Uk Economic Activity

Question 1

Describe one way of calculating the unemployment rate in the UK

Answer 1

The claimant count which is published every month and counts the number of people claiming unemployment benefits such as job seekers allowance.

The labour force survey which interviews a sample of around 90,000 people each month and counts as unemployed those who were unavailable to start work within the next two weeks, and had actively seeked work within the last four weeks or had found a job and were waiting to start.

Question 2

Describe & Explain possible effects of high levels of unemployment on UK firms.

Answer 2

Negative - may cause a fall in demand for products leading to a fall in sales and profits

Negative - Knock on effect on supplies as they use businesses and downward spiral continues.

Positive - More jobs are available as there is a bigger pool of labour

Positive - There is less pressure on firms as they do not have to pay out as many wages.

Question 3

Describe & explain possible effects of unemployment on the unemployed individual

Answer 3

Reduced efficiency as the unemployed worker loses skills, fitness and motivation.

Reduced status which is a bad thing because it could lead to social exclusion from friends

Increased health problems both physical and mental because of factors such as stress from being unemployed and reduced quality of diet.

Question 4

Describe & explain possible effects of unemployment on the government

Answer 4

Increased burden on taxpayers as they need to fund training and benefits.

Increased crime because people are not earning money through legal means.

Reduced taxation revenue for the government because people are not earning as much to be taxed on.

Question 5

1. Describe and explain ways in which fiscal policies could be used to decrease unemployment

Answer 5

Reducing taxes because when taxes on consumers are reduced this should increase disposable income which increases demand for products, helping growth and leading to more workers being employed.

When taxes on businesses are reduced this allows them to keep more of their profits which they can invest into expanding and possibly creating new jobs

Question 6

2. Describe and explain ways in which fiscal policies could be used to decrease unemployment

Answer 6

Increasing government spending because when government spending is increased this should create jobs in the public sector e.g. more teachers, police officers etc. and give existing government workers more income. This increases demand for products, helping growth and leading to more workers being employed

Question 7

Describe and explain ways in which monetary policies could be used to reduce unemployment

Answer 7

Reducing interest rates as when interest rates are lowered this makes it cheaper to borrow money, which encourages spending by consumers. This increases demand for products, creates growth and jobs and therefore reduces unemployment.

Reducing interest rates also makes it cheaper for businesses to borrow money which they can use to grow, for example, by opening more shops. This requires more workers which will reduce unemployment.

Question 8

Describe & Explain ways in which supply side policies could be used to reduce unemployment.

Answer 8

Providing education and training because this gives workers new skills to find jobs and help occupational immobility

Employment subsidies because this gives businesses incentives to employ long term unemployed.

Stricter benefit systems because this makes it less worthwhile to claim benefits rather than getting a job.

Improve geographical immobility as this encourages businesses to set up in deprived areas or areas of high unemployment,

Question 9

Describe ways a government can improve the geographical mobility of labour.

Answer 9

Providing affordable housing

Financial help with relocation costs.

Ensuring suitable education places are available

Improving transport infrastructure to allow travelling

Ensuring adequate provision of social services e.g. doctors.

Question 10

1. Describe types of unemployment

Answer 10

Cyclical unemployment is associated with a recession in the economy.

Overall demand has fallen for many products and so firms pay off staff and there are not enough jobs for those seeking them.

Question 11

2. Describe types of unemployment

Answer 11

Structural unemployment is caused by a mismatch between the skills that workers in the economy can offer and the skills demanded of workers by employers.

Question 12

3. Describe types of unemployment

Answer 12

Frictional unemployment occurs when people are switching between jobs, either because they have been made redundant or are seeking new employment. It can also be linked to lack of knowledge about job vacancies.

Question 13

4. Describe types of unemployment

Answer 13

Seasonal unemployment occurs in industries such as agriculture, tourism and building where the number of people employed depends on the time of year.

Question 14

Describe the method of calculating the CPI

Answer 14

The prices of a basket of goods (usually around 700 items) are gathered every month.

Changes in price compared to the same month the previous year are used.

CPI does not include mortgage payments or other housing costs such as repairs, insurance and council tax.

CPI measure is much closer to the method used by the rest of the EU and allows easier compensation

The items in this basket are changed every year to reflect current trends.

The items in the basket are given a weight based on importance

Question 15

Describe deflation

Answer 15

Deflation is a fall in the general level of prices.

Question 16

1. Describe types and causes of inflation

Answer 16

Cost push inflation occurs when the costs of making a product increase at a fast rate.

Costs include wages, raw materials, VAT and energy.

If specifically linked to increases in staff costs it is known as wage push inflation.

In order to maintain profits businesses need to increase prices to cover costs.

Question 17

2. Describe types and causes of inflation

Answer 17

Demand pull inflation occurs when the economy is growing at a fast rate.

Aggregate demand from all consumers is greater than aggregate supply for all businesses.

Creates shortages and businesses have to increase prices in response to high demand.

Question 18

3. Describe types and causes of inflation

Answer 18

Monetary inflation occurs when the amount of money in an economy is increasing at a faster rate than output (what businesses produce).

Caused by government printing money to fund government spending.

Question 19

Describe & explain how monetary policies could be used to reduce inflation

Answer 19

Increasing interest rates as when interest rates are increased this makes it more expensive to borrow money, which discourages spending by consumers. This reduced demand for product should reduce demand pull inflation.

When interest rates are raised it also makes it more expensive for businesses to borrow money so they are less likely to expand and this reduces demand and prices.

Higher mortgage interest payments will reduce homeowner’s disposable income and their ability to spend which also reduces demand pull inflation.

Question 20

Describe & explain how fiscal policies can be used to reduce inflation

Answer 20

Increasing taxes as when taxes on consumers are increased (e.g. income tax) this reduces disposable income, which decreases the demand for products which reduces demand pull inflation.

Increasing taxes as when spending is decreased this should lower demand for products and in turn inflation.

Question 21

Describe & explain how supply side policies can be used to reduce inflation

Answer 21

Any measure aimed at improving the production capacity of the economy.

Improvements in education and training of the population allows for greater output.

Reduce powers of trade unions to ensure less strikes or disruption to production.

Make planning permissions easier to obtain to allow businesses to increase production.

Question 22

Describe GDP and economic growth

Answer 22

Economic growth occurs when a country is experiencing an increase in output.

The value of this output is called GDP and this indicates the size of a country’s economy.

GDP figures are announced every 3 months/quarter

It is usually given as a percentage and is the percentage change from the previous three months.

GDP should be adjusted for inflation and the real GDP is more important than nominal GDP.

A contraction occurs when there is a decrease in GDP rate in one quarter while a recession occurs when there’s a decrease in two consecutive quarters.

Question 23

Describe how GDP is measured (Diagram)

Answer 23

No
Ni
Ne-CS
BI
GS
+
(X-M)

Question 24

Describe how GDP is measured

Answer 24

National output adds up all the values of finished goods and services produced by businesses produced by all sectors of the economy; agriculture, energy, construction, the service sector and government.

National income adds up all the incomes received from production - wages, rent, dividends, profits.

National Expenditure adds up all spending on finished goods and services purchased by consumers or government, investment in machinery and buildings and also includes the value of exports minus imports.

Question 25

Describe the benefits of economic growth

Answer 25

Increases employment. People have more income and receiving less benefits. More tax revenue for government.

Question 26

Describe the costs of economic growth

Answer 26

Not all the increased spending/income is distributed equally amongst people. Pollution and environmental damage may be caused. GDP calculations include spending on weapons and prisons which may not be desirable for society. Growth could be caused by overspending and create large and unaffordable debt for consumers. Increase in demand pull inflation due to greater spending.

Question 27

Describe & explain monetary policies to create economic growth.

Answer 27

Lowering interest rates can encourage more consumer spending as lower interest rates makes it cheaper to borrow money, reduce mortgage repayments and reduce the incentive to save. This spending creates growth Lowering interest rates encourages business investment as lower interest rates makes it cheaper to borrow money so businesses are more likely to borrow and grow their businesses which may create jobs. Lowering interest rates can reduce the exchange rate value of the pound which increases exports as they become cheaper and decreases imports as they become more expensive.

Question 28

Describe & explain how fiscal policies can be used to create economic growth.

Answer 28

Reducing taxes for individuals can increase consumer spending as people will keep more of their income and increasing disposable income which they will spend in businesses. Reducing taxes for businesses can increase business investment as it allows them to keep more of their profits which they may use to grow their business which will require more staff. Increasing government spending as an increase in public sector wages can improve consumer spending.

Question 29

Describe & explain how supply side policies can be used to create economic growth.

Answer 29

Providing grants and subsidies to allow businesses to invest in equipment to speed up production. Having less government control and regulations to allow for businesses to compete more. Increase the working population by allowing more immigration and higher birth date.

Question 30

Describe the stages of the business/trade cycle

Answer 30

Boom - GDP is increasing. Income, employment and tax revenues are high and inflation may start to increase. Recession- GDP has fallen for two consecutive quarters. Income, employment and tax revenues fall, benefit payments increase and inflation likely to fall. Slump - GDP falls for longer than 2 consecutive quarters. Issues similar to recession but more severe. Recovery- Follows a recession or slump and GDP begins to increase. Income, employment and tax revenues rise, benefits payments become lower

Question 31

Types of government spending

Answer 31

Capital spending - spending on building of hospitals, schools and roads. Current spending - the running costs of government mainly wages/salaries of public sector workers. Transfer payments - a payment to individuals or firms for which there is nothing given in return e.g. unemployment benefits, child benefits and pensions.

Question 32

Describe a deficit or surplus

Answer 32

Deficit - when government spends more than its income from tax it is called a budget deficit. When government brings in more tax than it spends it is called a budget surplus.

Question 33

Describe National Debt

Answer 33

The total amount that the public sector owes to those who have loaned it money. When there is a budget deficit then national debt will increase. When there is a budget surplus there will be a reduction in national debt

Question 34

1. Explain ways in which fiscal policy measures can be used to reduce the level of income inequality in the UK

Answer 34

Increasing rates of income tax because as it is a progressive tax high earners will pay more and revenue can be redistributed by government. Reduce VAT because as it is a regressive tax then lower earners could pay less of their income. Increase rates of inheritance or capital gains tax because this is usually paid by the richest in society which can then be redistributed.

Question 35

2. Explain ways in which fiscal policy measures can be used to reduce the level of income inequality in the UK

Answer 35

Increase spending on infrastructure because this will create more jobs for people. Increase benefit payments because this will increase the income of those who are unemployed. Increase the pay of public sector workers particularly the lower paid

Question 36

Define PSNCR

Answer 36

PSNCR stands for Public Sector Net Cash Requirement. When government spending is greater than taxation then money must be borrowed. The borrowing needed by the government is the PSNCR. It is measured in £ billion and as a percentage of GDP

Question 37

Distinguish between progressive and regressive taxation

Answer 37

A progressive tax takes into account the ability of people to pay and affects those of higher income as they pay more whereas regressive taxes take no account of the ability of people to pay. A progressive tax will take a larger percentage/proportion of income as income rises whereas regressive taxes are normally at a flat rate for everyone which means that it hits lower income individuals harder as they pay proportionately more. Examples of progressive taxes include income and council tax and examples of regressive taxes are VAT and duties on alcohol and tobacco

Question 38

Describe Possible reasons for a shift from a direct to an indirect tax.

Answer 38

May encourage more people to seek a job as keeping more of their income will reduce unemployment. Will increase taxes collected from all age ranges, not just those of working age who pay income tax. Reduced demand for harmful goods as they become more expensive and help reduce cost of health services. Less direct tax gives individuals more choice allowing them to make their own decisions on which taxes to pay/what to purchase. Cheaper to collect as indirect taxes are collected by businesses on behalf of the government.

Question 39

Describe and Explain using a circular flow diagram what is meant by a multiplier effect.

Answer 39

The multiplier effect describes the situation where change in an injection or leakage in the circular flow causes a greater overall change in the value of the economy. If an injection increases or a leakage decreases it will be a positive multiplier. If a leakage increases or an injection decreases it will be a negative multiplier effect. The size of the multiplier depends on the % of income that is spent and the % of income that is saved. Marginal Propensity to consume (MPC) measures how much extra income is spent. Marginal Propensity to save (MPS) measures how much of extra income is saved. For example the government increases spending and gives the doctors a £1000 pay rise. If every doctor saves 10% of the extra income the MPS, is 0.1, they will save £100 and the MPC is 0.9 they spend £900.

Question 40

Describe the uses of a country’s National Income statistics.

Answer 40

1. To measure economic growth and changes in standards of living. 2. Aid of government decision making - help assess the state of the economy. 3. Comparison of economic growth and standard of living between countries. 4. Identify countries that are in need of aid - those with low NI. 5. Calculate contributions that countries should make to international organisations such as the world bank and EU.

Question 41

Describe limitations of using national income statistics to compare economies.

Answer 41

1. Methods of calculating NI may differ over time or between countries. 2. Standard of Living is measured by income per head so population figures need to be correct as well. 3. Figures do not show differences in working conditions, leisure time or hours worked in different countries. 4. No differences in income distribution or equality are shown in GDP figure. 5. Social Costs such as Pollution are not considered. 6. Spending on defence or prisons may increase national income but does little for standard of living of people.