Unit 2 - UK Economic Activity Flashcards
National Income
The value of goods and services produced by an economy in a given year - usually measure through GDP
Measuring National Income - Output Method
Final value of all goods and services produced in an economy in a year
Measuring National Income - Income Method
Total Incomes earned by households (from the factors of production) in a year
Measuring National Income - Expenditure method
Total money spent by households on the output of goods and services in a year.
Calculated using consumption + investment + government spending + (exports - imports)
Uses of GDP statistics
To check if policies have worked in improving the economy
To measure living standards
To compare with other countries
Used by international organisations (such as the EU) to decide how much each country should contribute
To decide how much aid the government should give to a country
Measures of National Income - GDP
Gross Domestic Product - Value of goods and services produced in the UK in a given year
Measures of National Income - GNP
Gross National Product - Value of goods and services produced by UK firms in a year
Measures of National Income - NNP
Net National Product - Value of goods and services produced by UK firms in a year, taking into account depreciation
Economic Growth
Increase in the productive capacity of the economy over a period of time i.e. A year
Recession
Two consecutive quarters of negative economic growth
Real GDP
Measure of the value of economic output that is adjusted for price changes (i.e. inflation/deflation)
Nominal GDP
Measure of the value of economic output without taking into account price changes (i.e. inflation/deflation)
Government Economic Aims - Growth
Stable economic growth - steady and controlled = 2%
Government Economic Aims - Unemployment
Low unemployment : around 3% - reduce structural and frictional unemployment
Government Economic Aims - Balance of Payments
Balance of payments balance - increase value of exports and reduce value of imports
Government Economic Aims - Inflation
Low inflation - Bank of England manage interest rates and money supply to achieve the targeted 2%
Government Economic Aims - Inequality
Low inequality - Reducing the gap between the rich and the poor
Inflation
A general rise in the level of prices of goods and services in a year
Measuring Inflation - CPI
Consumer Price Index - does not include housing costs and mortgages
Measuring Inflation - RPI
Same as Consumer Price Index but it includes housing costs and mortgages
Measuring CPI
Complete the Living Costs and Food Survey to find out what the average family buys
Create a basket of goods and give a weight to each item based on importance
Gather prices from retailers around the country
After a period of time, check prices from the last time and calculate a percentage change (per item)
Add up all the % changes and calculate the average change - this gives us the annual inflation figure
Causes of Inflation - Demand Pull
This is when demand in the economy increases and firms reach maximum capacity - so prices are bid up
Causes of Inflation - Cost Push
This is when the price of inputs increases (e.g. better wages demanded) so firms will increase prices to maintain their profit margin
Causes of Inflation - Monetary
This is when the money supply in the economy grows and consumers spend more money. This will drive up demand and hence prices.
Deflation
A general fall in the level of prices of goods and services in a year
Disinflation
A fall in the rise of the level of prices of goods and services in a year
Effects of Inflation - Individuals
Fall in purchasing power if incomes do not change with inflation - based on real income/wage
Savings value falls - based on real interest rate
Borrowers pay back less (in real terms)
Fiscal drag - can be dragged into a higher tax band
Effects of Inflation - Firms
Costs of Production could rise - e.g. wages; price spiral
Menu costs
Decrease in demand
Effects of Inflation - Government
Less Tax Revenue Greater unemployment Exports become less competitive Imports increase Reduces real economic growth Greater inequality
Unemployment
Being willing, able and available to work but cannot find a job
Rate of Unemployment
Percentage of workforce (16-65 yrs) that are unemployed
Level of Unemployment
Number of people unemployed
Measuring Unemployment - Claimant Count
Based on the administrative records of people claiming unemployment benefits - i.e. Job Seekers Allowance (JSA)
Those claiming must declare that they are out of work, capable for work, available for work and actively seeking work during the week in which their claim was made
Claimant Count - Issues
Not all people claim benefits
The government can change the eligibility criteria
Some choose not to claim benefits
Measuring Unemployment - Labour Force Survey
International measure involving a sample survey of people living in private households, students’ halls of residence and NHS accommodation
Around 150,000 people surveyed every quarter, asking respondents about their personal circumstances and activity in the labour market
Unemployment - Seasonal Adjustment
Removes seasonal trends such as Christmas
Frictional/Transitional Unemployment
Caused by movement between jobs - contracts ending and relocation for new contracts beginning
Structural Unemployment
This is when an industry disappears
May be because foreign countries outcompete or new technology makes it redundant.
Can also be regional unemployment
Cylical/General Unemployment
Relates to the business cycle (demand) - should self right once the economy improves. Recession = high unemployment
Seasonal Unemployment
Changes in unemployment due to seasonal jobs such as berry picking
Real-wage Unemployment
Caused by wages being above equilibrium
Impact of Unemployment - Individual
Lower income as they are on benefits
Lose skills is unemployed for a long time - makes it harder to find work
May be socially excluded - cannot afford to go out
Mental & Physical Problems - increased stress and social isolation cause health issues
Impact of Unemployment - Firms
Less demand for goods and services - meaning lower profits
They offer lower wages since many people are available to work
Impact of Unemployment - Government
Need to spend money on benefits
Less tax revenue since less people pay income tax
Fewer purchases - so less VAT revenue
Associated rise in crime - money must be spent to deal with this
NHS might require greater funding to deal with an increase in poor health
Lower demand - results in a fall in national income
Living Standards
Includes measures of health, wealth and income
Direct Taxation
Taxes which are taken from individuals and firms and paid straight to the government. These are usually taken from income or wealth
Direct Taxes - Examples
Income Tax Corporation Tax National Insurance Council Tax Inheritance Tax Stamp Duty
Indirect Taxation
Taxation paid through an intermediary to the tax authorities. These are generally taken from expenditure
Indirect Taxes - Examples
Value Added Tax (VAT)
Fuel Duty
Customs
Excise Duties
Types of Taxation - Progressive
Higher income earners pay more as a proportion of their income than lower income earners.
Progressive Taxation - Example
UK income tax - don’t pay any tax on first £11,500, then you pay greater percentages thereafter
Types of Taxation - Regressive
Higher income earners pay less as a proportion of their income than lower income earners
Regressive Taxation - Example
Value Added Tax - 20% for all
Indirect Tax - Reasons for Imposing
To decrease/discourage consumption
To raise tax revenue
To copy other countries who have successfully introduces similar taxes - e.g. tax on fizzy drinks
To reduce pressure on healthcare if a good is a demerit good
Impacts of Indirect Taxation - Individuals
Means less tax taken from incomes
Can have a regressive effect
Can choose whether to pay tax
Increased prices
Impacts of Indirect Taxation - Firms
Have to pay tax to government so may increase prices
This can reduce demand for goods and services - which will reduce profit
Impacts of Indirect Taxation - Government
Can reduce demand for goods and services
Can increase inflation
Can increase inequality
Expenditure - Why Spend?
To provide merit goods (that if left to the free market some would go without) - healthcare, education etc.
To provide public goods (that if left to the free market, it wouldn’t be provided due to the “free-rider” problem) - e.g. street lighting and defence
To reduce inequality and improve living standards
Types of Expenditure - Capital
Long term spending on fixed assets e.g. spending on new hospitals/schools/highways
Types of Expenditure - Current
Regular day to day spending e.g. salaries of teachers and healthcare workers and drugs used in NHS
Types of Expenditure - Transfer Payments
Welfare payments made available through the social security system e.g. state pensions, child benefit and JSA
The Budget
The balance between government expenditure and taxation
Types of Budget - Deficit
When Spending exceeds taxation revenue
Deficit Budget - Impacts
Rise in national income - creates economic growth
Increases inflation
Increases imports
Decreases unemployment
Types of Budget - Balanced
When taxation and spending are equal - no impacts on national income and economic growth
Types of Budget - Surplus
When taxation revenue exceeds government spending
Surplus Budget - Impacts
Fall in national income - reduces economic growth
Increases unemployment
Decreases inflation
Decreases imports
Scottish Industry - Examples
Food and Drink -Whisky
Financial Services - Banking and Insurance
Energy - including oil, gas and renewables
Scottish Entrepreneur - Example
Sir Brian Souter - Founder of Stagecoach
Scottish Entrepreneurism - Impact
Stagecoach - 36,000 jobs, produce output (bus services), pay taxes to government , increase national income and boost economic growth
Consumer Demand Increases - Economic Impact
Firms will demand more factors of production from the households. This means that incomes (received from the factors of production) will rise. This may also lead to an increase in employment - if Labour is demanded by firms. Overall, since there is more money in the circular flow, national income will rise - boosting economic growth
Consumer Demand Falls - Economic Impact
Firms will demand fewer factors of production from households. This leads to a fall in incomes (received from the factors of production). This may also cause a rise in unemployment - if less labour is demanded by firms. Overall, since their is less money in the circular flow, national income will fall - reducing economic growth
Measuring National Income - Problems
Cash-in-hand jobs may go undocumented
Double counting : input AND output both counted
Voluntary work : produce output for no income
