Unit 2 - Macroeconomics Flashcards
national income
the value of goods and services produced in an economy in a year
methods of calculating national income - expenditure method
adding up all the spending in the economy, usually measured over a specific time period i.e. a year
methods of calculating national income - income method
adding up all the incomes received from the factors of production i.e. wages, interest, rent and profit, usually measured over a specific time period i.e. a year
methods of calculating national income - output method
adding up the value of all final products produced in the economy, usually measured over a specific time period i.e. a year
government aims - low and stable inflation
the Bank of England has a target of 2% inflation
government aims - low unemployment
The government aims to reduce the number of unemployed. This helps reduce the burden on government spending.
government aims - balance of payments equilibrium
The government tries to increase the value of exports from the UK. This means we will be selling more abroad.
government aims- steady economic growth
The government wants the economy to expand at a steady rate. This will mean people become better off.
the business cycle
Shows how the value of goods and services have changed in the economy year on year. It will show times of economic recovery, boom, recession and slump.
boom characteristics
- high rates of economic growth
- growing inflation
- low levels of unemployment
- high value of imports
- high levels of tax revenue / low levels of government spending
recession
this is where the economy experiences two quarters of negative economic growth
recession characteristics
- falling inflation
- rising unemployment
- falling value of imports
- falling levels of tax revenue / higher levels of government spending
inflation
a rise in the general level of prices in an economy in a year
disinflation
a slowdown in the rate at which prices are rising in general (i.e. when prices rise less quickly than before)
deflation
a fall in the general level of prices in an economy in a year
calculating inflation (UK Office of National Statistics Method)
1) Complete the Living Costs and Food Survey to see what average families buy.
2) Create a basket of goods. The items change yearly and indicate trends in spending.
3) Give a weight to each item in the basket based on importance.
4) Gather prices from retailers across the country. ONS analysts go out and survey retailers as well as looking at prices online.
5) Check prices from last time
6) Calculate percentage change in prices using the following formula :
new price - old price
————————— x 100
old price
7) Add up all the percentage changes and calculate an average change ; this is inflation
causes of inflation - demand pull
This is caused by excess demand for goods and services which tends to occur when the economy is close to capacity (firms are getting close to or are at the maximum production level). This means that in response to shortages, consumers will bid up prices.
causes of inflation - cost push
This is caused by firms having an increase in their costs of production. In response to this and to protect profit margins, they will increase prices. Costs of production could increase due to falls in the exchange rate, government legislation (like an increase in the National Living Wage), rises in oil prices etc.
impacts of inflation - individuals
- reduces the purchasing power of people’s incomes because inflation leads to a fall in the value of money
- people save less because they get less return on their savings
- people might borrow more because it is beneficial to borrow to buy now as prices will be significantly higher later
- firms might not be able to afford wage demands so will make workers unemployed, reducing living standards
impacts of inflation - firms
- cost of production will rise reducing profits
- workers will demand higher wages, increasing cost of production or resulting in the workers striking if the firm cannot meet the demands
- reduces competitiveness in domestic markets because prices are rising more than prices of the same goods from foreign firms
- UK firms exporting will find that their goods and more expensive than those of foreign firms
impacts of inflation - government
- high inflation can increase the value of imports and decrease the value of exports due to a fall in international competitiveness
- unemployment could rise because firms cannot afford the wage demands of employees and because demand for goods and services will fall due to falling real incomes
- inequality could rise because the price rises will represent a larger proportion of a low income earner’s wage
unemployment
a person is unemployed if they are willing and able to work but cannot find a job
level of unemployment
the number of people who are willing and able to work but cannot find a job
rate of unemployment
the percentage of the workforce (16-66) who are willing and able to work but cannot find a job
measures of unemployment - claimant count
This is the number of people who claim the Job Seekers Allowance component of Universal Credit. It is not an accurate measure of unemployment because not everyone who is unemployed claims benefits, some are not eligible to claim it and the government can change the eligibility criteria.
measures of employment - labour force survey
This is a survey carried out every quarter. It asks 150,000 people their employment status and uses this as a representative sample of the population. This is an internationally recognised measure of unemployment.
causes of unemployment - cyclical unemployment
a downturn in the trade cycle / less demand due to recession
causes of unemployment - structural unemployment
A change in the make up of the economy / some industries no longer required
causes of unemployment - regional unemployment
decline of an industry in a specific geographical area (e.g. what will happen to Aberdeen when oil in the North Sea runs out)
causes of unemployment - seasonal unemployment
workers are unemployed due to the nature of their job at certain times of year (e.g. ski instructors and berry pickers)
causes of unemployment - frictional unemployment
when workers are moving between jobs
causes of unemployment - technological unemployment
workers have been replaced by machinery
causes of inflation - monetary inflation
This is caused by an increase in the supply of money. For example, if the Bank of England print more money, consumers will start to buy more goods and services. However, if output does not increase, then prices will bid up because shortages will occur.
consequences of unemployment - individuals
- unemployed people will have a fall in their standard of living because they will be reliant on unemployment benefits
- unemployed people may suffer from social exclusion leading to mental illness
- employed people will not easily be able to increase wages because there will be others who are looking for work
consequences of unemployment - firms
- demand for their goods and services falls due to falling incomes
- surplus of labour therefore wage demands will be kept low
consequences of unemployment - government
- economic growth falls because the output of goods and services will fall due to lack of demand
- increase in government spending on unemployment benefits, healthcare and possibly policing due to an increase in crime
- government receive less tax revenue due to a fall in income tax and VAT receipts
- value of imports will fall as less people can afford to buy goods from abroad
economic growth
an increase in the productive capacity of the economy in a year
how to increase economic growth
to increase economic growth, the government must increase the quantity of the factors of production or improve the quality of these
measures to increase economic growth
- increasing immigration / increasing the retirement age, both increasing the size of the labour force
- investing in education, improving the quality of labour, making them more productive
- encouraging investment in research and development, improving the quality of capital such as machinery
- reclaiming land, providing more land to build on
- building new infrastructure, making it easier and faster to transport goods
- promote entrepreneurial activity, as entrepreneurs will start up new businesses and find new ways to produce products
- encourage competition - the government could introduce laws that allow for more competition and markets, forcing forms to produce more with their resources
- update management techniques meaning that the productivity of labour could rise, meaning that more is produced with the current factors of production
standard of living
the level of wealth, material goods and necessities available
factors affecting the standard of living
inflation, education, unemployment, economic growth and income (IEUEI palindromic acronym)
Human Development Index (HDI)
seeks to measure standard of living by looking at a range of factors including income and education
main areas of UK government taxation
income tax, national insurance and VAT
