporation tax effect investment?

A

Corporation tax is tax on business profits.
Therefore, higher corporation tax will lead to less profits for business so they have less money to reinvest.
Lower corporation tax means business have more retained profit to invest in capital goods.

52
Q

How does spare capacity effect investment?

A

If a business is working near max capacity, they will need to invest so they can increase spare capacity.
Vice versa

53
Q

How does level of competition effect investment?

A

If competitors are improving and competition is strong then business will invest to equal their competitors.

54
Q

How does growth in other countries effect investment?

A

If there is high AD in other countries, they will demand more of our exports meaning firms will invest more to meet the increased demand

55
Q

How does price of capital effect investment?

A

Low price of capital means investment is less costly

56
Q

What are the determinants of investment?

A

Interest rates
Business confidence
Corporation tax
Level of spare capacity
Level of competition
Price of capital
Growth in other countries
Animal spirits
Access to capital
Gearing of firms

57
Q

What is meant by gearing of firms?

A

% of invested money which has been borrowed. High gearing means more money has been borrowed to invest.

58
Q

What are the 4 types of government spending?

A

Welfare spending
Current spending
Capital spending
Debt interest payments

59
Q

What does current spending consist of ?

A

When the government spend on maintenance of public services and payment of public service workers e.g. NHS and public transport

60
Q

What does capital spending consist of ?

A

Spending on infrastructure e.g. building hospitals, schools, railways

61
Q

What does welfare spending consist of ?

A

Spending on benefits and pensions

62
Q

What does debt interest payments consist of ?

A

Interest to pay on debts

63
Q

What causes a budget deficit?

A

Gov spending > Tax revenue

64
Q

What causes a budget surplus?

A

Gov spending < Tax revenue

65
Q

What is national debt?

A

Total stock of debt overtime. Accumulation of budget deficits.

66
Q

5 determinants of net exports

A

Real disposable income earned abroad
Real disposable income earned at home
Strong or weak exchange rate
Protectionism at home and abroad
Relative inflation levels at home

67
Q

How does a strong or weak exchange rate effect net exports?

A

Stronger
Pound
Imports
Cheaper
Exports
Dearer

Weak exchange rate
Imports
Dearer
Exports
Cheaper

68
Q

How does real disposable income abroad effect our net exports?

A

Boom abroad means MPC to import increases so it is likely they buy more of our exports.

69
Q

How does real disposable income earned at home effect net exports?

A

Boom in the UK means MPC to import is likely to rise. Imports rise and AD shifts left.

70
Q

How do relative inflation levels at home effect net exports.

A

High inflation in the UK means our exports are more expensive due to inflation, so our exports decrease as other countries have to pay more.

71
Q

What are factors of long run economic growth

A

Increase in productivity
Increase in workforce
Investment
Infrastructure movement
Increase in competition
New resource discoveries

72
Q

Which one of the following is most likely to be a cause of deflation? A fall in:

A oil prices
B unemployment
C income tax rates
D interest rates

A

A - Oil prices

73
Q

Explain the likely effect on a rise in value of the pound on AD (5 marks)

A

A rise in the value of the pound means the pound has appreciated. Therefore it is more expensive for consumers in other countries to buy our exports. This is a less attractive option, so they will demand less as they don’t want to buy more of our currency. This causes AD to shift left. Exports become expensive so aggregate demand falls

74
Q

Define the term ‘national income’ (1)

A

Total spending on goods and services

75
Q

Define the term ‘circular flow of income’ (2)

A

-Money flows around the economy between consumers/households and firms
-Withdrawals are taxation, savings, imports

76
Q

Define the term ‘purchasing power parities’ (2)

A

-The rate at which the currency of one country would have to be converted into that of another country to buy the same amount of goods and services in each country
-Comparison between countries, taking into account different cost of living.

77
Q

Define the term ‘claimant count’ (1)

A

Number of people claiming unemployment benefit/jobseekers allowance

78
Q

Which one of the following is likely to cause a reduction in the claimant count? (1)
A) An increase in the weekly payment for claimants
B) A compulsory weekly interview for every claimant
C) An increase in the size of the workforce
D) A fall in employment

A

B

79
Q

Which one of the following is most likely to cause a rightward shift in the aggregate supply curve? (1)
A) A decrease in real output
B) A rise in price level
C) A fall in price level
D) An increase in productivity

A

D

80
Q

Explain one likely cause of inflation (2)

A

Increase in raw material price (1)
This causes price to increase as producers need to make same amount of profit as before so they increase price of good/service

81
Q

Explain the reason for the shape of the Classical long-run AS curve (2)

A

Economy operates at full capacity/no spare capacity (1) so there are no unused factors of production/ resources (1)

82
Q

Define the term ‘interest rate’. (1)

A

Cost of borrowing (1)
Reward for saving (1)

83
Q

Define the term ‘Gross National Income’ (1)

A

It is GDP plus net income paid into the country by other countries for things such as dividends or interest (1)

84
Q

Explain the likely effect of a fall in the exchange rate of the British pound on
aggregate demand (5)

A

AD = C + I + G
Leads to a depreciation in the exchange rate.
AD will increase as our exports are now cheaper to buy for foreign consumers so value of exports increases.
Value of imports decreases as the pound goes less distance in other countries.
AD shifts right.

85
Q

Define the term ‘exchange rate’. (1)

A
  • The value/price of one currency in terms of another (1)
86
Q

Explain one limitation of CPI in measuring the rate of inflation (2)

A

Does not include housing costs (1)
Monthly rent or mortgage interest repayments form a large part of consumers spending (1)

87
Q

Explain two influences on the level of UK investment (6)

A

-Business confidence, high business confidence means a business will be more likely to invest. Vice versa. Firms will only invest if there is less uncertainty about future costs and revenues, and sales. Firms are reluctant to commit to capital spending while there is economic uncertainty

-Demand for exports lower the demand in a country to which a firm is trying to export, the less the investment. Uncertainty over the UK’s future trade relationship has discouraged companies from investing. Trade tensions are also affecting investment

88
Q

Explain what is meant by a deflationary spiral

A

The spiral begins with deflation which is where there is a sustained fall in the general price level. Consumers notice the falling prices and decide to delay their purchases and wait for prices to fall further. This causes a reduction in AD as consumption is a component of AD. The fall in AD lowers the price level again and so consumers further delay their purchases. And the cycle repeats.

89
Q

What factors influence LRAS?

A

-Technological advancements = Improve quality of FOPs
-Changes in relative productivity = process innovation often results in productivity improvement
-Changes in education and training = often results in better quality FOPs
-Changes in government regulations = increases quantity of FOPs

90
Q

What factors influence SRAS?

A

-Changes in costs of raw materials and energy = As the price of input costs rise, fewer goods/services can be produced with the same amount of money

-Changes in exchange rates = Producers often import raw materials
Stronger currency = cheaper imports
Cheaper imports = decrease in input costs
Lower costs = more output

-Changes in tax rates =
Taxes represent an additional cost for firms
Decreasing taxes = decrease in costs
Lower costs = more output

91
Q

What is monetary policy?

A

Changes to interest rates, the money supply and the exchange rate by the central bank in order to influence AD

92
Q

What does expansionary monetary policy aim to do?

A

-Increase inflation
-Increase growth
-Reduce unemployment

93
Q

What does contractionary monetary policy aim to do?

A

Reduce inflation
Reduce excess debt and promote saving
Reduce current account deficit
Slow down growth

94
Q

What is a supply side policy?

A

A policy aimed to increase the productive capacity of an economy, shifting LRAS to the right

95
Q

What does interventionist supply side policy include?

A

-Aims to increase the role of the government

-Gov spending on education/training
-Gov sending on infrastructure
-Subsidies to firms to promote investment

96
Q

What does market based supply side policy aim to do?

A

-Aims to reduce the role of the government

Tax reform:
-Lower income tax
-Lower corporation tax

Labour market reform:
-Reduce benefits
-Reduce minimum wage

Competition policy:
-Privatisation
-Trade liberalisation
-Deregulation

97
Q

What is meant by an extension in AS?

What is meant by a contraction in AS?

A

1) When an increase in price leads to an increase in real GDP

2) When a decrease in price leads to a decrease in real GDP

98
Q

Explain one likely impact of a decrease in the base interest rate on inflation.
(2)

A
  • Decreases reward for saving (1)
  • Consumption will increase, AD and inflation rises (1)
99
Q

Does cost change influence LRAS or SRAS?

A

SRAS

100
Q

Does change in quantity/productivity influence LRAS or SRAS?

A

LRAS

101
Q

What are the 2 measurements of inflation?

A

RPI - Retail price index (Includes payments on mortgage and rent)
CPI - Consumer price index

102
Q

Benefit of high inflation

A

Lower chance of deflationary spiral

103
Q

What will occur if firms begin to pay higher wages?

A

SRAS shifts left and price level increases

104
Q

What is a price wage spiral?

A

Higher prices means workers demand higher incomes —> costs for firms increases —> SRAS shifts inwards —> that means even higher prices and the spiral repeats. This can lead to hyperinflation

105
Q

3 advantages of high inflation and 3 disadvantages of high inflation

A

Advantage:
1. Protects from deflation and a deflationary spiral
2. Reduces real value of debt —–> Improves inequality
3. High inflation decreases value of real wages which lowers costs for firms and government

Disadvantages:
1. Can lead to a decrease in real wages and savings which can worsen inequality.
2. Price wage spiral
3. Uncertainty. Difficult to predict future prices

106
Q

What is the formula for calculating economic growth?

A

% change in real GDP = % change in nominal GDP - inflation rate

107
Q

Definition of economic growth?

A

An increase in real GDP

108
Q

Formula for GNI?

A

GDP + net income from abroad

109
Q

Weakness of using claimant count to measure unemployment

A

Not everyone who is unemployed will claim benefits, there is a stigma around benefits. Therefore it underestimates unemployment

110
Q

Weakness of using ILO to measure unemployment

A

Only surveys 80000 households so it may not give an accurate representation of unemployment

111
Q

Definition of underemployment

A

Someone isn’t using their skills or isn’t working enough hours

112
Q

What are the factors shifting SRAS?

A

-Wages
-Oil prices
-Weather
-Import prices
-technology

113
Q

What is meant by fiscal policy?

A

A policy which changes government spending and taxation to influence AD

114
Q

Why would expansionary fiscal policy be used?

A

-Boost growth
-Reduce unemployment
-Increase inflation (demand pull)
-Redistribute income

115
Q

Why would contractionary fiscal policy be used?

A

-Reduce inflation
-Reduce budget deficit
-Redistribute income
-Reduce current account deficit

116
Q

Explain the effect of increasing interest rates on pensioners with savings

A

This increases pensioners’ savings as the return on savings is greater, which means pensioners have more real disposable income which means they can increase consumption leading to demand-pull inflation

Economics (9 decks)

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