Theme 2.1 Flashcards
What occurs when there is a rise in the value of Gross Domestic Product (GDP)?
Economic growth
Economic growth leads to higher living standards and more employment opportunities.
What does GDP measure?
The quantity of goods and services produced in an economy.
What is Real GDP?
The value of GDP adjusted for inflation.
What is Nominal GDP?
The value of GDP without being adjusted for inflation.
What is total GDP
the combined monetary value of all goods and services produced within a country’s borders during a specific time period.
What is GDP per capita?
The value of total GDP divided by the population of the country.
What is Volume of GDP
GDP adjusted for inflation. It is the size of the basket of goods and the real level of GDP.
What is value of GDP
the monetary value of GDP at prices of the day. It is the nominal figure and can be calculated by volume times current price level.
How can national income be measured?
Gross National Product (GNP) and Gross National Income (GNI).
What is Gross National Product (GNP)
the market value of all products produced in an annum by the labour and property supplied by the citizens of one country.
It includes GDP plus income earned from overseas assets minus income earned by overseas residents.
What is Gross National Income (GNI)
the sum of value added by all producers who reside in a nation, plus net overseas interest payments and dividends. It includes what a country earns from overseas and removes any money that is sent back home by foreigners in that country
What does Purchasing Power Parity (PPP) estimate?
How much the exchange rate needs adjusting so that an exchange between countries is equivalent according to each currency’s purchasing power.
What are the limitations of using GDP to compare living standards between countries over time?
1) GDP does not give any indication of the distribution of income. Therefore, two countries with similar GDPs per capita may have different distributions which lead to different living standards in the country.
2) GDP may need to be recalculated in terms of purchasing power, so that it can account for international price differences.
3) large hidden economies (black market) which are not accounted for in GDP. This can make GDP comparisons misleading and difficult to compare.
4) GDP gives no indication of welfare
GDP does not indicate income distribution, which can lead to different living standards.
What are the six factors affecting national well-being according to the UN happiness report?
- Real GDP per capita
- Health
- Life-expectancy
- Having someone to count on
- Perceived freedom to make life choices
- Freedom from corruption and generosity
explain the relationship between real incomes and subjective happiness
Generally, the higher the GDP per capita, the higher the average life satisfaction score.
Happiness and income tend to be positively related at low levels of income but, once basic needs are met, higher income does not lead to increased happiness.
What is inflation?
The sustained rise in the general price level over time. This means that the cost of living increased and the purchasing power of money decreases
What is deflation
where the average price level in the economy falls. There is a negative inflation rate.
What is disinflation
the falling rate of inflation. This is when the average price level is still rising, but to a slower extent. This means goods and services are relatively cheaper now than a year ago, and the purchasing power of money has increased.
How do you calculate the inflation rate in the UK
Consumer Prices Index (CPI)
Retail Price Index (RPI)
What is the Consumer Prices Index (CPI)?
Measures household purchasing power with the Family Expenditure Survey.
The survey finds out what consumers spend their income on. From this, a basket of goods is created. The goods are weighted according to how much income is spent on each item.
List the limitations of CPI
1) The basket of goods is only representative of the average household
2) Different demographics have different spending patterns.
3) CPI is slow to respond to new goods and services, even though it is updated regularly.
4) hard to make historical comparisons, since technology twenty years ago was of a vastly different quality to now
What is retail price index (RPI)
An alternative measure of inflation that includes housing costs, such as payments on mortgage interest and council tax.
RPI tends to have a higher value than CPI.
It excludes the top 4% of earners and low income pensioners.
CPI takes into account the fact that when prices rise people will switch to product that has gone up by less, whilst RPI does not.
What are the 3 causes of inflation
1) Demand Pull
2) Cost Push
3) Growth of money supply
What is Demand pull inflation?
Inflation caused by unsustainable growing of aggregate demand in the economy, putting pressure on resources
What are the triggers for demand pull inflation?
*A depreciation in the exchange rate, which causes imports to become more expensive, whilst exports become cheaper. This causes AD to rise.
*Fiscal stimulus in the form of lower taxes or more government spending. This means consumers have more disposable income, so consumer spending increases.
*Lower interest rates make saving less attractive and borrowing more attractive, so consumer spending increases.
*High growth in UK export markets means UK exports increase and AD increases.
What is Cost push inflation?
Inflation that occurs when firms face rising costs. (supply side)
When does cost push inflation occur?
*Raw materials become more expensive - oil prices rising
*Labour becomes more expensive - trade unions
*Expectations of inflation – if consumers expect prices to rise, they may ask for higher wages to make up for this
*Indirect taxes could increase the cost of goods if producers choose to pass the costs onto the consumer.
*Depreciation in the exchange rate, which causes imports to become more expensive, which pushes up the price of raw materials.
*Monopolies, using their dominant market position to exploit consumers with high prices.
Explain how the growth of money supply can lead to inflation
Extreme increases in the money supply usually cause hyperinflation, when the rate of inflation is incredibly high and uncontrollable.
It is only inflationary if the money supply increases at a faster rate than real output.
What are the effects of inflation on consumers?
- Purchasing power decreases
- Those on low/fixed incomes are hit hardest
- Loan repayments become less burdensome
What are the effects of inflation on the government?
Increased value of state pension and welfare payments.
What are the effects of inflation on firms?
1) Low interest rates, borrowing more attractive than saving. With high inflation, interest rates higher, so cost of investing will be higher and firms are less likely to invest.
2) Workers might demand higher wages, which could increase the costs of production for firms. Firms may be less price competitive on a global scale if inflation is high.
3) Unpredictable inflation will reduce business confidence, since they are not aware of what their costs will be. This could mean there is less investment.
What are the effects of inflation on workers?
Real incomes fall with inflation, so workers will have less disposable income. If firms face higher costs, there could be more redundancies when firms try and cut their costs.
What are the measures of unemployment?
1) The Claimant Count
2) The international labour org and the UL labour force survey
What is the Claimant Count?
The number of people claiming unemployment-related benefits, such as the Job Seekers Allowance.
What are some limitations with the claimant count
◦Not every unemployed person is eligible for, or bothers claiming JSA.
◦Those with partners on high incomes will not be eligible for the benefit, even if they are unemployed.
◦Although there may be instances of people claiming the benefit whilst they are employed, the method generally underestimated the level of unemployment.
What is the International Labour Organisation (ILO)?
An organization that collects data on unemployment through surveys.
It directly asks people if they meet the following criteria:
*Been out of work for 4 weeks
*Able and willing to start working within 2 weeks
*Workers should be available for 1 hour per week. Part time unemployment is included.
Evaluate the UK Labour Force Survey
Since the part time unemployed are less likely to claim unemployment benefit, this method gives a higher unemployment figure than the Claimant Count.
What does underemployment refer to?
Workers who have jobs but their labor is not used to its full productive potential.
Those who are in part-time work but are looking for full-time jobs are underemployed
What does unemployment mean?
those able and willing to work but are not employed. They are actively seeking work and usually looking to start within the next two weeks
What is the significance of change in the rates of and the effects of employment and unemployment on CONSUMERS?
If consumers are unemployed, they have less disposable income and their standard of living may fall as a result. There are also psychological consequences of losing a job, which could affect the mental health of workers.
What is the significance of change in the rates of and the effects of employment and unemployment on FIRMS?
1) With a higher rate of unemployment, firms have a larger supply of labour to employ from. This causes wages to fall, which would help firms reduce their costs.
2) With higher rates of unemployment, since consumers have less disposable income, consumer spending falls so firms may lose profits.
What is the significance of change in the rates of and the effects of employment and unemployment on WORKERS?
With unemployment, there is a waste of workers’ resources. They could also lose their existing skills if they are not fully utilized. Those in jobs are likely to see a fall in their wages as supply of labour increases.
What is the significance of change in the rates of and the effects of employment and unemployment on the GOVERNMENT?
If the unemployment rate increases, the government may have to spend more on JSA, which incurs an opportunity cost because the money could have been invested elsewhere. The government would also receive less revenue from income tax, and from indirect taxes on expenditure, since the unemployed have less disposable income to spend.
What is the significance of change in the rates of and the effects of employment and unemployment on the SOCIETY?
There is an opportunity cost to society, since workers could have produced goods and services if they were employed.
There could be negative externalities in the form of crime and vandalism, if the unemployment rate increases.
What’s the significance of changes in the rates of and the effects of inactivity
If the number of the economically inactive increases, the size of the labour force may decrease, which means the productive potential of the economy could fall.
What is structural unemployment?
Long-term unemployment caused by a decline in demand for specific industries.
What is frictional unemployment?
The temporary unemployment that occurs between jobs.
What is seasonal unemployment?
Unemployment that occurs at certain times of the year, usually around summer and winter.
What causes cyclical unemployment?
Unemployment caused by a lack of demand for goods and services during economic decline.
What is real wage inflexibility
*Wages above the market equilibrium may cause unemployment.
*Classical economists would argue that by letting wages be flexible, by removing trade union power and removing the NMW, wages could fall and unemployment would fall to 0.
*However, cutting wages during times of weak consumer spending would cause further falls in consumer spending, and there would be even lower economic growth.
What is the significance of migration for employment?
- Increases labor supply
- Can bring high-quality skills leading to more productivity and better skilled labour force, increasing global competitiveness
- May affect wages of the lowest paid
What is the general impact of migration on the supply of labor?
Increases with more migration
Migrants are usually of working age and many are looking for a job.
How do migrants contribute to the domestic workforce?
They bring high quality skills, increasing productivity and the skillset of the labor market
This could enhance global competitiveness.
What effect does migrant labor have on wages in the domestic labor market?
It tends to bring down wages for the lowest paid
The impact is small and primarily affects those from economies with lower average wages.
What is the balance of payments?
A record of all financial transactions between a country and other countries
It includes expenditures on imports and earnings from exports.
What are exports in the context of the balance of payments?
Goods and services sold to foreign countries, positive in the balance of payments. This is because they are an inflow of money
They represent an inflow of money.
What are imports in the context of the balance of payments?
Goods and services bought from foreign countries, negative in the balance of payments. They are an outflow of money.
They represent an outflow of money.
What are the three components of the balance of payments?
- The current account
- The capital account
- The official financing account
What does a current account surplus indicate?
A net inflow of money into the circular flow of income
The UK has a surplus with services but a deficit with goods.
What does a current account deficit mean for the UK?
The UK spends more on imports than it earns from exports
A long-standing large deficit could lead to financial difficulties.
What are the UK government’s macroeconomic objectives?
- Full employment
- Low, stable inflation
- A sustainable current account
- Sustainable economic growth
What happens to the current account deficit during economic decline?
It falls due to decreased consumer spending
This is typical during recessions.
What is the effect of economic growth on the current account deficit?
Larger deficit due to higher consumer spending
Consumers can afford to consume more.
What is the theoretical expectation regarding trade balances among all countries?
The sum should be zero
What one country exports will be imported by another.
How can economic downturns in the UK’s main export market affect it?
Demand for UK goods and services will fall
Consumers in the EU may be less able to afford imports.
What does international trade lead to among countries?
Interdependence
Economic conditions in one country affect another due to changes in exports or imports.
