unit 7: main economic indicators Flashcards
main economic indicators
define inflation
persistent and appreciable increase in the general price levels of goods/services over a period of time
state the causes of inflation and explain them
demand-pull inflation
– when people spend too much(either as a result of increased credit or excess spending by the government) means that expenditure exceeds the supply of goods and services
cost-push inflation
– if production prices are very high, then the level of production will fall (businesses won’t be able to produce as much due to high prices). if expenditure does not drop as well, the economy will have a shortage of goods and prices will rise (equilibrium is lost.)* firms have to increase the selling price of their goods and services to make up for the increased production cost.
money supply
– increase in money supply causes total spending to increase as the rate at which money changes hands is fairly constant(a lot of cash on hand) .* causes inflation as money supply(flow of cash) increases at a faster rate than the supply of goods and services in the economy (excess demand, increasing the prices of goods and services).
what are the types of inflation?
cyclical
caused by booms and slums in an economy
structural
caused by problems in an economy of a country(is on prurpose to deal with problems like excess credit in an economy)
booms- peaks in a business cycle
slums- when production is at its lowest
define retail price index, give a simple calculation
retail price index
index of the prices of goods and services yhat (consumers) people buy.*measures the level of consumer prices.
calculation**cost of fixed basket in a year divided by the base year cost of the fixed basket times 100 **
what are the consequences of inflation?
– people/ workers with a fixed income will be worse off as they will buy less goods(less real income)
– employees will demand for higher wages and if the firm cannot afford it they might chose to lay off workers
– cost of business might increase which might lead to a cut in brek production
– if prices of goods in Namibia increase, people will be importing more which will have a negeative effect on the balance of payment
what are the policies used to deal with inflation?
income policy
an attempt by the government to slow down the rate of inflation by controling the incomes of the factors of production such as wages, rent, interest rates and profits. wage increase is usually the main cause of inflation, so this policy focuses on wages.
fiscal policy
government may use fiscal policy to reduce the availbale money in the economy by increasing tax and reducing gocernment spending, thus reducing demand in the economy.
monetary policy
used if the government believes that inflation is caused by excess demand, so they use it to reduce money supply and the availability of credit in the economy by raising interest rates(the cost of borrowing.). this will lead to a decrease in borrowing and therefore less cash in hand.
how else do you reduce the availability of credit apart from the monetary policy?
– high interst rates
– putting up security when someone wants to borrow/ putting strict rules for lending
– reducing the period of time for people to pay back these loans
illustrate how the rate of inflation is measured
– government uses the retail price index/ consumer price index to calculate the rate of inflation
– they choose a base year in which the index starts
– each item is then given a weighted index by which its price is then multiplied
– value of goods and services is given a weighted index of 100 in the base year
base year: price level in a particular year against which all other pric
not (apparently) in the exam.
define employment
state of having a job/ being employment
state the theories of employment
– classical theory
– keynesian theory
– neo-classical theory
explain the classical theory of employment
full employment will only be achieved at the level at which employers ar prepared to offer a job to everyone who wants a job, and at which everyone who wants a job is prepared to accept the particluar wage rate offered. (hint: there needs to be kind of an equilibrium, if everone can agree on a wage rate.)
full employment will be achieved when real wage rate is at level require
explain the keynesian theory of employment
this theory states that the level of employment depends on total demand for goods and services (aggregate demand)
– if demand for goods and services is too low, then firms would make losses and have to relieve some workers, this increases the level of unemployent
explain the neo-classical theory
states that supply itself influences employment, since an increase in total output will lead to increased total expenditure to buy those goods and services.
what is unemployment?
people who want a job but cannot find one
define working population
all people above the school learning age(18 years old and below the retirement age of 60)
define labour force
all people who are supposed to work
what is the formula for unemployment?
unemployment divided by the labour force
labour force= labour force + non-labour force
what is the formula for population?
labour force+non-labour force+ not in labour force
types of unemployment
cyclicall- because of low demand
structural- because of a change in structure.e.g new machinery being introduced in a business/ economy
frictional- people searching for jobs
seasonal- because of seasonal production of products
explain cyclical and structural unemployment
cyclical– occurs when there is a general decrease in demand, which comes as a result of a recession/ slump in the economy
–when demand is low and people want to buy fewer products, the production of these products falls and so does the employment of the workers
structural– arises from the changes in the structure of the economy
– when changes in the economy lead to a permanent decrease in demand for an industry’s product, then structural unemployment will occur.
explain frictional and seasonal unemployment
frictional– this is time spent by people looking for work after they have changed their job. while they do this, they are called the frictional unemployment
seasonal– occurs when people are only needed to work during a certain season or time.
– if production times and activities are related to different seasons, then there will be much seasonal unemployment.
state the reasons for unemployment
– when workers are made redundent(no longer any work available)
– a decrease in the export of a certain product
– when businesses or firms become capital-intensive(replacing workers with machines)
– poeple entering the labour market for the first time(firms don’t want to employ someone with no experience.e.g. fresh university students)
– people re-entering the labour market(firms don’t trust that you still remember your skills, because it’s been a long time)
– employees are fired, because of behavioural issues/ unsatisfactory performance.
cost/ consequences of unemployment
– less products are produced, potential for production for production is not realised
– fall in the standard of living and economy growth
– cause for ill-health as unemployment poeple become depressed
– results in some people committing suicide
– government receives less tax, les income tax because less poeple are working and less VAT because of low demand for goods/services(people have less money)
– loss of skills
– causes an increase in crime and social unrest
how can unemployment be reduced?/policies to reduce unemployment
– training+ re-training- spending money to train workers to obtain new skills, reduce occupational immobility
– wage subsidies- government helps employers to pay their employees.
– labour market information- gaining information about employment opportunities, for more people to be employed
– promotion of small businesses and informal sector- develop small businesses to create/provide employment
– government as an employer- government can create jobs and employ people
how do you reduce frictional unemployment?
by providing more information on job opportunities so the unemployed can find a job more easily. labour market information programmes can be established.
explain how sructural unemployment can be reduced
- government should help with the training and re-training of workers so they are able to find jobs in other industries, this reduces occupational *immobility of labour
- government can subsidise firm with wages to help them from declining*
when people can’t change from on job to another due to a lack of skills
how can cyclical unemployment be reduced?
- governmen can increase demand for goods/services by decreasing VAT and income tax
- reduction of interst rates will encourage more borrowing and people will have more money to spend, which will increase demand for goods and services
not an objective
policies to reduce unemployment?
-
training and retraining: spending money to train workers so they can obtain new skills or renew old skills to enable them to find employment
-** wage subsidies: government can help employers pay their employees so labor costs are decreased and employers will not have to lay off workers to save on costs.
- labor market information** giving information on employment opportunities so it can be easier for new poeple in the market to find employment - promotion of small businesses and informal sector develop small businesses in order for them to create employment.
topic 7.2: output
define gdp, gnp and national income
gdp: value of all goods and services produced in a country in a year
gnp: final value of output/ expenditure by namibian- owned factors of production, whether located in Namibia or overseas
national income: money value of flow of output of goods and services produced, within an economy over a period of time
name and describe methods of calculating national income
output method- only final goods/services produced in one year
income method- adding all income earned
expenditure method-adding all expenditure
why do we measure national income?
- to provide an indicator of overall standard of living
- allows comparisons to be made with econmies of other countries
- helps businesses/ other organisations to forecast future levels of economic activities
- helps the distribution of icome between different groups within the economy
- enable income trends to be identified and to highlight relationships between different parts of the economy
not an objective
what could some of the limitatons of national income statistics?
- increase in national income over time may be partly due to inflation, rather than exclusively due to an increase in output
- population size must be considered. avarage national income/ gdp per capita may give a more meaningful indication of society’s standard of living
-national income statistics may exclude externalities (pollution)
national income statistics are affected by the balance of imports and exports
not an objective
define economy growth and list factors affecting it
- increase in producton of goods and services in the economy per year
- **labor: ** size of working populatin relates to size age structure of population, so an increase in quantity of availabe labor will normally occur as more people move into working age group
-
capital: capital widening- amounts of existing forms of capital mey be increased, e.g operator decides to purchase an extra truck and hire a new driver, increasing capital
: captal deepening- increasing the amount of capital per worker which increases worker’s productivity, e.g. changing the truck for a much bigger vehicle
-technology: changes in technology may an important source of economic source of economic growth. doesn’t necessarily mean extra capital is used, but that different techniques and processes are employed
-natural resources: economy may benefit from discovering a yet unknown natural resource, existence of natural resources offers an important source of growth - other factors:
- attitudes
- training of management
- flexibility, motivation and mobility of labor
- degree of political stability
(none are easily maesured)
not an objective
advantages of economic growth
- living standards of people living in a country are raised
- people will have access to more goods and services
- government is able to raise more revenue without increasing tax rates
- gives a country a good reputation
not an objective
disadvantages of economic growth
- technical inefficiencey(more machinery/ factories)can impose heavy social costs on the community
- requires more investment as there’s more production of capital goods
- rate of economic growth reduces output of consumer goods while more capital goods are being produced
- non-replaceable resources are used up
internatinal trade
define trade
exchange of goods and services for money, especially between country’s
not an objective
why do countries trade?
opportunity cost- countries can’t produce all the goods they consume, they need to import from othe countries
**comparative advantage **- there are countries that can produce goods at a cheaper price and more efficiently than another
absolute advantage- a country can produce more than a competitor using the same resources
how do you calculate GDP?
gdp= c+i+g+(x- m)
c- sonsumer spending
i- business investment
g- government
x- export
m= import
what is gain of trade?
adavantage which different countries participating in international trade enjoy as a result of specialisation and division of labor
what are the benefits of gain of trade?
- greater choice of products for consumers
- efficient supply of products
- political benefits from expansion of global trade
- increased competition for producers
- businesses exploit the economies of scale
- increased production leads to increased gdp
define imports, net exports and exports
imports= purchase of foreign products and bringing them into one’s home country
net exports= value of country’s total exports less the value of total imports
exports=selling of goods/services from one’s home counrty to foreign nations
list and explain the factors that determine total/net exports
- level of income- the higher the income, the more the imports(increased demand for foreign products)
- exchange rate of 2 countries- the stronger the currency, the more the imports, and vice versa
- import duties/ tax/ tariffs- the higher the tax, the less the demand for foreign products
- economic sanctions- anctioned countries import less
explain the reasons for fluctuating exchange rates
- demand for currency- high demand for a currency, causes te currency to appreciate
- supply of currency- if the currency is limited in supply, its value appreciates. vice versa
- balance of payments- if the country’s exports are string, greater demand for currency will follow to pay for these exports which will influence the bop
- economic growth- fluctuating exchange rates can result in economic growth, which can result in an increase in exchange rates if it’s driven by the exports
- interest rates- high interest rates attracts foreign investors and financiers to the country, forcing demand for the currency and causing a rise in the exchange rate
- inflation- inflation causes an increase in prices leading to a fall in demand for exports. this may require a drop in the exchange rate to rectify the situation
define trade restrictions
any controls set up by an importing country to limit trade with other countries
what is the reason for trade restrictions?
- to protect a country’s economy fro interanational competition
- cheaper products or products of a higher quality may dominate local industries
methods of trade restrictions
tariff barriers
* tariffs- taxes imposed on imported goods
non-tariff barriers
* quotas- when government puts limits on the amount of foreign goods sold locally.
* voluntary export restraints- agreements between countries to restrict the amount of exports they sell to another country so as to allow that country’s industry to develop.
* product standard regulation- set up standards the imported products must meet to enter the country.
* frontier delays and administrative burdens- a deliberate delay at the customs facilities of a country, which makes importing a long and burdensome task.
* exchange control- government restricts amount of foreign currency available to firms wishing t import goods
* subsidies- money the government pays to its own firms to help them keep prices down.
define free trade
system of trade where there are no trade restrictions
