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topic 3 economic performance Flashcards

1
Q

when does an output gap occur

A

when there is a difference between the actual level of output and the potential level of output

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2
Q

a negative output gap occurs when

A

the actual level of output is less than the potential level of output
-this puts a downward pressure on inflation
-it usually means there is the unemployment of resources in an economy and spare capacity

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3
Q

a positive output gap occurs when

A

the actual level of output is less than the potential level of output
-could be due to resources being used beyond normal capacity
-it puts upward pressure on inflation

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4
Q

what do classical economics happen in the long run

A

the market clears

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5
Q

the business cycle refers to

A

the stage of economic growth the economy is in

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6
Q

characteristics of a boom

A

-high rates of economic growth
-near full capacity or positive output gaps
-(near) full employment
-demand pull inflation
-consumers and firms have a lot of confidence which leads to high rates of investment
-government budgets improve due to higher tax revenue and less spending on welfare payments

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7
Q

characteristics of a recession

A

-negative economic growth
-lots of spare capacity and negative output gaps
-demand deficient unemployment
-low inflation rates
-government budgets worsen due to more spending on welfare payments and lower tax revenues
-less confidence amongst consumers and firms which leads to less spending and investment

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8
Q

costs to consumers of economic growth

A

-does not affect everyone equally . those w lower and fixed incomes might feel worse off w high inflation and inequality may increase
-likely to be higher demand pull inflation due to higher level of consumer spending
-could face more shoe leather costs which means spending more time and effort finding the best deal while prices are rising
-benefits of consumption may not last after the first few units due to the law of diminishing returns

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9
Q

benefits to consumers of economic growth

A

-average consumer income increases as more people are employed and wags increase
-consumers feel confident in the economy which increases consumption and higher living standard

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10
Q

costs to firms of economic growth

A

-firms could face more menu costs due to higher inflation as firms need to keep changing their prices to meet inflation

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11
Q

benefits to firms of economic growth

A

-might increase profits which might in turn increase investment. this is also driven by high levels of business confidence
-higher levels of investment could develop new technologies to improve productivity and lower average costs in the long run
-as firms grow they can take advantage of the benefits of the economies of scale
-if there is economic growth in export markets firms might face more competition making them more productive and efficent but may also give more sales opportunites

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12
Q

costs to government of economic growth

A

may need to increase spending on healthcare if consumption of demerit goods is higher

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13
Q

benefit to government of economic growth

A

-gov budget might improve since fewer people require welfare payments and more people will be paying tax

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14
Q

costs to current and future living standards of economic growth

A

-higher levels of growthh could lead to damage to the environment in the long run from negative externalities from the consumption and production of some goods and services

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15
Q

benefits to current and future living standards of economic growth

A

-as consumer incomes increase people may show more concern for the environment
-higher average wages mean consumers can enjoy more goods and services of higher quality
-public services improve since gov have higher tax revenues this could increase life expectancy levels and education levels

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16
Q

causes of cyclical instability

A

-the sustainability of economic growth
-excessive growth in credit and levels of debt
-asset price bubbles
-destabilising speculation and animal spirits
-herding

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17
Q

the sustainability of economic growth causing cyclical instability

A

-growth is sustainable when the rate of economic growth can be maintained in the long run so future generations can enjoy the same rate of growth
-fast economic growth may mean that natural resources might deplete
-unsustainable growth occurs around booms and bust sections of the business cycle
-if growth is excessive there could be inflation in the average price level, wages and assets. there could be excessive credit which is unsustainable in the long run and the savings rate might be falling

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18
Q

excessive growth in credit and levels of debt causing cyclical instability

A

-growth financed by public debt might not be sustainable and may be difficult to pay it back.
-if sustainable the economys productivity capacity will increase so there is more room to grow

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19
Q

asset price bubbles causing cyclical instability

A
  • a market bubble occurs when the price of an asset is predicted to rise significantly. this causes it to be traded more and demand exceeds supply so the price rises beyond the intrinsic value. the bubble then bursts when the price steeply and suddenly falls to its ordianry level. this causes investors to try and sell their assets. it results in a loss of confidence and can lead to economic decline
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20
Q

destablishing speculation and animal spirits causing cyclical instability

A

-destablishing speculation ;eads to changes in the price level due to speculation. this can affect the actual price of assets in an economy.
-animal spirits describe instincts and emotions of human behaviour which drives the level of confidence in an economy.
-if firms expect a high return and so invest more (vise versa). expectations about society and politics can affect investment

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21
Q

herding causing cyclical instability

A

-herding is the act of reacting to behaviour of other economic agents rather than the market.this might be beacuse some investors think other economic agents are better informed about the market so they follow their actions. this can cause instability in the market

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22
Q

two main measures of unemployment in the uk

A

-the claimant court
-the international labour organisation (ILO) and the uk force survey (LFS)

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23
Q

voluntary employment

A

occurs when someone chooses not to work at the current wage rate
-this can be encouraged from welfare payments or high income tax

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24
Q

involuntary unemployment

A

when someone is willing and able to work at the current wage rate but they cannot find work

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25
effects on consumers as a result of changes in unemployment
-less disposable income if unemployed and standard of living may fall -psycological consequences
26
effects on firms as a result of changes in unemployment
-larger supply of labour to employ from. causing wages to fall, reducing costs -consumer spending falls so may lose profits. but if sells inferior products might see a rise in sales -may cost firms to retain workers especially out of work for a while
27
effects on workers as a result of changes in employment and unemployment
-they could lose their existing skills if they are not fully utilised
28
effects on government as a result of changes in employment and unemployment
-spend more on JSA which incurs opportunity cost -less revenue from tax
29
effects on society as a result of changes in employment and unemployment
-opportunity cost to society since workers could have produced goods and services if they were employed -could be negative externalities in the form of crime and vandalism
30
the causes of unemployment
-structural unemployment -frictional unemployment -seasonal unemployment -cyclical unemployment (demand deficiency) -real wage unemployment
31
structural unemployment
occurs with a long term decline in demand for the goods and services in an industry which costs jobs
32
frictional unemployment
this is the time between leaving a job and looking for another job
33
cyclical unemployment
caused by a lack of demand for goods and services and it usually occurs during periods of economic decline or recessions. it is linked to negative output gaps. firms are forced to close or make workers redundant because of falling profits
34
real wage unemployment
wages above market equilibrium may cause unemployment because the supply of labour exceeds demand
35
how changes in the rest of the world affect employment in the uk
-migrants -globalisation
36
the natural rate of unemployment
the level of unemployment at which inflation is stable meaning there is no downward or upward pressure on prices. it is the rate consistent with stable inflation and includes frictional and structural unemployment (non accelerating inflation rate of unemployment)
37
inflation
the sustained rise in the general price level over time
38
deflation
the sustained decrease in the general price level of goods and services in an economy. there is a negative inflation rate
39
disinflation
the falling rate of inflation. when the average price level is still rising but at a slower extent
40
causes of inflation
-demand pull -cost push
41
demand pull
when aggregate demand is growing unsustainably so there is pressure on resources. producers increase their prices and earn more profits, usually occurs when resources are fully employed
42
main triggers for demand pull inflation
-depriciation in the exchange rate, imports become more expensive and exports are cheaper so ad rises -fiscal stimulus in the form of lower taxes or government spending so consumers have more disposable income -lower interest rates -high growth in uk export market so exports increase and ad
43
cost push
occurs when firms face rising costs
44
cost push occurs when
-changes in world commodity prices can affect domestic inflation increasing the cost of production -labour becomes more expensive -expectations of inflation -indirect tax -depreciation in the exchange rate which causes imports to be more expensive and increases price of raw materials -monopolies using their dominant market position to exploit consumers w high prices
45
effects of inflation on consumers
-purchasing power decreases -value of repayments on loans will be lower
46
effects of inflation on firms
high interest rates are likely to be higher so less likely to invest -unpredictable inflation will reduce business confidence since they are not aware of what their costs will be so there may be less investment -workers may demand higher wages increasing costs -firms may be less price competitive on a global scale
47
effects of inflation on government
-have to increase state pension and welfare payments
48
effects of inflation on workers
-real incomes fall w inflation so workers will have less disposable income -firms face higher costs so there could be more redundancies when firms try and cut their costs
49
effects of deflation
-causes the real value of money to increase -discourages spending because it makes goods and services cheaper in the future -can result in economic decline and increase rates of unemployment -can worsen the effects of economic stagnation -real value of debt is higher -less disposable income and level of spending fall
50
the quantity theory of money
states that there is inflation if the money supply increases at a faster rate than national income
51
fishers equation of exchange
MV=PQ M is the supply of money V is the velocity of circulation P is the price level Q is the quantity of real goods sold
52
what can replace Q in the fishers equation of exchange and why is it not as useful
T which represents transcations measuring trascations is difficult
53
what is assumed to be kept constant in the fishers equation of exchange
-velocity
54
what is the balance of payments
a record of all financial transactions made between consumers, firms and the government from one country with other countries
55
the balance of payments is made of
the current account the capital account the official financing account
56
capital transfers involves
involves transfers of the ownership of fixed assets
57
financial account involves
investment
58
current account involves
all economic transactions between countries
59
what is used to cover any discrepancies so the balance of payments are balanced
a balancing item
60
a current account surplus
there is a net inflow of money into the circular flow of income (the value of exports are greater than imports)
61
a current account deficit
net outflow of money into the circular flow of income (the value of imports are greater than exports)
62
causes of balance of payments disequilibrium
-appreciation of the currency -economic growth -more competitive -deindustrialisation -membership of trade union -attractiveness to foreign investors
63
when there is a current account surplus what is the capital and financial account
deficit
64
fdi
the flow of capital from one capital to another country in order to gain lasting interest in an enterprise in the foreign country
65
portfolio investments
passive investments where control over the company is not gained so the aim is to make financial gain
66
policies that may be used to correct a balance of payments deficit or surplus
-fiscal policy -expenditure reducing and expenditure switching -supply side polices
67
what does the long run philips curve suggest
that there is no trade off between inflation and unemployment in the long run. it is based on the idea of the natural rate of unemployment

Economics (6 decks)

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