unit 2 go over Flashcards
budget deficit
A budget deficit refers to a situation in which the government’s outgoings are more than their incomings/ government planned spending is more than planned tax receipts.
A budget is a plan for spending and revenue.
National debt
accumulated/total/sum of government borrowing over time
Accumulation of all a nation’s annual deficits is known as the National Debt.
PSNCR
Government debt/borrowing for the year which is caused when annual government expenditure exceeds tax revenue which causes an annual budget deficit. government borrowing to finance a budget deficit
Cost push inflation
Caused when higher costs result in firms making higher prices
The cost of producing goods & services can rise when costs of resources increase. For example, workers demanding higher wages which are not matched by increases in productivity (output per worker per hour)
Firms may need to pass these higher costs onto the customer in the form of higher prices in order to maintain their profits.
This can lead to a WAGE-RATE SPIRAL – higher wage demands lead to higher prices which in turn leads to higher wage demands and so on…
Oil prices are having a huge impact on prices currently.
Demand pull infl
Too much demand chasing too few goods!
Inflation is caused by increases in aggregate demand brought on by increases in government, consumer and business spending
If demand is greater than supply, this will cause the prices of goods & services to rise as businesses realise that there is sufficient enough demand to merit higher prices being charged.
The Costs of Unemployment
Individual
Reduced income and possibly debt as have spending commitments such as a mortgage or credit agreements
Reduced standard of living, as less purchasing power as not as much money
Reduced efficiency - loss of skill, motivation, fitness.the longer they are out of work
Reduced status – having to live ‘off the government’ or take a job you would normally consider ‘beneath you’, and so poor stigma
Not everyone is entitled to benefits - poverty
Firms
Fall in demand as less people willing and able to purchase goods at a certain price – fall in revenue and profit
A local area may go into decline and become unattractive for investment
Benefits is that there is a Bigger pool of available labour
Less wage pressure as there is less people to pay
Reduced worker numbers, means a fall in output as less division of labour and so more inefficiency and decrease in profits
Wasted resources on investment into workers training and education
For the economy
High levels of people claiming JSA, so less room for government to spend on healthcare or education (negative)
Less spending in the economy due to reduced disposable income of households means less spending in the economy and so less economic growth. (negative).
Lower standing of living as people have less incomes they can afford less things such as housing(negative)
Lost output – fall in real GDP
Reduced taxation (income, VAT & corporation) revenue ( and so the government might have to reduce public spending)
Budget deficit due to paying out higher JSA
Taxation onto indirect such as goods since the lower tax revenue
Harmful effects of inflation on the Economy:
Could lead to unemployment if demand falls due to higher prices
May lead to higher savings (withdrawals from circular flow of income) but only if the inflation rate is relatively low.
Firms may cut expenditure on factors of production
Can lead to uncompetitiveness abroad (further increase the current account deficit on the balance of payments)
May lead to ‘expectations’ based inflation which takes longer to correct
May lead to lower economic growth if investment in the UK falls
Effects of economic growth on unemployment
Unemployment may decrease (ID) as creating economic growth may have increased demand for labour (1). More people in work increases consumer spending/AD. This will stimulate further growth/a positive multiplier effect (DEV) (1).
Unemployment may decrease (ID) as the growth may have increased tax revenue which the government can invest (1).
Government investment in eg capital projects creates jobs (DEV) (1).
o Government may also use increased revenue to fund increased public sector wages/schemes to improve employment (DEV) (1). This will incentivise more people to enter the labour market (DEV) (1).
Supply side policies (SSP)
an necessity in funding in education. Thus improving education and attainment therefore higher productivity, and a better educated workforce
Decrease in corporation tax, thus means companies have more money to reinvest and therefore increase productivity and output.
Increase in nhs budget. This will improve a more healthy and productive workforce.
Improve infrastructure such as roads, and congestion. To improve this and improve productivity and allow people to get to work easier
Subsidies to help firms lower prices and production costs more employed
Decreasing JSA whilst also increasing the minimum wage
creates an incentive to work. • In this case people would be made financially better off by finding work rather than choosing not to.• This increases the supply of workers helping to reduce unemployment.
ADVANTAGES OF INTERNATIONAL TRADE:
Free trade encourages a more efficient use of resources.
If countries specialise in production of goods/services in which they have absolute or comparative advantage they will increase output.
Specialisation leads to lower average costs of production that can be passed onto consumers in the form of lower prices.
Exposure to international trade may force companies to become more competitive and hence more efficient. International free trade reduces the danger of home monopolies.
UK firms have access to larger markets (ID) so can benefit from economies of scale
UK consumers have more choice of goods/services (ID) because countries specialise in different goods/services (EXP) (1). This improves standards of living
UK consumers have access to cheaper goods/services (ID) which means their real income increases (EXP) (1) Standards of living increase (DEV) (1)
DISADVANTAGES OF INTERNATIONAL TRADE:
Home employment may be affected due to foreign competition.
Imports will deteriorate a weak balance-of payments position (difference between imports and exports).
New or ‘infant’ industries, which have not yet grown to a size big enough to allow them to compete effectively with their overseas rivals (who are benefiting from economies of scale) may fail.
Consumers are not protected from harmful products (more commonly known as demerit goods), e.g. illegal drugs, dangerous animals.
There is not protection from the selling of goods, by foreign producers, at prices below the cost of production – known as dumping. This may be done to gain a foothold in new markets or to get rid of surpluses.
the effects of changes in national income on employment and output
If aggregate demand is more than national income:
Then producers will increase production and hire more resources; this in turn will increase incomes and this will continue until equilibrium is reached
If injections are greater than withdrawals national income, output and employment will rise. It may be the case that firms can increase production because the economy might be at full employment. If this happens then aggregate demand is reduced through increased prices (inflation)
If aggregate demand is less than national income:
Then producers will notice that some of their output remains unsold
Firms will learn their mistakes and produce less next time, but this means that they don’t need to employ so much land,labour,capital or enterprise
Resources will become unemployed
As a result, incomes will fall until aggregate demand= national income
If injections are lower than withdrawals national income, output and employment will fall
Multiplier effect
An increase in an injection leads to a more than proportionate increase in national income (1).
• This is because the initial injection will circulate creating additional spending (1). ‘One person’s spending becomes another person’s income’ (1). For example, a £5 m government investment into a new hospital ward requires workmen who are paid an income, who can then spend it on a variety of goods and services, increasing demand for firms’ output (1).
- The size of the final impact can be calculated by using a formula — 1/MPS (Marginal Propensity to Save) (1).
- The extent of the multiplier is determined by the MPC or MPS
the uses of national income statistics
We can use it to measure Economic Growth (GDP %) therefore we can see if the economy is growing or slowing down and implement appropriate policies. The government targets 2.5% GDP growth so they can see if they have achieved this aim.
We can compare GDP year by year to spot patterns of change which indicate successful or unsuccessful policies or policies which may need changed.
We can see if living standards are rising or falling by dividing the National income by head of population
We can compare the UK with our many trading partners & rivals which can help determine how much money will be given the World Bank, EU Budget or in the form of donations to poorer countries.
Compare figures against other countries. (1 mark)
Compare figures against previous years. (1 mark)
Calculate the country’s rate of economic growth.
(1 mark)
Evaluate/compare living standards in a country
difference between gdp and gnp
GDP -
measures the value of all goods and services produced by uk firms within the uk
is a measure of the ups national output/value of all the goods and services produced in an economy
for example includes whiskey produced in scotland
used by many nations as the main measure of economic activity and gdp is more commonly referred to in the uk than gnp
GNP -
measures the value of goods and services produced by UK firms whether in UK or not
includes gdp and net property income from abroad
for example includes primary producing clothes in Bangladesh
used mainly by the USA as its measure of economic activity
