Uk economy (paper 2) Flashcards

Question

What is the evaluation to using the labour force survey to measure unemployment?

Answer 1

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.

Answer 2

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.

Answer 3

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.

Answer 4

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.

Answer 5

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.

Answer 6

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.

Answer 7

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.

Answer 8

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.

Answer 9

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.

Answer 10

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.

Answer 11

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*

Answer 12

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.

Answer 13

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.

Answer 14

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.

Answer 15

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.

Answer 16

The current account makes up half of the balance of payments. It measures the net income an economy makes from abroad. The four components include: 1. goods -> physical goods like cars, meat, etc 2. services -> legal advice, financial advice, etc 3. primary income -> investment or wages gained abroad 4. secondary income (like foreign aid, money sent over from family) -> it is money you didn't necessarily have to work for

Answer 17

A deficit – when the value of outflow is greater than the value of inflow. The country is spending more than it is receiving from the rest of the world – for example, the Uk. A surplus – when the value of inflow is greater than the value of outflow. The country is earning more internationally than it is spending – for example, China.

Answer 18

The Uk Government has the macro-economic objective to get the current account balance as close to equilibrium as possible. However, most years they run a small deficit. Export led growth would help the current account grow closer to equilibrium. If the current account doesn't balance, then either the capital account or financial account will have to compensate for the deficit in the current account, as it must be paid in some way. As the balance of payments is like a massive balance sheet, it must balance.

Answer 19

a small deficit may actually hint at a growing economy. As income and wealth rises in an economy, the marginal propensity to import will also rise. Consumers will now start demanding a wider variety of goods / services, that can only be found abroad. Thus, a small deficit isn't always a bad thing, as it actually hints that standards of living in your economy are improving. Equally a small deficit can easily be compensated from the capital account or financial account, as the Uk typically performs very well here, making a surplus each year.

Answer 20

Actual growth – when there is an increase in GDP (the quantity of goods/services produced in the economy) Potential growth – the increase in the productive potential of an economy – demonstrated through the PPF moving outwards. It shows a growth in the level of capacity the economy could achieve if all factors of production were to be fully employed.

Answer 21

In the short run: an increase in AD in the economy. Any increase in a component of AD will create economic growth: AD = C + I + G + X - M Any increase in any of these components will lead to growth as more factors of production are now being employed than previously. In the long run: improvement in the quality or quantity of factors of production (land, labour, capital, enterprise) - thus an increase in aggregate supply. Determinants on long-run AS to include: Technological advances (Like machinery, internet, etc) Changes in relative productivity rates - if your economy becomes more productive, (either more allocatively or productively efficient) then more output is produced with the same amount of inputs as previously, and thus your economy has grown. supply-side policies: improvement of human capital through training schemes or education, improvement of healthcare etc. will reduce the amount of time spent off sick, etc.

Answer 22

the difference between the actual level of output and a countries potential level of output.

Answer 23

A positive output gap – is when real GDP is greater than the potential real GDP. This is unsustainable in the long run. This may occur because workers are willing to work overtime. A positive output gap creates more productive capacity in the short run. A negative output gap – is when real GDP is lower than the potential real GDP. There is spare capacity in the economy to produce more goods/services if there is a negative output gap.

Answer 24

refers to the change in GDP overtime. The real GDP fluctuates above and below the long-term growth trend.

Answer 25

A positive output gap is identified as the growth of GDP is above the trend. At the top of this curve is the “boom”. when the curve starts to fall from the peak, this represents a fall in GDP. A negative output gap is identified as the growth of real GDP is below the trend. At the bottom of the curve this represents a “recession”. Once the curve starts to go up again this represents a recovery period.

Answer 26

This flow of GDP can be moderated through government intervention, according to Keynesian economics. For example, increasing tax during a boom and then using this tax during a recession to build the economy back up and stimulate AD again.

Answer 27

Boom - Increasing rates of economic growth Decreasing unemployment and increase in jobs created (more vacancies) Spare capacity in the economy starts to be used up higher tax revenue possibility of demand pull inflation Positive wealth effect More confidence / animal spirits in spending

Answer 28

Two consecutive quarters (6 months) of negative economic growth Increasing unemployment Spare capacity in the economy / negative output gap Low confidence /animal spirits Negative wealth effect Low inflation

Answer 29

-increased in income for workers leads to a better quality of living. -Greater profits for firms - increased investment by firms so they can meet demand in years to come – positive animal spirits -less Government intervention / spending needed (like on universal benefits), improving the Government deficit and eventually paying off the national debt -Higher tax revenue due to more income tax and more corporation tax

Answer 30

- environmental issues - negative externalities of production like environmental damage will occur. More income also leads to higher consumption rates on demerit goods. - worsening inequality - as the rich get richer and the poor get poorer. -A rise in AD causes demand-pull inflation and thus purchasing power for people on fixed incomes will fall

Answer 31

Economic growth – high and sustainable economic growth Inflation – keep inflation low at the target of 2% Employment – low unemployment rate (3% is considered as full employment) Balance of payments – avoid large deficits on the current account

Answer 32

The exchange rate – avoid drastic changes in the pound, keep it stable Minimise inequality Environmental considerations Balance of government budget – make sure they're not spending more than they're receiving, avoiding contributions to the national debt

Answer 33

if there is rapid economic growth in an economy, it is likely inflationary pressures will increase due to the rationing mechanism of the price signals. This is because the more people earn during economic growth the more demand-pull inflation will occur. As consumption is a component of AD, this will increase AD, pushing the price level up. This may conflict with the target of 2% inflation.

Answer 34

*draw diagram* If the government decides to introduce a minimum wage to reduce inequality and attract more people into the workforce, then demand-pull inflation may occur. Workers on a lower income (and thus those who would see their pay rise from the minimum wage) have a higher propensity to consume, and therefore any increase in their wage they are likely to spend. Evaluation: However, is important to evaluate whether the economy is operating near full capacity or not. If the economy wasn't near full capacity, an increase in demand will just mean more of the spare capacity is used now – possibly not causing demand-pull inflation from economic growth. Also, whether new people enter the workforce due to the minimum wage depends on whether the higher wage outweighs the value of universal benefits – if they were previously not working. If universal benefits are higher than the new pay created by the minimum wage, there will be no incentive to join the workforce and thus inflation will not occur.

Answer 35

As rapid economic growth occurs; more finite resources are needed to meet the new levels of AD in the economy. This will mean more fossil fuels and other greenhouse gases will be emitted into the atmosphere to meet the growth rate. However, this means a direct contribution to climate change and natural disasters like flooding, aggressive weather, etc. It also means wastelands are likely to build and negative externalities of production will occur from the waste generated – which may find its way back int our water supplies. Evaluation: Yet if the Government offers incentives for technology to turn green, then the economy will be able to keep up with this higher trend of growth all while not creating these negative externalities towards the environment. For example, the Net 0 by 2030 target – which pushed big brands like BMW and Ford to invest in modern, green technology. Counter: However, this can be removed by political pressures – like how Rishi Sunak removed his Net O by 2030 target to stay popular for the next referendum.

Answer 36

if the economy is in a negative output gap/recession, the Government will want to stimulate demand again in order for the economy to recover. However, this means there will be a period of time where the Government is spending more than it is receiving in taxation – worsening the deficit and contributing towards the national debt. Evaluation: However, according to Keynesian economics, the Governments spending will have a large multiplier effect, and this will create economic recovery. Once the economy is in growth, the government should start to tax higher in order to pay the deficit off. In the long run, the Government should tax high during booms and spend lots during recessions – this will balance the effects of both and create a steadier curve of growth, rather than the typical business cycle trend.

Answer 37

A policy introduces to increase AD

Answer 38

Expansionary policies – will increase AD Contractionary policies – will reduce AD

Answer 39

fiscal policies and monetary policies fiscal - includes taxation and government spending monetary - includes interest rates and QE

Answer 40

are achieved through the Government running a budget deficit. This is where they are spending more than they are receiving in taxation. You would run a deficit if you wanted to boost AD in an economy. The Government will prioritise fiscal policies that have a large multiplier effect – for example funding apprenticeships has a large multiplier effect, as the income they gain becomes someone else's income through what they consume/buy. Other expansionary projects with a large multiplier effect include construction projects for roads or infrastructure – such projects will require a large workforce to hire in order to build the roads, there will also be new demand for the materials and machinery needed, and these workers will use their income to buy other goods / services. ^The Government may also cut taxes like corporation tax to act as an incentive for firms to innovate in order to become more profitable in the long run. If a firm gets to keep more of its profits (through less going to the government) they may hire more staff – which also has a large multiplier effect. Or, they may reduce income tax, which should boost consumption in the economy as now people have more money at their disposable.

Answer 41

Evaluation of expansionary fiscal policies: Focusing on AD to stimulate economic growth / recovery isn't sustainable in the long run. Once AD starts to rise, inflationary pressures will also rise if AS measures are not also introduced alongside expansionary AD policies. Evaluation of expansionary fiscal policies: Cutting the amount of tax the Government takes in will worsen not only their Government deficit but also the national debt – this is a sum that must be paid back at some point. Therefore, short term cuts in income collection will actually lead to austerity measures further down the line for different generations – once the national debt grows too large. Evaluation: Increasing Government spending through funding projects is subject to political change. For example, David Cameron's one nation faction started the HS2 project in order to connect the North with the South. However, Rishi Sunak's new conservative faction decided the HS2 project should no longer extend out to Birmingham. The project was estimated to total at £65 billion.

Answer 42

Indirect tax – tax on expenditure. For example, VAT. Direct tax – tax on income/wealth. For example, income tax, corporation tax, etc.

Answer 43

are achieved through the Government running a budget surplus – they take in more money through taxation than they spend in the country. This can be used to either 1) pay off the national debt or 2) reduce AD in the economy. Reducing AD in the economy may be important in the short run to tackle increasing inflationary pressures. The Government will once again cut spending on projects that have a large multiplier effect. These policies are called austerity measures – they may cut their spending in the economy, yet also increase the amount of tax they take in. There are two types of tax: Direct tax – tax on income/wealth. For example, income tax, corporation tax, etc. ^The Government may increase the amount of direct tax they take in (through income tax or corporation tax) in order to slow people’s demand in the economy, as now firms have less profits to spend and individuals have less income to use for consumption.

Answer 44

Evaluation: If the Government increases income tax across all pay brackets, then there will be a dipropionate effect on people's welfare/poverty rates. Increasing income tax for low pay earners will start to see sacrifices be made to their spending habitats – which may even lead to having to cut vital needs, like food - this will see increasing pressures of food banks. Evaluation: If the Government increases corporation tax, this may have a big enough impact on profit that they may start to lay off workers in order to preserve the profit they are still making. This will have a disproportionate effect on small businesses in comparison to multi-national corporations. Smaller businesses will already have a tighter profit margin due to their lack of economies of scale, and they may have to make some unemployed as a result – resulting in a huge negative multiplier effect.

Answer 45

interest rates and changing the monetary supply through QE

Answer 46

contractionary monetary policy – if the MPC (monetary policy committee) raises the base rate of interest, this will discourage people to take out loans as it’ll cost more to pay the interest back. There are also higher rewards for saving as they will be paid more in interest on their savings. This acts as a contractionary policy as less people are taking out loans and spending that money, so AD shall fall. The MPC may do this to tackle inflationary pressures.

Answer 47

The MPC (monetary policy committee) may reduce the base rate to encourage individuals / companies to take out loans, as the loans interest will be cheaper to pay back than before. By taking out a loan this increases AD in the economy as that money will be spent somewhere. A fall in interest rates may also lead to exchange rates to fall – making exports more competitive and imports weaker, also leading to a rise in AD as net trade is a component of AD.

Answer 48

The US stock market crashed. This effected the rest of the world as much of Europe was dependent on US loans in order to recover from WW1, however 50% of US banks went bankrupt following the Great Depression. The stock market crashed because: 1) market bubble for stocks - stocks were wildly overpriced and investors were overconfident in their value. 2) not enough regulation - too many people could access credit. The concept of “buying on margin” allowed ordinary people with little guaranteed income to borrow money from and only have to put down 10% of the share value.

Answer 49

Fiscal: Keynesian approach - Roosevelts "new deal" provided large funds for infrastructure projects and conservation projects. These construction projects included building new bridges, etc, which employed a lot of people in the USA. They introduced more tariffs in order to protect their domestic market from foreign competition. Monetary: Their central bank cut their base interest rate form 6% to 4%. ^Yet in the 1930s they raised the interest rate again to help strengthen the dollar as now people were selling the dollar to buy gold.

Answer 50

Fiscal - The Gov reduced spending by cutting public sector wages and unemployment benefits by 10%. They were more concerned with keeping a balanced budget rather than the lack of AD in the economy at the time. They raised the income tax amount from 22.5% to 25%, this decreased the amount of disposable income households now had. They also introduced protectionist policies, introducing a tariff on all imports to increase production and conusmption within the Uk. monetary - They stopped using the gold standard which had previously appreciated the currency significantly. If you're not tied to gold, you can adjust your interest rates and thus the amount of money in the country. ^This movement away from gold helped the pound depreciate by nearly 25%. this boosted exports and thus an increase in AD. The interest rate was also lowered in order to encourage investment a year later.

Answer 51

USA - Keynesian UK - classical yet they both introduced protectionist policies through tariffs. They both also eventually left the gold reserve.

Answer 52

When the Great Depression hit, the people in England panicked, and started trading in their paper money for gold. It got to the point where the Bank of England was in danger of running out of gold.

Answer 53

Asymmetric information - banks were selling off bundle packages which included “toxic assets” - mortgage loans made to people unlikely to pay it back. Individual banks did not know to what extent other banks were affected by these toxic assets and held back from lending to each other as a result. This made credit scarce and more expensive. Mortgage sellers also often understand the effect of a change in interest much more than the people they are lending the money to. This can lead to market failure as consumers /investors struggle to make an informed, rational decision that would maximise their utility, if they have only half the information needed present. Housing bubble - a market bubble is where the price of an asset rises due to speculation that it will rise in the future. More investors therefore demand it as they think they will receive a profit in the future. This inflated price therefore well exceeds the true intrinsic value of the good. Once belief sets in that the asset has reached its peak value, investors will try to quickly sell, causing the bubble to pop – and the price to fall. When the bubble bursts there is a fall in confidence and AD is reduced in the economy – usually due to a negative wealth effect occurring.

Answer 54

Fiscal - Keynesian approach - they introduced the "economic stimulus act" which pumped $150 billion into the US economy. monetary - They had 3 rounds of quantitive easing in order to pump more money into the economy. Interest rates were cut 8 times in total, reaching as low as 0.25%

Answer 55

fiscal - originally they had a Keynesian approach - There was a major injection of £3 billion on defence and infrastructure projects. -They cut income tax - VAT cut to only 2.5% -£20 billion small business loan monetary - -also cut interest rates 9 times reaching only 0.5% -several rounds of quantitive easing that lasted unitl 2012 ^However, the new 2010 conservative government were concerned with the amount of debt the country was in. they introduced austerity measures which is thought to deal the recovery.

Answer 56

They both: - cut interest rates to the noughts - had several rounds of quantitive easing - massive gov, spending projects However, The Uk introduced austerity measures towards the end.

Answer 57

quantitive easing is where the bank of England buys assets / bounds in exchange for money. Quantitive easing can prevent a liquidity trap from occurring - this is where addd more fed up

Answer 58

fiscal - Spending can be targeted on specific industries Short time lag as compared with monetary policy Redistributes income through taxation Reduces negative externalities through taxation Increased consumption of merit/public goods Short term government spending can lead to an increase in the long-run aggregate supply E.g. Building a new airport immediately increases government spending and AD, but when it is built, the potential output will have increased monetary - The Bank of England operates independently from the Government (political process) Is able to consider the long-term outlook Targets inflation and maintains stable prices Depreciating the currency can increase exports

Answer 59

fiscal - Policies can fluctuate significantly as governing parties' change Long term infrastructure projects may lack follow-through Increased government spending can create budget deficits Repaying this debt may lead to austerity on future generations Conflicts between objectives E.g. Cutting taxes to increase economic growth may cause inflation monetary - Weaknesses of Monetary Policy Conflicting goals e.g economic growth puts upward pressure on inflation Time lags between policy and the desired impact (up to 2 years) Expansionary policy is less effective in negative output gaps than when used with positive output gaps Consumers may not respond to lower interest rates when confidence is low Cheaper credit can inflate asset prices in the long term The interest rate has limitations on downward adjustment

Answer 60

Supply side policies aim to shift the long run supply curve to the right. The two types: interventionist and market based.

Answer 61

Interventionist supply-side policies require government intervention in order to increase the full employment level of output ^These are mainly used to correct market failure

Answer 62

Market-based supply-side policies aim to remove obstructions in the free market that are holding back improvements to the long-run potential ^These can be removing government failure

Answer 63

1. increase incentives 2. promote competition 3. reform the labour market 4. improve the skills and quality of the labour force 5. improve infrastructure

Answer 64

One way to increase incentive to innovate and become more efficent is to reduce taxation. for example, corporation tax will incentivise firms to spend more on innovation as then they can keep more of the return on profit they make than they could've done previously. Equally, reducing income tax may incentivise people to work harder as they now know that they will earn more as a result - and there is a smaller opportunity cost for selling their labour. Thus in the long-run, more output is created than previously, as there is now a larger incentive to innovate and become more efficient / cost saving. However, it is not always a guarantee that firms will use this lower tax rate to increase innovation. It depends on a lot of other factors how a firm may use this money. they may look to pay off debt, or pay off dividends to keep investors interested.

Answer 65

one way to increase the incentive to enter the workforce and sell your labour is to restrict the criteria for benefits. If the benefits paid is higher than the amount you'd earn from working, there is no incentive to work as you do not gain anything from it. However, if the government removed this restriction, more people would have to enter the workforce in order to now fund themselves and their lifestyle. This will increase the amount of labour in the labour market and equally reduce the amount of government spending. However, this is a highly contentious supply side policy, as there are genuinely people who cannot work claiming benefits (either through disability, etc) who will be lesser off as a result. This will worsen relative poverty rates in the Uk, and worsen inequality a s a result.

Answer 66

A direct support to new small business will increase competition as it removes some pf the barriers to entry into the industry - like high start up costs or access to credit finance.

Answer 67

Many firms are reluctant to enter the market if the government is operating in it, as they are unlikely to be able to adequately compete against the government - as they do not have access to the same sort of funding and resources that the government would have access to. Privatising an industry therefore removes a dominate character (the government) and enables new firms to enter the market and compete with other firms with similar costs, resources, access to credit, etc.

Answer 68

interventionist - increased government spending on infrastructure projects to improve geographical immobility or on apprenticeship schemes to improve occupational immobility. market based - 1) remove the minimum wage - the minimum wage causes real wage inflexibility unemployment, by distorting the price signals 2) remove trade union power

Answer 69

- Increasing government spending on education and retraining - Increasing government spending on healthcare so that productivity improves

Answer 70

They increase the rate of growth of an economy They reduce average price levels They reduce unemployment They often increase the value of net exports Improvements in Infrastructure can raise the quality of life for all citizens Multiplier effect

Answer 71

1. opportunity cost 2. time lag 3. possibility of government failure ADD MORE

Answer 72

The Short-run Phillips Curve (SRPC) observes that there may be a trade-off between unemployment and inflation. - Rising inflation is accompanied by falling unemployment - Rising unemployment is accompanied by falling inflation This trade-off makes it difficult for the government to achieve both low unemployment and low inflation