Unit 2 - The National and International Economy Flashcards
AD =
C + I + G + (X-M)
Economic growth
In the short run, an increase in real GDP, and in the long run, an increase in productive capacity, that is, in the maximum output that the economy can produce.
Unemployment
A situation where people are out of work but are willing and able to work.
Inflation
A sustained rise in the price level; the percentage increase in the price level over a period of time.
Gross Domestic Product (GDP)
The total output of goods and services produced in a country
Aggregate Demand
The total demand for a country’s goods and services at a given price level and in a given time period.
Aggregate Supply
The total amount that producers in an economy are willing and able to supply at a given price level in a given time period.
Multiplier effect
The process by which any change in a component of aggregate demand results in a greater final change in real GDP.
Supply-side policies
Policies designed to increase aggregate supply by improving the efficiency of labour and product markets.
Monetary policy
Central bank and/or government decisions on the rate of interest, the money supply and the exchange rate.
Fiscal policy
The taxation and spending decisions of a government.
Determinants of consumer expenditure
- Real disposable income
- Wealth
- Consumer confidence
- Interest rates
- Inflation
- Demographics
- Channels to saving
- Credit availability
Determinants of investment expenditure
- Changes in real disposable income
- Capacity utilisation (firms are more likely to invest if they are operating close to full capacity)
- Corporation tax
- Interest rate
- Technological advances
Determinants of government expenditure
- The governments view on the extent of market failure and its ability to correct it.
- The level of economic activity in the economy can influence government spending
Determinants of net exports
- Real disposable income abroad
- Real disposable income at home
- Exchange rate
What would cause a shift to the right in the AD curve? (4)
- A fall in the interest rate
- Fall in the exchange rate
- Rise in the population
- Cuts in income tax
What would cause a shift to the left in the AD curve? (4)
- A rise in the interest rate
- A rise in the exchange rate
- Fall in share prices on global markets
- A rise in income tax
What would cause a shift in the SRAS curve? (4)
- Changes in the costs of production
- Changes in the costs of raw materials
- Changes in wages
- Changes to producer taxes
What would cause a shifts in the LRAS curve? (3)
- Changes in the quantity and quality of resources
- Improvements in education and training
- Advancements in technology
Circular flow of income - producers and consumers
Household expenditure (consumption) flows to firms to pay for goods and services
Circular flow of income - Employers and employees
Income (Y) flow from firms to households to pay for the services of factors of production(wages, interest, rent and profit pay for labour, capital, land and enterprise, respectively)
Withdrawal/leakage
Money leaving the circular flow is known as a withdrawal,
- Savings
- Taxation
- Import spending
Injections
Money entering the circular flow is known as an injection.
- Investment
- Government spending
- Export earnings
Circular flow of income
Households —-> Consumer expenditure —–> Firms
Firms —-> Wages, rent, dividends —-> Households
Households —-> Factors of production —-> Firms
Firms —-> Goods and Services —–> Households
Objectives of government economic policy
- High but sustainable rate of economic growth
- Economic stability, limited short run fluctuations of output
- Low and stable inflation rate
- High employment and low unemployment levels
- Satisfactory balance of payments that avoids large or persistent deficit or surplus
- Equitable distribution of national income
How do we measure economic growth?
By the annual percentage change in real GDP
Causes of economic growth (5)
- A fall in the exchange rate
- A cut in income tax or a rise in consumer confidence
- Essential causes of long run growth are increases in quantity and/or quality of resources
- Increased resources due to rising labour force
- Advances in technology and improvement in education and training
Costs of economic growth (4)
- The only way to increase output is to switch resources from making consumer goods to capital goods.
- If economic growth is not sustainable, there will be damage to the environment
- Economic growth may result in the depletion of non-renewable sources
- Economic growth may reduce the quality of some people’s lives
Benefits of economic growth (5)
- A rise in peoples material standard of living,
- If real GDP per head rises, the population can enjoy more goods and services.
- Economic growth enables poverty within a country to be reduced.
- Higher output raises tax revenue without having to increase tax rates.
- Economic growth increases employment
What is sustainable economic growth?
- Sustainable economic growth, economic growth that can continue over time and does not endanger future generations.
Unemployment
A situation where people are out of work but are willing and able to work.
How do we measure unemployment?
- Unemployment rate, the percentage of the labour who are out of work.
What is the preferred measure of unemployment?
- The government’s preferred measure is what is known as the Labour Force Survey (LFS), a measure of unemployment based on a survey using the ILO definition of unemployment.
Difficulties of measuring unemployment
- The Labour Force Survey is based on the ILO definition of unemployment
- Some people can be actively seeking work but not entitled to claim unemployment-related benefits.
- LFS is more expensive to collect information than the claimant count.
- There is also a risk that it may be subject to sampling errors.
- Some people claiming benefits may not be actively seeking work.(false)
- Another difficulty of the claimant count is that it is not suitable for international comparisons.
What are the 5 types of unemployment?
- Cyclical unemployment
- Structural unemployment
- Technological unemployment
- International unemployment
- Frictional unemployment
What is cyclical unemployment?
unemployment arising from a lack of AD.
What is structural unemployment?
unemployment caused by the decline of certain industries and occupations due to changes on demand and supply.
What is technological unemployment?
Technological unemployment arises when workers lose their jobs because of advances in technology.
What is international unemployment?
Occurs when jobs are lost because firms decide to carry out some of their work abroad.
What is frictional unemployment?
short term unemployment occurring when workers are in-between jobs.
Consequences of unemployment
- Lost output (Waste of resources)
- Lost tax revenue
- Government spending on unemployment benefits
- When people are unemployed they are more likely to suffer health problems and even increase crime (?)
- Hysteresis, the longer people are out of work, the more difficult it can be for them to gain another job
Benefits of unemployment
- More time allocated in search of a more rewarding job
- High levels of unemployment may discourage workers from seeking wage rises and may dissuade them from taking industrial action.
Significance of unemployment
- How significant the consequences of unemployment are depends on how much unemployment there is, how long on average people are unemployed, the benefits provided to the unemployment, the type of employment and the distribution of unemployment.
- The higher the rate of unemployment, the more serious the costs are likely to be
- Generous unemployment benefits reduce the costs of unemployment but they have an opportunity cost for the economy.
Inflation
A sustained rise in price level; the percentage increase in the price level over a period of time.
How can we measure inflation?
- Consumer price index (CPI), a measure of changes in the price of a representative basket of consumer goods and services.
- Retail price index (RPI), measure of inflation that is used for adjusting pensions and other benefits to take account of changes in inflation and frequently used in wage negotiations.
Difficulties of measuring inflation
- Measures of inflation also tend to overstate inflation, as they measure the price of a fixed basket of products.
- The measures do not take into account people’s ability to alter what they buy during the year.
- People usually move away from buying products that are becoming relatively more expensive towards those that are becoming relatively cheaper.
Causes of inflation
- Demand-pull inflation, increases in the price level caused by increase in aggregate demand.
- Cost-push inflation, increases in the price level caused by increases in the costs of production.
Consequences of inflation
- Fall in the value of money
- Menu costs
- Shoeleather costs
- Administrative costs
- Inflationary noise
- Random redistribution of income
- Fiscal drag
- Uncertainty
What are menu costs?
the costs of changing prices due to inflation.
What are shoeleather costs?
costs in terms of the extra time and effort involved in reducing money holdings.
What is inflationary noise?
the distortion of price signals caused by inflation.
Benefits of inflation
- Workers also like rises in their pay, even if these are matched by higher prices.
- The ability that inflation gives firms too alter workers’ real pay can help labour markets operate more efficiently and reduce unemployment.
