Unit 3 - Economic Objectives And The Role Of The Government Flashcards
Economic growth
Growth in GDP (value of output) over time
Determinants of economic growth
Investment (spending on capital goods), changes in technology, education, labour productivity, size of the workforce, natural resources and government policies (i.e. infrastructure development)
Economic growth benefits
A rise in material lifestyles
A reduction in poverty (through tax revenue)
A rise in the welfare of the population
A rise in employment
Economic growth costs
Pollution (Air, land etc) Carbon emissions Congestion Loss of renewable resources Inflation A lower quality of life
Employment
The use of labour in the economy to produce goods and services
Claimant count
The method of measuring unemployment according to the number of people claiming unemployment related benefits
Level of unemployment
The number of people in the working population who are unemployed
Rate of unemployment
The % of the country’s workforce that is unemployed
Four types of unemployment
Seasonal
Frictional
Structural (Permanent decline of an industry)
Cyclical (Fall in total demand in an economy)
Benefits of unemployment
Wage inflation kept down
Firms can be more competitive on price
Inflation kept under control
Individual consequences of unemployment
Loss of self-esteem
Lower living standards
Family issues
Become deskilled
Government consequences of unemployment
Wasted labour resources Paying out more in unemployment related benefits Less tax revenue Leads to further unemployment (cyclical) Budget deficit
Regional consequences of unemployment
‘Depressed areas’
Falling house values
Crime
Distribution of income
How incomes are shared out between households
Distribution of wealth
How wealth shared out between households
Income
A flow of money over times includes wages, rent, interest, profits (dividends) and benefits (incl. pensions)
Wealth
The combined value of a stock of assets at a particular point of time including property, land and money in the bank
Causes of uneven income distribution
Income earning assets are unevenly distributed Differences in wages Reliance on benefits (includes pensions) Age Gender
Causes of uneven wealth distribution
Inheritance
Savings
Purchase of property
Enterprise
Consequences of uneven income and wealth distribution
Poverty and deprivation (Distinguish between absolute and relative)
Poor housing
Poor health
Inequality of opportunity
Cost of living
The price level of goods and services bought by the average family
Price stability
When the general level of prices stays constant, or grows at an acceptably low rate
Nominal values
The value of something in money
Real values
Pay adjusted for inflation (Shows purchasing power comparable to other years)
CPI Key Points
Measured using index
Basket is weighted
Consequences of inflation for consumers
Shoe leather costs
Loss of consumer confidence
Fall in real incomes
Consequences of inflation for producers
More flexibility setting wages Menu costs Conflicts (i.e. with trade unions) Less internationally competitive Make workers redundant Reduced business confidence (leading to less investment)
Consequences of inflation for savers
Savings worth less (value falls)
Consequences of inflation for the government
Policy needed to combat inflation
More spending on benefits and public sector wages (index linked)
More tax revenue (i.e. VAT)
Government spending
The total amount of money spent by the government in a given period of time
Government revenue
The source of finance for government spending
Budget deficit/surplus - key point
The government might deliberately budget for a deficit/surplus to achieve objectives
Macro economic objectives
Low unemployment
Economic growth
Price stability
Balance in the balance of payments
Fiscal policy tools
Taxes
Government spending
Costs of budget deficit
No guarantee workers will spend extra money
Extra income may be spent on imports
Inflation could rise
Opportunity costs
Government action to redistribute income and wealth
Taxes Benefits Progressive taxes Inheritance tax Means tested benefits Education spending
Progressive tax
A tax which takes a greater % of tax the higher the income
Evaluating consequences of measures to redistribute income and wealth
People may not work in post tax income is not much better than benefits
Workers may not seek promotion
Businesses may not/invest in the UK
High earners may move abroad
Monetary policy
A policy that aims to control the total supply of money in the economy to try to achieve the government’s macro economic objectives - in particular, price stability
Monetary policy tools
Interest rates
Quantitative easing
Quantitative easing
The central bank makes more money available for High St banks to lend
Other impacts of reduced interest rates
Fall in the value of the %
Asset (i.e. houses) prices rise
Supply side policies
Policies that increase the productive capability of the economy i.e. increase the output
Supply side policies examples
Education and training Subsidies Spending on infrastructure Reducing power of trade unions Competition policies Reduction in benefits Reduction in direct taxes Privatisation (encourages efficiency)
Benefits of supply side policies
Targets specific markets Combats inflation Increases employment Improves the balance of payments Increases growth
Evaluation of supply side policies
Times lags Costly Resistance i.e. trade unions Affects distribution of income negatively Unintended effects i.e. more P/T workers
Externality
An effect of an economic activity on a third party
Government policies to impact externalities
Taxes Subsidies Information provision State provision Legislation
State provision
Goods and services provided directly by the government i.e. education and healthcare
