Unit 2 Flashcards
Macro-economics
The study of the whole economy
The four main macro-economic objectives of the government
Full employment
Economic growth
Achieving price stability
Balancing exports and imports
Full employment
Everyone who is able and willing to work has a job. The workforce includes only those who are working plus the unemployed who are looking for a job
Economic growth
Growth in output of the economy over time - a growth of real GDP over time
Price stability
Keeping inflation low
Balancing exports and imports
A balance between exports and imports over time
Aggregate demand
The total demand
Interest rate policy
Using interest rates to change the level of AD in the economy
Gross Domestic Product
The total value of goods and services produced in the country in a year
Economic Growth rate =
(change in GDP / original GDP) x 100
What are the causes of economic growth?
Investment
Changes in technology
A larger workforce
Education and training
Natural resources
Government policies
How does investment cause economic growth?
More investment (spending on capital goods) means the economy has the capacity to produce more goods and services in the future
How does a large workforce cause economic growth?
The economy can produce more if it has more workers
How do changes in technology cause economic growth?
Technical progress means the quality of capital goods improves, and a given quantity of capital can now produce more output than before
How does education and training cause economic growth?
The more educated, trained and skilled the workers, the higher the output of the country is likely to be
How do natural resources cause economic growth?
The discovery or development of natural resources can be a stimulus to economic growth
How do government policies cause economic growth?
The government takes responsibility for the macro-economic management of the economy
Benefits of economic growth
A rise in material living standards
A rise in the welfare of the population
A rise in employment and a fall in unemployment
A reduction in poverty
Costs of economic growth
Enviromental costs
Congestion
Loss of non-renewable resources
Lower quality of life
Inequalities of income and wealth
Inflation
How does economic growth cause a rise in material living standards?
If the GDP rises at a faster rate than the population, the GDP per capita rises. This means everyone has more output available to consume on average
How does economic growth cause a rise in the welfare of the population?
The government is able to devote more resources to services such as health and education
How does economic growth cause a rise in employment and a fall in unemployment?
As output rises, more workers will be required to produce it, and the unemployment rate will fall
How does economic growth cause a reduction in poverty?
As output and incomes rise, the government can raise living standards of those with lower incomes by providing benefits from progressive taxes
How does economic growth cause environmental costs?
Greater output and consumption can lead to more pollution and global warming
How does economic growth cause congestion?
Economic growth is often concentrated in certain urban areas, which can become overcrowded and congested
How does economic growth cause a loss of non-renewable resources?
Economic growth uses resources that can’t be replaced, including oil, natural gas, natural environments (rainforests), metals and other minerals
How does economic growth cause inequalities of income and wealth?
The benefits of growth are unevenly spread. Some people become better off, while others are ‘left behind’
How does economic growth cause inflation?
Sometimes the rate of economic growth is too fast for the economy to respond without a rise in the general price level
Unemployment
When workers who are able and willing to work are unable to find employment
How can unemployment be measured?
Claimant Count
Labour Force Survey
Claimant Count
Counts the number of people claiming unemployment related benefits (such as JSA)
Labour Force Survey
A survey of a sample of households, counting people as unemployed if they are actively seeking work but do not have a job (in the week of the survey)
What are the six types of unemployment?
Voluntary
Seasonal
Frictional
Structural
Technological
Cyclical
Voluntary unemployment
This is caused by people choosing not to work
Seasonal unemployment
This is caused by seasonal workers not being employed at other times of year, for example in the tourist industry
Frictional unemployment
This is caused by workers moving between jobs
Structural unemployment
This is caused by long-term changes in the structure of industry when some industries decline
Technological unemployment
This is caused by capital taking the place of labour
Cyclical unemployment
This is caused by a fall in aggregate demand in the economy. If the demand for goods and services falls, then fewer workers are needed to produce the output, and some will be laid off
Consequences of unemployment
Labour resources are wasted
Lower living standards
Excluded workers
Costs to taxpayers
A budget deficit
Regional problems
How does unemployment cause labour resources to be wasted?
The economy is not using all of its resources to full capacity. This means that the economy could produce more output than it is currently producing
How does unemployment cause lower living standards?
Workers and their families suffer a lower standard of living as unemployment causes their incomes to fall
How does unemployment cause excluded workers?
Some people are unemployed for so long that they become excluded from the workforce
How does unemployment cause costs to taxpayers?
The unemployed are entitled to JSA and other benefits. The more unemployed people there are, the greater the costs to taxpayers
How does unemployment cause a budget deficit?
The government loses tax revenue from workers when they become unemployed. Spending in the economy falls, and the government receives even less tax revenue
How does unemployment cause regional prblems?
Unemployment is unlikely to be spread out evenly in the economy. Some locations tend to suffer much more than others, and may become ‘depressed areas’
Depressed areas
Unemployment in these regions is well above the national average, and the lack of demand in the area leads to even more unemployment
Inflation
A sustained rise in the general price level over time
Consumer Price Index (CPI)
This is the official measure of the rate of inflation for both the UK government and governments of other European Union countries
What types of inflation are there?
Monetary
Demand-pull
Cost-push
Monetary inflation
Inflation caused by growth in the economy’s money supply
Demand-pull inflation
Inflation caused by excess demand in the economy
Cost-push inflation
Inflation caused by a rise in costs in the economy
Shoe leather costs
If prices are not stable, consumers and firms spend more time shopping around to find a reasonable price. This extra time and effort is known as “shoe leather costs”
Menu costs
Firms have to adjust their price lists more often when there is inflation, for example restaurants increasing the prices on their menus
Hyperinflation
A rate of inflation so high that the value of money becomes close to worthless
Tax
A compulsory payment to the government
Direct tax
A tax on income or wealth
Indirect tax
A tax on spending, often defined as a tax on goods and services
Income tax
A tax paid on wages and salaries
Corporation tax
A tax on the profits of companies
Inheritance tax
A tax on the transfer of wealth at the time of death
Value added tax
A tax on a wide range of goods and services
Excise duties
Taxes on a specific range of goods
External cost
The negative impact of an economic transaction on a party who is not directly involved in the transaction
Demerit good
A good or service whose consumption is considered unhealthy or undesirable due to its bad effects on the consumers
Distribution of income
How incomes are shared out among the people of the country
Redistribution of income
A policy to reduce the inequalities of income so that incomes are distributed more evenly
Inequalities of income
Incomes are distributed unevenly so some people have a much higher income than others
Transfer payments
Benefits to citizens which are paid out of tax revenue
Regressive tax
Takes a greater proportion of income from lower incomes, or takes a smaller percentage of a higher income
Proportional tax
Takes the same proportion of income from all income levels
Progressive tax
Takes a greater proportion of income from higher incomes, or takes a smaller percentage of a lower income
Market failure
When the market fails to allocate resources in the best interests of society as a whole
Externalities
The effects on people in society who are not part of the production process
Fiscal policy
A policy that uses taxation and government spending to try to achieve the objectives of the government
Multiplier effect
A process by which an original change in incomes in the economy leads to a total change in incomes which is a multiple of the original change
How does the government use fiscal policy to inflate the economy?
It deliberately aims for a budget deficit, which leads to a positive multiplier effect, and therefore increases employment and economic growth
How does the government use fiscal policy to deflate the economy?
It deliberately aims for a budget surplus, which leads to a negative multiplier effect, and therefore decreases inflation and the balance of payments deficit
Interest rate
The reward for saving and the cost for borrowing
Bank rate
The interest rate set by the Bank of England, which affects all interest rates in the economy (also called the base rate)
Why are there different interest rates?
Competition between banks and building societies
Other factors affecting savings rates
Factors affecting rates on loans
Supply-side policies
Policies that increase the ability of the economy to supply more goods and services
Monetary policy
A policy aimed at affecting the total supply of money in the economy
Why does competition between banks and building societies affect interest rates?
These institutions are competing for customers, so some of them may try to attract customers by having higher saving rates
What are the other factors that affect savings rates?
The minimum deposit for the account
The time that the money is tied up
When the saver is committed to a regular saving plan
What are the factors that affect rates on loans?
The greater the risk, the higher the rate of interest
The greater the security offered by the borrower
The types of supply-side policies
Education and training
Reducing direct taxes
Reducing benefits
Encouraging enterprise
Encouraging new technology and innovation
Reducing monopoly power
