Unit 12

Question 0

What is economic growth? What is the government target?

Answer 0

Economic growth is the increase in the productive capacity of an economy. The government target is sustainable growth.

Question 1

What is inflation? In what ways can it be measured, and how do these differ?

Answer 1

Inflation is a general increase in price levels. It is measured using CPI (not including houses, and compares better with the HICP) or RPI (including houses).

Question 2

What are the causes of inflation? What are the effects?

Answer 2

The causes are either demand-pull or cost-push. The disadvantages include lower spending power savers losing money and exports decreasing.

Question 3

How is the balance of payments calculated? What does it include?

Answer 3

Value of the exports - value of imports. It includes the value of goods, services, investments and transfers.

Question 4

What are the three main causes of unemployment?

Answer 4

Cyclical (recession)
Structural (workers have the wrong skills)
Frictional (people between jobs)

Question 5

What two ways can unemployment be measured?

Answer 5

Claimant count (number of people on JSA)
Labour Force Survey (more accurate ONS survey)

Question 6

What are the effects of unemployment?

Answer 6

Quality of life can decrease.
Government issues (more benefits, less tax)

Question 7

What are the advantages and disadvantages of the welfare state?

Answer 7

The main advantages are reduced poverty, reduced inequality and improved health.
The main disadvantages are a disincentive to work and higher taxation.

Question 8

What are alternatives to the current welfare state?

Answer 8

Charities - should they have a bigger role in welfare? They can provide some services offered by the state.
The change from universal to means tested benefits also is important, as it decreases benefits payouts (though increases admin costs).

Question 9

Contrast command and free market economies.

Answer 9

In free market economies, there is no economic intervention, it runs itself, and the government exists only to make laws.
In command economies, there is no entrepreneurship, and the government does everything including laws.
(Mixed economies have features of both.)

Question 10

Describe the benefits and drawbacks of privatisation.

Answer 10

Advantages: It is more efficient, market forces sort everything out, and there is a lucrative revenue from the sale.
Disadvantages: Private monopolies can exploit consumers and the choice can be hard to reverse.

Question 11

Why is lack of competition classed as market failure?

Answer 11

It leads to a monopoly - the market value is not always what is charged. It leads to lower quality and inefficient resource allocation.

Question 12

Describe ‘information failure’.

Answer 12

Not all values are market values. Merit and demerit goods are consumed ‘incorrectly’ so the government steps in to sort out the situation.

Question 13

Contrast private benefits/costs and positive/negative externalities.

Answer 13

Private benefits and costs only affect the consumer and the firm selling the product. Externalities affect society as a whole.

Question 14

How does the government intervene in market failures?

Answer 14

Lack of Competition - They promote competition, regulate markets, and run the competition commission.
Public goods - the government supplies them.
Merit goods - they provide information, funds and price ceilings.
Demerit goods - they legislate and levy duties.
Negative externalities - Pigovian taxes, laws and regulation
Positive externalities - Pigovian subsidies and information

Question 15

Describe the four stages of the economic cycle.

Answer 15

In the slump, growth is low, unemployment is high, inflation is low and the BoP is in a surplus.
In the recovery, growth is increasing, unemployment is falling, inflation is increasing and the BoP is in a lower surplus.
In the boom, growth is high, unemployment is low, inflation is high and the BoP is in a deficit.
In the recession, growth is falling, unemployment is increasing, inflation is dropping and the BoP is in a lower deficit.

Question 16

What does fiscal policy entail?

Answer 16

Controlling the supply of money in the economy.

Question 17

What three positions can fiscal policy aim for?

Answer 17

Budget surplus (Tax > Spending)
Balanced budget (Tax = Spending)
Budget deficit (Tax < Spending)

Question 18

Name some examples of UK taxes.

Answer 18

Income tax
National Insurance
Corporation tax
VAT
Council tax
Road tax
Stamp Duty
Capital gains tax
Inheritance tax
Duty

Question 19

What are the positive and negatives of economic growth?

Answer 19

Positives include improved quality of life, decreased unemployment. Negatives include inflation and pollution.