Yr1 Economic Performance Flashcards
PART 1
ECONOMIC GROWTH AND THE ECONOMIC CYCLES
What are the 3 terms linked to economic growth cycle?
- potential growth
- actual growth
- output gap
What are the 2 definitions for economic growth?
- An increase in the output that can economy produce over a period of time
- An increase in what an economy can produce if it is using all of its scarce resources > productive potential
- What is economic growth measured with?
- What are the problems with this measurement?
- GDP
- Don’t take into account social and environmental factor + unequal distributions of money
THE ECONOMIC CYCLE
1. What is the place where GDP and economic growth are at their peak
2. What is the difference called when actual growth is bigger than trend growth
3. What is it called when there is negative economic growth
4. How long does neg economic growth have to occur for to be called this
5. What is it called when there are the lowest levels of GDP and economic growth
6. What is the difference called when actual growth is smaller than trend growth
7. What is it called when there are incr levels of GDP and economic growth
8. What does on the x and y axis
- Boom
- Positive output gap
- Recession
- 2 quarters
- Slump
- Negative output gap
- Recovery
- X > time
Y > GDP
What are benefits and costs of economic growth?
BENEFITS
- decr unemployment
- higher standards of living
- improved public figures
- incr investment through accelerator and high confidence
COSTS
- inequality
- inflation
- negative externalities
- depletion of non renewable resources
What are the characteristics of a recession?
- people struggle to pay off debts
- negative GDP growth for more than 2 quarters
What are the characteristics for a slump?
- high unemployment levels
- high levels of business failure
- increase in redundancies, particularly in the service sector
What are the characteristics for a recovery?
- unemployment begins to fall
- possible GDP growth
- house price will rise
What are the characteristics for a boom?
- incr in tax receipts and public spending
- low welfare and benefit claims
- rise in consumer spending and borrowing
PART 2
EMPLOYMENT AND UNEMPLOYMENT
Definition of unemployment?
Those registered as able, available and willing to work at the going wage rate but are unable to find work
Equation for unemployment rate?
Unemployment % = number of unemployed / working population x100
What age range is the working population?
16-67
What are the 7 types of unemployed?
- Frictional
- Seasonal
- Cyclical
- Structural
- Voluntary
- Involuntary
- Real wage
What is the definition of frictional unemployment?
Workers change jobs and spend time looking for a new one
- workers don’t claim benefits
- short term
What is the definition of seasonal unemployment?
- consumer demand for some goods and services is seasonal e.g. ski instructor
What is the definition of cyclical unemployment?
Too little demand for goods and services in the economy > downwards cycle
What is the definition of structural unemployment?
Long term changes in the structure of the economy as demand falls for the goods and services they produce
- particular sectors e.g. steel works
- parts of industry > no skills to move easily
Definition of full employment
A situation in which everyone in the labour force that is willing to work at the market rate has a job, except for those who are switching from one job to another. There is no involuntary unemployment
What sort of % of the UK are you
1. Voluntarily unemployed
2. In full employment
- 15-20%
- 70-80%
What are the two ways of calculating unemployment?
- Claimant account (Job Seekers Allowance)
- Labour Force Survey
Explain what the claimant account is?
- count only people eligible to claim Job Seekers Allowance
- not everyone claims benefits
- stigma + short term unemployment
Explain what the labour force survey is?
- covers those who have looked for work in the past month and are able to start work in the next 2 weeks
- 1/2 mil annually > sample group represent UK economy + not up to date
Definition of involuntary unemployment
Unemployment which exists when workers are unable to find jobs despite being prepared to work at the existing wage
Definition of voluntary unemployment
Workers who choose not to accept employment at the existing wage rate (gap in what people want to be paid + realistic wages)
What is real wage unemployment?
When wages are maintained over the market clearing level
> excess supply of labour
What are the 3 key causes of real wage unemployment?
- Trade unions using collective bargaining power
- Successive rises national minimum wage
- Globalisation
Definition of long term unemployment
People who have been out of work for > 26 weeks
- significantly damaging for individual and economy
Definition of short term unemployment
Are unavoidable and cannot really be alleviated e.g. frictional and seasonal
Definition of hysteresis
Unemployment that persist is into the future, even after factors that led to the unemployment have been removed. When people are unemployed for so long them give up trying
1. Lack of skills
2. Give up
Positives and negatives of unemployment on the individual
Pos
- incr free time, time to pursue qualifications
Neg
- less disposable income > decr C
- decr purchasing power
- stress > health issues
- other issues
E.g. gambling
- decr standard of living
- vulnerable to terrorist groups
- WAITHOOD
Positives and negatives of unemployment on businesses
Pos
- reduced cost of labour > more to invest
- costs spent on wages reduced
- more options for hiring > control of wages
Neg
- pass less wages
- reduce productivity unless replaced
- decr output due to decr workers and decr demand
Positives and negatives of unemployment on the government
Neg only
- pay more benefits to unemployed people (incr G)
- incr crime rates, incr investment in public services needed
- decr tax revenue
- incr borrowing
- bankruptcy and closure
- protests + civil unrest
- dissatisfied workers
Positives and negatives of unemployment on society
Pos
- more available jobs
Neg
- incr crime rates
- incr taxes
- bad deflation
- homelessness
- loss of other businesses in the area
Positives and negatives of unemployment on the macro economy
Pos
- less strain on resources
- silver lining effect of decr benefits, less competition for jobs
Neg
- reduced consumption
- reduced economy growth
- incr stress levels
- deflation
- decr output
What are the levels of young employment in the UK compared to Spain?
UK - 12%
Spain - 28%
What moves when structural unemployment occurs?
SRAS decreased and LRAS decreases
What happens when cyclical unemployment occurs?
AD decreases
What does the impact of unemployment depend on?
- Type of unemployment
- How much employment had increased by
- How the economy is performing
- How important unemployment is as a macroeconomic objective
- Length of time
PART 3
INFLATION AND DEFLATION
INFLATION
1. What is the definition of inflation
2. What is the UK government targets
- A sustained increase in price level over a period of time
- 2%
DEMAND PULL INFLATION
1. Definition
2. What are the 5 causes
3. What is the key on the diagram
- Changes in demand side factors lead to an incr in AD
- depreciation of the exchange rate
- a reduction in direct or indirect taxes
- rapid growth in the money supply
- rising consumer confidence
- faster rates of economic growth in other countries
- Incr in AD curve
COST PUSH INFLATION
1. Definition
2. What are the 3 causes
3. What is the key on the diagram
- Changed in supply lead to an increase in price > incr cost
- external shocks
- depreciation of exchange rates
- acceleration of wages
- Decr in SRAS curves
Positives and negatives of inflation on consumers
Pos
- higher pay rise over inflation rate
- value of assets incr in value
Neg
- decr disposable income
- decr value of savings
- decr essentials
- decr consumption
Positives and negatives of inflation on businesses
Pos
- incr demand for products > demand pull
- assets incr in value
Neg
- incr CofP
- decr demand if products too expensive
- incr wages cost
- decr profit margins
Positives and negatives of inflation on the economy
Pos
- incr growth, incr AD
- incr cash flow > demand pull
- incr employment due to demand incr
Neg
- decr consumption > cost push
- decr worth of money, economic growth, confidence
- incr unemployment
What is the (money supply as a cause of inflation) fisher equation + what do the letters mean
MV = PT
V and T are constants so if M incr, P incr
M > money
V > velocity of money
P > general level of prices
T/Y > transaction/ level of output/GDP
Disinflation definition
When the rate of incr or the price level is falling
Deflation
1. Definition
2. Extra info
3. Two types and what side it causes
- A sustained fall in the general price
- rate of inflation becomes negative (0%)
- internal value of money rises
3.
- benign (supply side) > good
- malevolent or malign (demand side) > bad
BENIGN DEFLATION
1. What side is it caused by
2. Good or bad
3. Definition
4. Causes
5. Key things about diagram
- Supply side
- Good
- falling prices due to higher productivity, improving technology or better managerial practises > lower costs and prices
4.
- improved technology
- technological advancements
- significant fall in wage rates
- higher exchange rates causing import prices to fall
- higher productivity
- better managerial practises
- Incr in SRAS
MALEVOLENT / MALIGN DEFLATION
1. What side is it caused by
2. Good or bad
3. Definition
4. Causes
5. Key thing about diagram
- Demand side
- Bad
- Prices fall because of a lack of demand
- large fall in AD causing a persistent recession or depression
- a large negative output gap
- Decr in AD curves
Positives and negatives of deflation on consumers
Pos
- lower prices
- disposable become goes further
Neg
- negative equity
- negative inflation rates
- decr salary/wages (malevolent)
- decr value of assets
Positives and negatives of deflation on businesses
Pos
- cheaper shops incr in demand + profits
- reduced labour costs
- CofP decr as decr variable cost per unit
Neg
- inability to decr CofP
- decr demand
- small profit
- assets decr in value
Positives and negatives of deflation on the economy
Pos
- benign > real output incr
Neg
- decr/neg economic growth (malevolent)
- incr unemployment = decr AD
- decr consumer spending (malevolent)
What does the impact of deflation/inflation depend on?
- Type/cause of deflation
- How much the deflation has changed by
- Proportion of income spent on the product
- Time period
Why is deflation damaging for an economy?
- decr spending
- incr debt
- incr real cost of borrowing
- decr profit margins
- decr confidence and saving
- income distribution
- more competitive exports eventually
What is shrinkflation?
When the quantity decreases but the price remains constant
Why do we have a 2% target inflation rate in the UK?
- make sure economic growth continues
- controlled growth (control problems of inflation)
- compete against other countries
- deflation bad for economy
- to incr consumption and spending
- predictable + sustainable
- uncontrolled = hyperinflation
- controlled value of assets
- stagflation = rising inflation, limited economic growth
- deflation = consumers delay spending to get best possible deal
Definition of inflationary expectations?
The rate of inflation UK households will occur in the future
Definition of hyper inflation?
very large rapid increases in the general price level
What is the definition of monetary policy?
Manipulation of short-term interest rates and use of QE by the MPC
Definition of the wage price spiral?
Wage rise to protect real incomes which raise costs of production putting further pressure on wages
Definition of unanticipated inflation?
Where economic agents do not predict the future rate of inflation
What is CPI?
The headline measure of inflation
Definition of money illusion?
Economic agents fail to realise changes in money values are not the same as changes in real values
Definition of a credit crunch?
The reduced willingness of financial institutions to lend
Definition of nominal in terms of inflation?
Interest rates not adjusted for inflation
What is the family expenditure survey?
A representative monthly survey of UK households expenditure
Definition of anticipated inflation?
Economic agents correctly predict the future rate of inflation
What are real interest rates?
The nominal rate of interest minus the rate of inflation
What is the bank rate (base rate)?
Interest rate a bank sets to determine its lending and borrowing rates
Explain the cause of inflation due to a change in the money supply through the equation MV=PT? (Explain each of the letters)
- M - Money supply
> due to policy or economic cycle - V - Velocity of money
> assumed to be constant
> evaluation > Christmas velocity is faster - P - General price level
> incr = inflation - T - Transaction / level of output / GDP
> constant
As both V and T as assumed to remain constant, an increase in the money supply leads to an increase in the price level (inflation)
PART 4
POSSIBLE CONFLICTS BETWEEN MACROECONOMIC POLICY OBJECTIVES
What does the Phillips Curve show?
The inverse relationship between inflation (%) and unemployment (%)
- the trade off as a result of bargaining
What is money illusion?
Wage rates rising but individuals not factoring inflation into real wage rates
Why did the original Phillips curve not hold the weight as originally expected?
In the 1970s when unemployment and inflation were both rising (stagflation)
What is the expectations augmented Phillips curve? And what are the differences?
Movements along the SR Phillips Curve but unemployment always makes it back to the LR Phillips curve
Why does unemployment decr and inflation increase along the SR Phillips curve?
- due to policies by the gov
Why does unemployment go back to the LR Phillips curve?
As employees demand higher wages so the firm cannot afford as many workers, so unemployment increases without correcting inflation
What is the other name for the LR Phillips Curve?
Non-Accelerating Inflation Rate of Unemployment (NAIRU)
What reduces unemployment below the natural rate on the Phillips curve?
- Influencing expectations > persuading inflation is going to fall
- Boosting supply side of the economy > incr capacity (shift LRPC)
What are some of the supply side policies (3) focussed on to move the LR Phillips curve?
- Education
- boost time in school, numbers going to uni, lifelong learning and vocational a-levels - Welfare benefits
- work family tax credit + incentives to work - Labour market flexibility
