AS Macroeconomics: C5-9 Flashcards
-Economic Growth -Inflation -Unemployment -Balance of Payments
What does being economically active/ economically inactive mean?
-economically active:those ppl who are at work or who are willing to work. Also, called the workforce and these include unemployed ppl.
-economically inactive:those people who are not available to work, such as students/ ppl unable to work etc…
How are employment/ unemployment measured?
-employment: number of people in work/ total who are economically active x 100
-unemployment:number of people out of work/ total who are economically active x 100
What are the five causes of unemployment and definitions?
-Cyclical:lack of spending in the economy means ppl are out of work. During recessions.
-Structural:industries are in decline and workers skills are becoming obselete.
-Frictional:where ppl are in between jobs
-Seasonal:where ppl are out of work for some periods of the year.
-Classical/real wage inflexibility:problems with supply side of labour e.g. minimum wage is too high. National wage may be set above the equilibrium wage.
What are the costs of unemployment to the person, firms and the government?
-person: no income, low self-esteem
-firms: ppl don’t spend as much in shops
-government: they have to spend more on JSA and they receive less in income tax.
What are the two measures of unemployment?
-ILO Measure:uses a questionnaire (labour force survey) to ask ppl aged 16-65 whether they have been out of work over the last 4 weeks and are rdy to start within two weeks.
-Claimant Count: records ppl who are successfully claiming JSA.
Why might ILO be higher than Claimant Count and why might the CC rise relative to the ILO measure of unemployment?
-there are strict criteria for claiming JSA and many are not eligible. E.G. have high levels of savings, spouse with a high income etc…
-CC records people who receive a financial reward for declaring themselves unemployed, whereas the ILO method has no reward for saying your unemployed. So during a recession, the JSA tends to rise relative to ILO. Ppl have a stronger incentive to claim JSA and are less likely to have high levels of savings/spouses with high incomes.
What is the distinction between unemployment and underemployment?
-unemployed ppl don’t have a job. But many ppl have jobs which dont offer them enough hours. These underemployed ppl are NOT taken into account in unemployment figures. So unemployment figures may under-represent the problem of joblessness.
-therefore, an evaluation point could be ppl are also overqualified for the work they do, as well as wishing to work more hours or on a stable contract.
What is the significance of increase employment?
-increased incomes (rise in living standards)
-improved skills and human capital or workers.
-multiplier effect (increased incomes lead to increased spending, so firms might see increased profits)
-higher government taxation revenue (more ppl pay tax and spend-VAT and corporation tax-)
What is the significance of decreased unemployment and inactivity?
-falling government spending on JSA and other benefits.
-decreased unemployment can have exponential benefits because ppl who are out of the job market for a long period become increasingly unemployable.
-the job market becomes more flexible
-deceased dependency ratios (number of inactive ppl that active and employed ppl are supporting directly/indirectly)
What is the relation between migration and employment/unemployment?
-migration can occur when ppl are searching for work/better paid work, to escape from social or political problems in original country etc…
-if immigrants come to a country to fill vacancies, then immigration leads to an increase in employment.
-but if immigrants are looking for work/displace other ppl from work, then employment may be unchanged and unemployment might increase.
What is the balance of payments?
-record of international payments over the course of a year.
What is the current account and what does it include?
-the current account records payments for transactions between countries in the present year (other than investment).
-trade in goods
-trade in services
-investment income (rewards for investment only)
-transfers (tax payments to foreign governments)
What is a current account deficit?
-more money outflow (imports) than money inflow (exports)
What are the causes of a current account deficit?
-the currency is too strong relative to other countries. e.g. if the pound buys too many then people holding euros will not want to buy goods and services from the UK + people in the UK will be keen to buy things from the Euro area (DEMAND-SIDE)
-high rates of inflation relative to other countries (SUPPLY-SIDE)
-high wage costs relative to other countries (SUPPLY SIDE)
-high level of growth in a country, meaning people with higher incomes tend to buy imports from abroad. (DEMAND-SIDE)
How do high wage costs/inflation cause a current account deficit?
-high wages increase production costs therefore exports are less price-competitive, making them less attractive to foreign buyers.
-high inflation rates increase price of domestic goods, less price-competitive, reducing foreign demand.
Why are supply-side factors causing a current account deficit more important to consider?
-supply-side reasons affect the competitiveness of exports.
-these are way more destructive than demand-side reasons. This is because they are hard to rectify and long-term.
What is the consequence of a current account deficit?
-shift inwards (C+I+G+ (X-M))
What are some evaluations for the consequences of CA deficit?
1) if deficit is a small % of GDP?
2) indicator of a strong growing economy?
3) is it supply/demand side?
What are the causes of a current account surplus?
-the currency is too weak relative to other countries. e.g. if the pound buys few US dollars then people in the UK will find it difficult to buy things from outside UK. (demand-side)
-low rates of inflation relative to other countries (supply-side).
-low wage costs relative to other countries (supply-side). –> exports are more price competitive as production costs are low.
-low level of growth in a country, making it difficult to buy imports from abroad and creating a strong incentive for firms in the country to export.
-low incomes at home, high incomes abroad.(remittances increases exports).
-gains in comparative advantage –> country can specialise in a specific area and increase export revenues.
What are supply-side causes and demand-side causes of a current account surplus/deficit?
-supply-side:factors that affect the ability of a country to produce and export goods/services , or the costs of imports.
-demand-side:factors that influence domestic and foreign demand for a country’s goods and services.
What are consequences of a current account surplus?
-shift outwards in AD
-can harm international relations
-sign of an unbalanced economy –> vast majority of a country’s production will be for sales of exports
What is economic growth and potential economic growth?
-measure of an increase in real GDP. GDP is the total value of goods and services produced in a country in one year, or the total amount spent/earned.
-potential economic growth is a measure of the increase in capacity in an economy. It can be shown by a movement outwards of the PPF curve.
What is a recession?
-when a country has two consecutive quarters of negative economic growth.
-this can lead to firms closing, increased unemployment and fall in living standards.
What is the effects of economic growth on living standards?
-an increase in GDP is likely to cause an increase in standards of living, which means that people can afford more goods/services, or feel that their lives are better because they do not need to work as hard to achieve their requirements in life.
-however, a rising income does not necessarily make standards of living rise. It depends on how the extra money is distributed, whether inflation is being taken into account, the amount spent on investment and population change. It is better to look at GDP per capita.
