Uk economy (paper 2) Flashcards
what is the distinction between real and nominal?
Real: adjusted for inflation
Nominal: not adjusted for inflation
What does GDP mean and how does GDP measure economic growth?
Gross Domestic Product. Measures the value of goods/services produced in the economy in one year. This measures the output of the economy. By comparing GDP figures between years, you can see if an economy has grown or not.
what are the limitations of using GDP to measure economic growth?
- Does not include the differences in hours worked. GDP does not capture how long it takes a worker to create their income. It may take less time to create the same income in one country in comparison to the other. Thus, you’d have to work longer hours to achieve the same amount of income.
- GDP doesn’t provide any information on the quality of goods/services over time. If quality worsens but prices are lower, then according to GDP quality of living must be higher. Yet we may take this decrease in quality to actually reduce our quality of living.
What is GNI?
Gross National Income. GNI measures GDP + income created from abroad. Thus, GNI considers times where people will work abroad yet send their profits back home.
What is purchasing power parities? (PPP)
Calculates the relative purchasing power of a currency. It is about how much goods the unit of your currency can buy. The purchasing power of a currency can be eroded over time due to inflation. PPP gives a more accurate representation of living standards amongst countries, as you can compare how much goods 1 unit of your currency can buy in comparison to how many goods another unit of currency could buy.
For example, £1 in the Uk could buy you some milk and bread. Whereas the equivalent of £1 in the USA could only buy you milk. The cost of living in the USA is higher, and therefore the pound has more purchasing power.
What is the relationship between income and happiness according to a neo-classical economist?
Neo-classical economists would assume the higher your income the higher your happiness levels are – as your money can create more utility for yourself.
For people on low incomes, this neo-classical theory is relatively strong. Low-income earners have a higher propensity to consume. Therefore, as their income rises, they will be able to afford more (or better quality) goods like food, shelter, healthcare, etc.
What are the limitations of this theory?
other factors to do with your job can affect your happiness – other than the income you gain. For example, you maybe really passionate about your area of work and find it mentally fulfilling to complete, despite the low wage you are on – like nurses. Whereas boring, repetitive jobs that pay a lot may give you little satisfaction despite the money. Therefore some people find utility in other concepts that aren’t just income.
The growth of income and happiness are not parallel to one another. Someone with £1 million is not 1 million times happier than someone with £1. After a certain level of income is reached, there can be a rapid diminishing marginal utility gained from spending – doing little to increase happiness.
What is inflation?
the sustained increase in the price level of goods/services in the economy
What is deflation?
The sustained fall in the price level. Inflation must be below 0%
What is disinflation?
Occurs when the price level is still rising yet at a slower rate. It is a fall in the rate of inflation. Inflation is still increasing just at a decreasing rate.
How does the Consumer Price Index (CPI) check the rate of inflation?
The CPI is in an index that calculates the changing price in a basket of goods that the average household will buy. Each year there is a survey asked to see what things consumers purchase the most. Each year items are either removed or added to this basket of goods. Goods in this basket are weighed based on the proportion of income it takes up for each household. Once the items are decided for the year, their price is taken once a month from 150 different locations in the UK.
What is the evaluation behind the effectiveness of the CPI?
The goods within the basket are decided on an annual basis. This does not cater for how consumer spending may change drastically within that year. It also does not take account for short lived trends.
Lack of individual relevance. The basket represents the average households spending. Yet if your spending habits do not reflect the average household – say if you only eat gluten free products – then this basket does not represent how inflation has affected you.
Its form of data collection (a survey) is flawed. There is little incentive to fill in the form to its most accurate ability and they only ask 1000, a very small sample in comparison to the rest of the UKs population.
What is the retail price index? (RPI)
The Retail Price Index (RPI) is calculated in the same way CPI is, yet it takes a larger list of things into its calculation. Goods included in the RPI (yet not the CPI) include council tax, mortgage interest rates, etc.
RPI is a more accurate representation of inflation as it does take more things into account. It is also influenced by interest rates (unlike the CPI) due to the mortgage element of the index.
What is cost push inflation? (Draw the diagram)
Occurs when there are higher prices due to higher costs of the factors of production – like raw materials. Cost-push inflation can lead to slower economic growth and lower living standards.
The graph : (short run AS curve should move left) -> higher price level on the x axis and lower quantity produce on the y axis should be labelled
What are the causes of cost-push inflation?
external shocks - for example the Russian oil after the Ukraine war
natural disaster - great depletion of natural resources
Higher direct taxes - like corporation tax which will add to the cost of production for a firm
new legislation - like the minimum wage or pollution permits which will raise the cost of production for a firm
Rising import prices used by British producers for production
What is demand-pull inflation? (include the diagram)
Demand-pull inflation is caused by excess demand in the economy. If any of the components in AD increase (C + I + G + X – M) then AD will shift right. When AD rises faster than AS, firms will increase their prices in order to ration their goods.
Demand-pull inflation usually occurs when the economy is close to full capacity. This is because too much money is chasing too little goods available.
The graph: Demand curve moves right. Higher price level should be on the labelled on the x axis.
What are the causes of demand-pull inflation?
-lower interest rates. A cut in interest rates cause a rise in consumer spending as there is less reward for saving. It is also at its most economically viable time to take out a loan as you have to pay less in interest.
-positive wealth effect or higher wages . If people feel more stable in their wealth, like from house prices rising (their main form of asset) then there will be a boost in consumer spending as their animal spirits feel stable in larger purchases.
- Fall in the value of the pound. If the value of the pound falls, imports get more expense and exports cheaper – therefore domestic demand in the country will rise (for example locally produced things) and demand from abroad will also rise for the goods in the Uk as these exports are cheaper for them also.
- animal spirits / speculation - more confidence in the economy will lead to greater investment
How does a growth of the money supply cause inflation?
If the Bank of England lowers the base rate of interest, then more firms will begin to borrow larger sums of money from the bank. This will result in an increase in consumption (Like taking loans out for a new car) and investment.
The Bank of England can also increase the money supply through quantitive easing. This is where the bank purchases bonds to increase the amount of money in the market. The growth of the money supply is likely to lead to demand-pull inflation.
what are the effects of inflation on economic agents?
Firms – Less likely to invest, as rapid changes in the price level creates uncertainty and harms animal spirits.
^If cost-push inflation, also raises the cost of production for them. If the goods that they sell have an elastic PED this may harm their profits as they’ll want to absorb as much of the higher cost as possible. This may push some firms out of business.
Consumers – Decrease in their purchasing power and therefore standards of living may fall as they can no longer buy as much as they once could with the same amount of money. There will also be a fall in real income for those on fixed incomes or pensions.
Government – By the Government tackling inflation it may have some trade-offs that go against other macro-economic initiatives. For example, by introducing measures to get rid of excess demand in the economy this may create unemployment and harm economic growth.
what does it mean to be unemployed?
Someone is considered to be unemployed if they are not working but seeking work. They are a part of the labour force.
What does it mean to be economically inactive?
you are not employed and you are not seeking employment either. you are not apart of the labour force. the more economically inactive people there in a country the worse your dependency ratio is.
What is the claimant count and how does it measure unemployment?
The claimant count. This counts the number of people who are claiming job seekers allowance in the Uk. Anyone unemployed can seek job seekers allowance – it is not means tested. If you are receiving this benefit you must meet up once a week with a “work coach” who helps find you a job.
What is the evaluation to using the claimant count to measure unemployment?
Not everyone unemployed may feel like they need to claim benefits in order to survive. If they have recently been made unemployed yet their spouse is on a stable income, they may not consider claiming this benefit – and therefore the claimant count is unrepresentative of how many people are unemployed.
There is also some stigma around claiming the claimant count- some people are too proud to admit that they need financial help and would just rather find a job quicker.
What is the labour force survey and how does it measure unemployment?
The labour force survey. An extensive survey is sent to 60,000 every quarter of the year, and the respondent self-determines if they are unemployed given the surveys criteria. This survey is useful as there is an international survey as well, so good comparisons can be drawn.
What is the evaluation to using the labour force survey to measure unemployment?
It relies on the respondent to successfully determine what category they sit in. They survey is done over the phone, however like using any survey, it struggles to get responses from all that were called.
The time of day they call will also effect the verdict. if they call during the day, it is likely the unemployed are more likely to pick up than the employed.
What is the distinction between unemployed and under-employed?
Unemployed – people not working yet seeking work
Under-employed – People who are working yet not to their full capability. This can occur for two reasons: 1) not working as many hours as they would like 2) Not working to their full skill-set potential. For example, someone with a degree working in a supermarket.
What is the problem with under-employment?
The economy is not operating to its full capability. The economy is not working allocatively efficiently - resources have been inefficiently allocated. There is a negative output gap present in the economy.
^Equally, under-employed people will be placed in the “employed” part of the labour survey.
What is structural unemployment?
Structural unemployment – unemployment caused by the economy adjusting. It is where there is a mismatch between jobs and skills in the economy. For example, the secondary sector declining yet the tertiary sector growing – however there will be a lot of workers now trained in the secondary sector out of work.
Many western countries have relocated their production in cheaper countries for production like China. This has caused structural unemployment in their own economies.
Why may structural unemployment not necessarily be a bad thing?
structural unemployment may actually hint at a dynamic, responsive economy. structural unemployment may occur to ensure factors of production in the long run are being better allocated to where they’ll be best used most efficiently. The Government can also create supply side policies for these new emerging sectors by creating apprenticeships or funding re-training.
what is cyclical unemployment?
Cyclical unemployment (or demand deficient) - unemployment caused by a fall in AD in the economy. It is called “cyclical” as it is affected by the cyclical nature of the economies boom and recessions. This occurs because the demand for labour is a derived demand from the demand for goods / services. Therefore, as the demand for goods fall, so does the demand for labour.
What is frictional unemployment?
occurs when workers are between one job and the next job. This is usually short-term unemployment. This can occur for different reasons – like workers taking a break from work after they’ve just been made redundant, or voluntarily leaving their career to find a new one.
why may frictional unemployment not necessarily be a bad thing?
Frictional unemployment may actually boost productivity for workers. cyclical unemployment allows people to take a step back from work and focus on other important things, like family, taking time to rest, etc. If they are able to take a step back and comeback to their new position re-charged and ready, then the economy will be able to create better quality output than before.
^it also shows labour moving to where it can be best employed.
what is seasonal unemployment?
occurs when a certain season comes to an end and their labour is no longer needed until that season comeback again. For example, strawberry pickers in the summer or Santa clauses in the winter.
why may seasonal unemployment not necessarily be a bad thing?
Some seasonal workers are students looking to make some extra money. Therefore, when they stop working their seasonal post, they stop seeking work and fall back into the inactive population. Thus, any labour they did contribute during their time working is extra output for the economy that it wouldn’t had before.
What is real wage inflexibility / unemployment? (include diagram of the minimum wage)
Occurs when wages are set above equilibrium level, resulting in an excess supply of workers. This is usually caused by the minimum wage. The minimum wage raises cost of production for firms, and they may have to lay off previous workers in order to fund their current.
make sure I have done the diagram and explained it
How does immigration increase employment?
immigrants usually fill vacancies that residents cannot or will not fill themselves. For example, eastern European workers have made reputation for working manual labour jobs. equally, such immigrants will fill vacancies that they have the skill set to fill - it fixes the problem of a mix match between jobs and skills available in the economy.
A larger population results in more consumption in the economy, boosting AD.
How does immigration harm employment?
immigration may displace previous workers creating unemployment for local workers.
It is not a guarantee these immigrants may find work and may actually join the unemployed category instead. This may lead to them claiming benefits as a source of income instead if they struggle to compete for work, worsening the Uks dependency ratio.
what are the effects of unemployment on all economic actors?
Society: Increased anti-social behaviour. Vandalism. Theft.
Producers: will actually benefit the producers, as now they have a wider pool of workers to choose from, and can consequently hirer the best ones. They can also pay them less, as they’re easily replaceable by other people wanting the job.
^However may face loss of output and therefore loss of revenue.
Workers: loss of income for individuals. Increased stress levels trying to find a new job.
The Government: Increased spending on universal benefits like jobs seekers allowance, which may create a budget deficit. Less tax revenue (in form of income tax) from less people working. Will also have to create supply side schemes to hirer people themselves.
what is the balance of payments?
is a record of all the financial transactions between a country and the rest of the world. The balance of payments has three main accounts: the current account, the financial account and the capital account.
