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Economics A level Edexcel > Y1 Macroeconomics > Flashcards

Y1 Macroeconomics Flashcards

1
Q

Name Four main Economic Objectives

A

Low and stable inflation
Real Economic Growth
Low Unemployment
Balance of payments

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2
Q

Name three secondary objectives

A 
Income distribution (equality) 
Environmental externalities 
Balancing budget
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3
Q

Measures for Unemployment (2)

A

Claimant Count
Labour Force Survey

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4
Q

Why is the LFS usually higher than the Claimant Count? (3)

A

Not all members of a household will claim benefits, while some will still unemployed

  • People may be unemployed but not eligible for benefits
  • Part time unemployment is included in the LFS
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5
Q

What are the criteria for the LFS? (3)

A

Monthly survey of
60,000 households
Uses International Labour Organisation definition of u/e
- looked for work past 4 weeks
- ready to start in 2 weeks
- must be able to work 1 hour/week (so part time included)

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6
Q

What is GVA

A

Gross value added (value of out put minus the value of resources used to produce goods and services)

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7
Q

How is GDP calculated

A

GVA + taxes - subsidies (it’s a bit more like the actual amount of money in an economy)

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8
Q

How do you calculate Real values with indices

A

= nominal * base year/current year

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9
Q

National Output is theoretically the same as…

A

National income and national expenditure

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10
Q

What is capital depreciation

A

loss in value of capital due to capital consumption and depreciation (over time)

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11
Q

GDP + Overseas Production + NET Overseas interest payments and dividends = ?

A

GNI (Gross National Income remember it uses foreign income)

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12
Q

What is NPIA

A

Net property income from abroad (international earnings)

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13
Q

Why is GNP a better measure than GDP?

A

GNP includes the value of overseas and domestic earnings by citizens of a country (think domestic vs national)

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14
Q

NNI (Net National Income) =

A

GNI - depreciation

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15
Q

What is the best estimate for a country’s national income

A

Net National Income (NNI) = GVA + taxes - subsidies + NPIA - capital depreciation
= GDP + foreign production + overseas income - depreciation
= GNI - depreciation

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16
Q

What type is excluded from National Income calculations and why?

A

Transfer payments as they have no corresponding outputs

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17
Q

Name 3 transfer payments

A

government benefits
Aid
Remittances

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18
Q

What is the most common value used for comparing country’s national income?

A

GDP pc - accounts for population size and is readily available data

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19
Q

Name 5 weaknesses with GDP pc when comparing countries

A

Doesn’t take into account

  • Purchasing power (Low GDP countries often have high purchasing power)
  • Quality of G+S may differ
  • Income distribution is ignored
  • Externalities ignored
  • Unrecorded Economy may differ in size
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20
Q

What is GNP

A

Value of G+S produced domestically and internationally by residents

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21
Q

What is the accelerator coefficient equation?

A

Accelerator coefficient = Investment/change in income

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22
Q

Name 6 positives of investment

A

Uses profits
Improves effeciency
Raises capicity
Capital can substitute labour (cheaper)
Exploit economies of scale
Provides barrier to entry so start ups can’t compete

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23
Q

Net investment =

A

Gross investment - capital depreciation/consumption

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24
Q

What is investment in economics?

A

Adding of CAPITAL stock to the economy

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25
Q

What is the balance of payments?

A

Record of all financial dealings between two countries

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26
Q

What is the balance of payments split into (and which bit is more important for year 1 macro)

A

Current Account (Important), capital and financial accounts

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27
Q

What is the current balance

A

Net trade (difference between exports and imports)

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28
Q

Current account surplus =

A

Exports>Imports

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29
Q

Current account deficit =

A

Imports>exports

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30
Q

Why are current account deficits problems in the long run?

A

means a country is living beyond its means -leads to debt

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31
Q

What is the current account split into?

A

Visibles (goods) and Invisibles (services), primary and secondary income

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32
Q

What is Hot Money?

A

IR proportional to ER
Higher interest rates increase saving which increases speculative money flows into the UK, appreciating the pound

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33
Q

What are Primary and Secondary incomes in the current account?

A

Primary is investment income
Secondary is transfers between organisations or governments

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34
Q

What goes from households to firms in the circular flow model?

A

Factors of Production, Expenditure

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35
Q

What goes from firms to households in the circular flow?

A

Income, G+S

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36
Q

What are the injections?

A

Investment, Exports, Government spending

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37
Q

What are the withdrawals?

A

Saving, imports, taxes

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38
Q

How is inflation measured?

A

Typical basket of goods (600 items)
Consumer Price Index and Retail Price index

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39
Q

What is disinflation?

A

A decreasing rate of inflation

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40
Q

What is Stagflation?

A

High inflation during a recession

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41
Q

What is the opposite of inflation?

A

Deflation

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42
Q

What is Money Illusion?

A

Wage increase may not equate to a real change in income, yet people feel richer

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43
Q

6 Costs of high inflation

A

Economic disruption as planning is difficult
Less international competitiveness
Redistribution costs (disrupt fixed incomes/taxes)
Shoe-leather costs - money lost as decisions put off
Menu costs - shops have to change prices
Wage Price Spiral - higher wages mean higher prices which mean higher wages etc

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44
Q

Types of inflation (2)

A

Demand pull
Cost push

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45
Q

7 causes of unemployment (and brief explanations if you can)

A
  • Frictional (When workers are looking for a new job)
  • Seasonal (Certain industries only operate at certain times of year e.g. farming)
  • Structural (If an industry is failing workers may find it hard to find work with low transferrable skills)
  • Cyclical/demand deficient - (Lack of economic activity due to a recession in AD)
  • Real Wage (When sticky wages mean that the wage level is set too high)
  • Benefits trap (Workers would rather claim benefits than seek employment)
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46
Q

7 Costs of unemployment

A

Loss of household income - less spending
Emotional difficulties for unemployed
Reduces available capital workers
Employers don’t want the long term unemployed
Can lead to increases crime and violence
Costs the government’s large amounts in welfare
Loss of economic output

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47
Q

Equations for the multiplier

A

1/(1-MPC) =
1/(MPW) =
1/(MPT + MPM + MPS)

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48
Q

2 examples of supply-side shocks

A

Commodity price rise
Trade Union wage rise

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49
Q

2 Demand-side shocks

A

Stock Market Crash
IR rise
Sharp pound appreciation
World economic recession

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50
Q

What is hysteresis?

A

When a variable does not return to the same trend when dramatically changed

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51
Q

What are the factors of production?

A

Land, labour, capital, enterprise

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52
Q

Name three transfer payments?

A

Pocket money
2nd hand trade
Government benefits

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53
Q

Why is real GDP pc better than just GDP (2)

A

Real adjust for inflation
pc adjust for population size

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54
Q

formula for real

A

nominal x base year/current year

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55
Q

What is inflation

A

increase in average prices

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56
Q

Why is high inflation bad

A

unstable prices and therefore consumers misinterpret and therefore there is misallocation of resources

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57
Q

When is there a current account surplus?

A

Exports>imports

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58
Q

When is there a current account deficit

A

Imports>exports

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59
Q

How is the current account deficit financed?

A

borrowing and selling assets of the general population

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60
Q

Equation is Ad

A

AD = C + I + G +X-M

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61
Q

What is the interest effect?

A

Reason for AD sloping down
- If PL increases people have to borrow more to finance it, this increases demand for loans increasing the cost of money (interest rates), this reduces Consumption and investment therefore AD decreases

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62
Q

What is the wealth affect (in terms of AD)?

A

Reason for AD sloping down
As PL increases, consumer purchasing power decreases reducing RO

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63
Q

What is the international effect?

A

Reason for sloping AD
As PL increase then international competitive decreases and therefore exports decrease reducing AD

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64
Q

What are durable and non-durable goods?

A

Durable - proivdese.g. car
Non-durable - used up or perishes soon after purchase e.g. food

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65
Q

What is MPC?

A

Marginal propensity to consume =
change in consumption/change in income
= dC/dY

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66
Q

What is APC

A

Average propensity to consumer =
C/Y

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67
Q

What is the wealth effect?

A

Large change in asset prices change consumer confidence as they feel wealthier or poorer

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68
Q

What is APS

A

Average propensity to save
= S/Y

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69
Q

What is MPS

A

marginal propensity to save
dS/dY

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70
Q

What is the UK APC approx

A

~90% - high and suggests under investment

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71
Q

What is investment?

A

spending on capital stock

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72
Q

What are the positives of investment? (3)

A

Uses profits
Raises capacity
Capital can substitute labour
Improves efficiency
Exploit economies of scale
Creates barrier to entry

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73
Q

Variables that affect investment (5)?

A

Costs
Interest rates
The rate of economic growth
Business expectations/confidence
World economy
Retained profit
access to credit
government regulations

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74
Q

D exogenous

A

non-economic variables have influence

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75
Q

What does “ring-fenced” mean?

A

When areas of G spending are unlikely to change bc they are too supported

(i.e. a government would struggle to cut education spending)

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76
Q

G and T in a deficit/

A

G>T

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77
Q

How is a government deficit financed?

A

Government borrowing

78
Q

What factors affect net trade? (3)

A

Price (labour/production costs)
Real income - incomes up raise imports
Exchange rate - SPICED
World economy
Protectionism (FREE TRADE)
quality

79
Q

What happens in teh short run

A

at least one factor of production is fixed

80
Q

Why is the SRAS upward sloping

A

As price levels increase, business can make more profit so their output increases

81
Q

Why is the SRAS shallow?

A

As businesses can repsond quickly in the short run to a small increase in price (overtime working for e.g.)

82
Q

What affects SRAS?

A

Supply side shocks

83
Q

Name some supply side shocks

A

Wage rates
Raw material prices
taxes
exchange rates
productivity

84
Q

What curve works in a similar way to the LRAS

A

PPF

85
Q

What cause shifts in the LRAS (5)

A

Technological advancements
Productivity increase
Education/skills
Regulation
Size of workforce
COmpetition policy
New enterprise
Mobility of FoP
Economic incentives (e.g tax breaks)
Institutional structure (politics)

86
Q

What is the issue with classical LRAS

A

Doesn’t account for long times of mass unemployment

87
Q

What are the types of LRAS?

A

Classical Keynesian

88
Q

Why is the keynesians model more realistic

A

Modern economies have minimum wages therefore stopping wages falling very low when labour is in excess supply

89
Q

Events in the economic cycle

A

Peak/boom
Downturn/contraction
Regression/depression/slump
Recovery/expansion

90
Q

Circular flow equation

A

O=E=Y

91
Q

Name the injections

A

Investment
Government spending
Exports

92
Q

Name the withdrawals

A

saving
taxing
imports

93
Q

What goes from firms to households in the circular flow diagram

A

Goods and services
Wages/rents/interest/profit

94
Q

What goes from households to firms in circular flow

A

Expenditure (on G+S)
Land, labour, capital

95
Q

When is an economy in equilibrium

A

injections=withdrawals

96
Q

what is not necessarily independant in macro?

A

AD and AS

97
Q

Which side of LRAS is negative output gap

A

left

98
Q

What is the name for the output gap on the right side of the LRAS

A

positive

99
Q

Where does an economy always end up long run in classical economics

A

On the LRAS as LR there is full employment

100
Q

3 equations for the multiplier

A

1/(1-mpc)
1/mpw
1/(mps+mpt+mpm)

101
Q

Principle of the multiplier

A

as money flows around an economy it causex a domino effect by boosting NI more than the initial investment

102
Q

What is the negative multiplier effect

A

What is resultant after a large withdrawal (knock on effects)

103
Q

What are the difficulties with the multiplier (3)

A

Hard to measure
based on the circular flow model
Not instantaneous

104
Q

Difference between real and nominal

A 
Real = adjusted for inflation 
Nominal = unadjsuted prices
105
Q

What is a transfer payment

A

movement of money without a corresponding output

106
Q

Difficulties with measuring economic growth? (4)

A

Statistical innaccuracies
Hidden economy (black market)
Home produced services
Public sector (non marketed goods can be difficult to value)

107
Q

Flaws with comparing NI over time (3)

A

Population changes
quality may chnage
defence costs are not invested
measures are innacurate
C is SR growth but I is LR growth
income inequality

108
Q

What is a Purchasing power parity

A

comparison between GDP taking into account cost of living

109
Q

Why is a PPP better than an exchange rate

A

weaker economies are often undervalued even though their population has a high purchasing power

110
Q

What is wealth?

A

a stock of assets that produce a flow of income over time

111
Q

What is the easterlin paradox?

A

Happiness and income only correlate at low incomes
- only relative income matters once necessities are covered

112
Q

Name indicators of happiness? (5)

A

Economy
personal finace
location
type of work
health
relationships
well being
government trust
education/skills

113
Q

What is stagflation

A

rising inflation and unemployment

114
Q

definition of a recession

A

tow sucessive quarters of negative growth

115
Q

Name some demand side shocks (3)

A

housing bubble burst
stock market crash
sharp IR rise
Sharp tax raise
World economic recession
sharp appreciation in the pound

116
Q

What does actual GDP above the trend line represent?

A

Output gap positive
- overworked, unsustainable

117
Q

Why is a positive output gap unsustainable in the long run?

A

Economy is overworked
In the LR workers may demand higher wages for extra hours

118
Q

What is hysterisis?

A

Variable does not return to its former trend
- e.g. shock creates new trend level

119
Q

Why does economic hysterisis occur?

A

A shock can cause long term struxtural unemployment

120
Q

What are the factors on the function of output?

A

Land, labour, capital, technical progress, effeciency

121
Q

How can AD affect long term growth?

A

An increase in demand by cause the need for business investment

122
Q

How long does it take for a government to double at a growth at

i) 3%
ii) 5%
iii) 10%

A

i) 25
ii) 14
iii) 7

123
Q

What is sustainable growth?

A

Must increase productive potential as well as AD
shift AD and LRAS

124
Q

What occurs in unsutainable growth?

A

Scarce resources and used up and increase in price reducing consumption
suppliers try and find alternatives
consumers switch products

125
Q

impact on consumers and producers of economic growth

A

Consumer incomes rise over time, may become unequal
Producers - sales increase, but some markets may disappear

126
Q

impact of economic growth on government?

A

rising tax revenue
rising demand for public goods

127
Q

Impact on environment of economic growth

A

usually negative but depends on regulation

128
Q

What is reflation

A

recovering growth after a recession (QE for e.g.)

129
Q

What two measures are used to measure inflation

A

CPI - consumer price index
RPI - retail price index

130
Q

Is the CPI or RPI usually higher

A

RPI

131
Q

How is inflation calculated?

A

using a typical basket of goods (650 items) and their average change in price
items are weighted and then added proportionately

132
Q

2 main causes of inflation?

A

demand pull
cost push

133
Q

What influences demand pull inflation

A

increases in C I G or X
decreases in M

134
Q

What causes cost push inflation

A

increases in costs for firms
increase in regulations
wage changes

135
Q

Costs of high inflation (5)

A

growth and unemployment (planning difficult)
decreases competitiveness world trade
redistributional costs - real values change dramatically
Price increases are unpopular
Shoe-leather costs - money lost as decisions put off
Menu costs - changing prices
Inflationary noise - ineffecient allocation
Wage price spiral - workers want higher wages which pushes up costs, which means workers need more money etc

136
Q

Problems of deflation (5)

A
  • falling prices encourages people to delay spending as goods will be cheaper in the future
  • lowers confidence
  • Deflation increases the real value of money → increase in real value of debt → firms and consumers have to spend more on debt repayments → less spending and less investment → decrease AD
  • As interest rates can’t go below zero deflation means that savings is very attractive so leakages increase and AD decreases
  • Can lead to real wage unemployment as the demand for workers decreases but sticky wages persist → increased unemployment
137
Q

Benefits of low, stable inflation (4)

A
  • money illusion (workers think they’re getting richer → increase AD)
  • AD is steady (unstable inflation leads to big swings)
  • doesn’t affect saving/fixed income (high inflation leads to savings becoming worthless
  • investment can repay long term borrowing (deflation means the value of debt increases massively)
138
Q

What is the money illusion

A

low inflation causes people to believe that their wages are increasing when they aren’t in real terms

139
Q

Causes of unemployment (6)

A

Frictional
Seasonal
structural
Demand-deficient/cyclical
Real wage
benefits trap

140
Q

What is the benfits trap

A

people would rather claim benefits then work

141
Q

What is the real wage cause of unemployment

A

a minimum wage stops firms being able to employ as many people as they want

142
Q

What are three target demographics for governments looking to increase employment

A

women
older workers
Disabled workers

143
Q

Pros of migration

A

Fills skills gap
circular flow of income creates jobs

144
Q

Negatives of migration (CoR with 5 chains and what affect could migration have on AD and one counter to this) and one political point

A
  • larger workforce → higher supply of labour → lower equilibrium wage → lower disposable income for workers → lower quality of life (can also lead to lower wealth affects and therefore reduce AD. However, could also lead to an increase in migrant expenditure which leads to a sustained AD)
  • put jobs owned by UK citizens under pressure
145
Q

Costs of unemployment (7)

A

Costs to unemployed:
- emotional
- loss of income → lower QoL
Costs to firms/wider economy
- loss of human capital (→ higher PL for consumers)
- reduced AD and output
Costs to Government/Society
- loss of income and tax revenue
- can lead to crime
- large costs to government in welfare

146
Q

Benefits of small amounts of employment? (3)

A
  • keeps some workforce flexible for new firms to employ at cheaper rates
  • too high employment → worker scarcity → wage competition → wage inflation.
    Therefore some unemployment can be deflationary
  • defers strikes
147
Q

Name top five global trading nations

A

usa
china
japan
germany
uk

148
Q

What is the balance of payments?

A

A record of all financial transactions between two countries over a period of time

149
Q

What is the balance of payments spilt up into

A

curent account
capital and financial account

150
Q

What is the current account?

A

A record of the inflows and outflows involved in trade and income

151
Q

What are invisibles

A

intangible services

152
Q

What is a debit in the BoP?

A

A negative in the balance of payments, such as importing a good or service, or income being paid to an overseas shareholder.

153
Q

Example of invisible credit export

A

foreigner staying in UK hotel

154
Q

What is a credit on the BoP?

A

A positive on the balance sheet (money flowing in) such as exporting a good, service, stock or bond

155
Q

Example of invisible debit import?

A

foreign holiday

156
Q

When something is exported where does the money move? (Fact)

A

Into the UK

157
Q

Name for net money flowing into the UK

A

Current account surplus

158
Q

What type of current account does the uk have

A

deficit

159
Q

Issues of a long term deficit on the current account (6)

A
  • Leads to increased borrowing which is unsustainable
  • If foreign investors lose confidence in UK ability to pay back debt → investments removed → large devaluation in currency → decline in living standards and investment
  • More assets are sold to keep surplus on cap/fin account → Increasing foreign ownership of assets → long term reduction in income
  • Shows economy may be unbalanced
  • Indicates economy has low international competitiveness
  • large deficit always have the risk that a value of a currency can fall as so much of a currency is being spent
160
Q

Point of Hot money

A

IR proportional to ER

161
Q

Two parts of demand side policies

A

Fiscal
Monetary

162
Q

Who desides monetary policy

A

Monetary policy commitee (9 people chaired by Mark Carney)
Part of Bank of England
Independant from government

163
Q

What are the main types of monetary policy

A

IR - conventional
QE - unconventional

164
Q

Is a rise interest rates generally regressive or progressive

A

regressive as the wealthy have larger savings and the poor borrow more

165
Q

What is quantitative easing

A

Government buys financial assets (usually bonds) with newly printed money to increase borrowing and lending

166
Q

IR target

A

2% +- 1%

167
Q

What is key to the analysis marks

A

the transmission mechanism

168
Q

What is government expenditure split into?

A

Capital
Current

169
Q

How is government expenditure financed?

A

Taxing and borrowing

170
Q

What is PSNB

A

Public Sector Net borrowing - government borrowing

171
Q

What is accumulated when PNSB>tax revenue

A

Public sector net debt (PSNB)

172
Q

What is the PSNCR

A

Public sector net cash requirement

173
Q

q.175 what is the current (nov 2017) debt as a percentage of GDP

A

87.2%

174
Q

What are automatic stabilisers?

A

Smooth the business cycle with progressive taxes and benefits systems

175
Q

What are the arguments for running a budget deficit

A

More G and multiplier
Low IR borrow now instead of later
growing economy will be able to cope with future debts

176
Q

Types of fiscal

A

loosening, tightening

177
Q

What does expansionary fiscal policy do

A

shift AD out

178
Q

What type of policy can shift AD in

A

Contractionary demand side poicies

179
Q

Weaknesses of demand-side policies (5)

A

time lag 1-2 years
Can increase debts
Multiplier has little effects in the short run
Difficult to quantise output gap or multiplier
Very easy to overstimulate economy

180
Q

What would a keynesian economist say about demand side policy

A

only way out of a recession (diagram)

181
Q

Name some supply side policy (5)

A

incentives
promoting competition
reforming the labour market
improving labour quality
improving infrastructure
removing red tape

182
Q

Why is supply-side sometimes more advantageous than demand side

A

long term and deflationary

183
Q

Problems with supply side

A

can cause output gap
can increase income inequality (cutting min wage)

184
Q

what happens when AD is raised

A

Increase Real output
Lower unemployment
Inflationary pressure (especially if small output gap)
Reduced international competitiveness → balance of payments deterioration

185
Q

AS shift what happens?

A

Improve or worsen all 4 main macroeconomic objectives (growth, inflation, employment, balance of payments)
Can have knock on effects on wages and the labour force

186
Q

What are on the axis of the short run Philips Curve

A

unemployment
Rate of change of moeny wage (inflation)

187
Q

What is key to the trade off?

A

Where the current equilibrium is on the LRAS (keynesian)

188
Q

What is the accelerator equation

A

It = a (Yt - Yt-1)

189
Q

How do you calculate the accelerator coefficient

A

ratio of capital to goods

190
Q

What does the CPI exclude

A

mortage payments
council tax
tv licences

191
Q

Name of the survey used for inflation calculation

A

Living costs and food survey (LCF)

192
Q

D productivity

A

output per unit of input

Economics A level Edexcel (18 decks)

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