Unemployment and Current Account Balance

Question 1

Define ‘unemployment’.

Answer 1

When people are actively seeking work but unable to find it

Question 2

In what 2 ways is unemployment measured?

Answer 2

Labour Force Survey (LFS)

Claimant Count - number of people who’ve claimed unemployment benefits

Question 3

What are the 5 types of unemployment?

Answer 3

Cyclical
Structural
Frictional
Seasonal
Voluntary

Question 4

What is cyclical unemployment?

Answer 4

Unemployment linked to the economy cycle that occurs due to low levels of AD in the economy during a recession/depression

Question 5

What is the issue with cyclical unemployment?

Answer 5

Dependent on the cycle - unless economic growth occurs, it is hard for it to be reduced

Question 6

What is structural unemployment?

Answer 6

Unemployment that occurs due to a change in the structure of an economy

Question 7

What are the 3 types of structural unemployment?

Answer 7

Sectoral
Technological
Regional

Question 8

What is sectoral unemployment?

Answer 8

Structural employment that occurs due to the decline of a particular industry

Question 9

What is technological unemployment?

Answer 9

Structural unemployment that occurs due to the replacement of certain jobs by automated machinery

Question 10

What is regional unemployment?

Answer 10

Structural unemployment that occurs in a particular region of a country

Question 11

What is the issue with structural unemployment?

Answer 11

Workers need to be adaptive and perhaps need to retrain or relocate

Question 12

What is frictional unemployment?

Answer 12

Short-term unemployment that occurs as people transition from one job to another

Question 13

What is seasonal unemployment?

Answer 13

Temporary unemployment due to workers only being required during a certain season

Question 14

What is voluntary unemployment?

Answer 14

Unemployment from people choosing not to work due to the idea of work or the level of wages

Question 15

What are the 5 effects on unemployment on individuals?

Answer 15

A fall in income

Lower standard of living

Loss of homes - unable to pay mortgage

Family breakups

Lower self-esteem

Question 16

What are the 4 effects on unemployment on businesses?

Answer 16

Redundancy packages paid to laid-off employees

Demotivation of workers

Spare capacity - unused machinery and desks

Fall in demand - especially for luxury goods

Question 17

What are the 5 effects of unemployment on the economy?

Answer 17

Lower national income - people don’t contribute to the GDP

Wastage of resources

Fall in tax revenues

Increased government spending

Increase in taxes and debt in the long-run

Question 18

What are the 4 effects of unemployment on the local community?

Answer 18

Fall in community spirits

Crime rate increases

Businesses start to struggle - bankruptcy and foreclosure

Community rends to look shabby - areas look run-down

Question 19

Define ‘balance of payments’.

Answer 19

A statistical statement that records an economy’s transactions with other countries relating to international trade

Question 20

Define ‘exports’.

Answer 20

Goods or services produced in one country that are sold in another country

Question 21

Define ‘imports’.

Answer 21

Goods and services brought in from abroad for sale

Question 22

What does the current account show?

Answer 22

The exports and imports between countries over a period of time, usually a year

Question 23

What are the 3 reasons a country might have a current account deficit?

Answer 23

Income - high domestic income = greater ability to spend on foreign imports

Price - domestically produced goods are more expensive

Non-price - Exports may use inferior technology

Question 24

What are the 2 advantages and 3 disadvantages of a current account deficit?

Answer 24

Pros:
Less demand-pull inflation
Financial account surplus

Cons:
Less economic growth
Unemployment increasing
Greater government spending to support unemployment

Question 25

What are the 6 possible causes of a current account surplus?

Answer 25

Weak domestic income growth causing lower demand for imports

Strong growth in foreign countries - higher demand for exports

Weak exchange rate

Exports more competitive than imports quality-wise

Exports more price competitive than imports

Lower rates of domestic inflation

Question 26

What are the 8 steps in the chain of reasoning for a current account surplus?

Answer 26

X > M
Injections > Leakages
AD↑ ((X-M)↑)
Economic growth ↑ (export-led growth)
Demand-pull inflation pressure
More jobs - labour is derived demand
Unemployment ↓
Increased incomes

Question 27

Define ‘exchange rate’.

Answer 27

Value of one currency in terms of another

Question 28

What is the effect of a strong exchange rate on the current account?

Answer 28

Strong Pound Imports Cheaper Exports Dearer

Worse for net trade - can cause current account deficit

Question 29

What is the effect of a weak exchange rate on the current account?

Answer 29

Weak Pound Imports Dearer Exports Cheaper

Better for foreign trade - can cause current account surplus

Question 30

What are the 7 possible solutions to a current account deficit?

Answer 30

Increase income taxes to reduce domestic consumption

Subsidise domestic firms to increase competition

Weaken currency to make exports more attractive

Reduce costs of production to increase price competitiveness

Increase tariffs

R&D to improve quality of goods

Improve labour productivity