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A-level Economics Macro > Pack 1 Macro > Flashcards

Pack 1 Macro Flashcards

1
Q

What are the seven macroeconomic objectives?

A

Economic growth
Low unemployment
Low and stable inflation
Balanced government budget
Trade Balance
Great income equality
Protection of the environment

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1
Q

When does economic growth exist and why do the gov want it?

A
  • exists if there is a rise in economic activity as measured by the increase in real output (GDP) from one year to another
  • will hopefully boost living standards in the country as should be higher rates of employment and incomes for citizens
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2
Q

Why is low unemployment a macroeconomic objective?

A
  • more people who have jobs the more
    efficiently the economy ‘s resources are being used
  • high unemployment causes unpopularity for the political party in power
  • causes hardship for unemployed, their families/communities and the gov
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3
Q

Why is low and stable inflation a macroeconomic objective?

A
  • Provides a stable environment for the businesses to invest and grow and protects our international competitiveness of uk goods and services
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4
Q

What is a balanced government budget and why is it a macroeconomic objective?

A
  • means tax revenue equals gov spending in that year
  • avoids issues of budget deficit (which result in increased national debt)
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5
Q

What is a balance of payments equilibrium on the current account?

A
  • if the inflows and outflows from trade are equal
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6
Q

What is the fiscal policy?

A
  • use of government spending and taxation to influence the level of demand in the economy
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7
Q

What is the monetary policy?

A
  • involves adjusting interest rates and using quantitative easing (increases the supply of money in the economy) to influence the level of demand in the economy
  • Bank of England responsible
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7
Q

What are supply side policies?

A
  • aimed to boost long-term growth of the economy
  • such as increasing government spending on the key policies of education, healthcare and infrastructure
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8
Q

What is income?

A
  • a flow of money which acts as a reward for the services of factors of production
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9
Q

What is wealth?

A
  • the stock of assets held by an individual or organisation, such as properties
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10
Q

What are the differences between income and wealth?

A

Income: flow concept - only be measured over a period of time
Wealth: stock concept - measured at a certain point

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11
Q

What are the links between income and Wealth?

A
  1. High levels of income can build wealth (by buying up shares)
  2. High levels of wealth can earn income (if someone owns shares they can earn dividends over time)
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12
Q

What is the circular flow of income?

A
  • Households own the wealth in the economy
  • These are the factors of production
  • Households supply their factors of production to firms and receive income as a reward
  • They receive rent for land, wages for labour, interest for capital, and profit for enterprise
  • With this income, they purchase goods/services from firms
  • Firms purchase factors of production from households
  • They use these resources to produce goods/services
  • They sell the goods/services to households and receive sales revenue
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13
Q

What are examples of injections?

A
  • add money into the circular flow and increase economic activity
    e.g:
  • Government spending (G)
  • Investment (I)
  • Exports (X)
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14
Q

What are Withdrawals?

A
  • take money out of the circular flow of and decrease economic activity
    e.g:
  • Taxation (T)
  • Savings (S)
  • Imports (M)
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15
Q

What is the multiplier effect?

A
  • the number of times a rise in income exceeds the rise in injections that caused it
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16
Q

What can cause the multiplier effect (explain why)?

A
  1. Investment increases:
    - if firm successfully expands then more profit to distribute to shareholders/ more jobs, hours worked increases
    - increases income = increase spending, will generate more profits for firms to invest further
  2. Government spending: (e.g helping regenerate a run-down area):
    - more gov spending mean more jobs in public sector
    - money then spent by the workers, generating more profits for firms to invest
  3. Export increases (due to successful product launch abroad):
    - more profits
    - increases shareholder dividends and future jobs = higher incomes
    - income spent = profit for firms to expand
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17
Q

What is the negative multiplier effect?

A
  • when an initial withdrawal of spending leads to knock-on-effects and a bigger final fall in real GDP
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18
Q

What causes negative multiplier effects?

A
  • decreased in injections (investment, exports and gov spending)
  • increase in withdrawals (taxation, imports and saving) and falling consumer spending
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19
Q

What is Marginal Propensity to consume? MPC
What is Marginal Propensity to Withdraw? MPW

A

MPC = proportion of additional income that is spent

MPW = proportion of additional income withdrawn from circular flow in tax, saving and imports

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20
Q

How do you work out MPW?

A

MPW = (1-MPC)
MPW = MPS+MPT+MPM
Marginal Propensity to Save (MPS)
Marginal Propensity to Tax (MPT)
Marginal Propensity to Import (MPI)

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21
Q

What is the multiplier formula?

A

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

multiplier greater:
- higher the value of MPC
- lower value of MPS, MPT, MPM

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22
Q

What is national income?

A
  • total value of a country’s final output of all new goods and services produced in one year
23
Q

How do you work out national income?

A

Expenditure method:
- adds up the value of all the expenditure in the economy
- includes consumption, government spending, investment by firms and net exports (exports - imports)

Income method:
- total money value of factor payments (wages,rent,interest) for the use of factors of production over the eyar

Output method:
- total value of goods and services produced by different sectors of the economy in a given year

24
Q

What is GNI?

A
  • value of goods and service produced in an economy over a year within national borders and net income from production abroad
25
Q

What is the difference between GNI and GDP?

A
  • GDP = national income within national borders only (cares about geographical location)
  • GNI= income from abroad (takes into account who owns the factory)
26
Q

What is the difference between nominal and real GDP?

A

Nominal = unadjusted for inflation
Real = adjusted for inflation

27
Q

What is the difference between Total and Capita GDP?

A

Total GDP = money value of the volume of output of goods and services in an economy over a year
GDP per capita = total GDP divided by the number of people in the population

28
Q

What is Purchasing Power Parity? (PPP)

A
  • an exchange rate of one currency for another which compares how much a typical basket of goods costs compared to that of another country
29
Q

How do you convert nominal GDP to Real GDP?

A

Base year index/current year index x Nominal GDP

30
Q

What are the advantages of using GDP to compare living standards?

A
  • internationally recognisable
31
Q

What are statistical issues of GDP?

A

Statistical issues:
- assuming its calculated accurately when it may not be:
statistical errors
hidden economy (not accounted for)
home produced goods (not included)
public sector
quality issues (e.g falling prices make GDP decreased but consumers better off)

32
Q

What are the limitations of using GDP to compare living standards? (3)

A
  • statistical issues
  • issue of inequality
  • no measure of quality of life
33
Q

Why is there an issue of inequality when using GDP?

A
  • GDP per capita is an average income of economy
  • does not reflect distribution of income
  • few large rich elite may affect GDP per capital
34
Q

Why is there an issue with no measure of quality of life when using GDP?

A
  • GDP figures ignore:
  • levels of pollution
  • war/conflict
  • access to clean water
  • education standards
  • healthcare quality
35
Q

What is economic growth?

A

increase in real GDP over time

36
Q

Why do economists need to be careful when comparing economic growth figures?

A

Economic growth is the rate of change of GDP:
- when economic growth is slowing down, GDP is just rising at slower rate

Economic growth rate will disguise the level of GDP in a country:

The accuracy of growth figures depends on validity of GDP statistics

37
Q

What is actual growth?

A

an increase in real GDP in the economy over time

38
Q

What is potential growth?

A

increase in the productive potential of the economy over time

39
Q

What are the causes of actual growth?

A

caused by an increase in income circulating the economy

higher consumption: more income flowing around economy
lower costs of production
increase in injections/fall in withdrawals:
- increase in business investment
- reduction in savings
- increase in budget deficit
- decrease in trade deficit

40
Q

What are causes of potential growth?

A

any factors that cause an outward shift in the PPF:
- investment in capital goods
- advancements in technology
- improvements in education/healthcare
- markets become more competitive
- higher productivity

41
Q

What is the output gap?

A

difference between actual level of GDP and productive potential of the economy

42
Q

What is a positive/negative output gap?

A

Positive: actual level of GDP is above the productive potential of the economy

Negative: actual level of GDP is below the productive potential of the economy

43
Q

What is an economic boom?

A

when actual GDP is well above the productive potential

44
Q

What is a recession?

A

when GDP falls for two or more consecutive quarters

45
Q

What happens in an economic boom?

A
  • high rates of economic growth
  • low rates of unemployment and higher real wages
  • low levels of spare capacity
  • high rates of inflation (companies raise prices)
  • high consumer consumption
  • high demand for imports
46
Q

What happens during a recession?

A
  • negative rates of economic growth
  • high rates of unemployment
  • lower real wages
  • low rates of inflation (companies put down prices)
  • higher levels of saving
  • deteriorating gov budget balance ( tax revenue falls and gov expenditure on benefits rise)
  • lower demand for imports (less money to buy them)
47
Q

What are the costs/benefits of growth for consumers?

A

pros:
- higher employment opportunities and incomes (businesses more likely to expand)
- reduced absolute poverty
- higher consumer confidence (less worry of losing job)

cons:
- higher inflation (demand increases)
- higher relative poverty and income inequality
- living standards may not rise (due to inc stress/environmental issues)

48
Q

What are the benefits/costs of economic growth on firms?

A

Benefits:
- higher profits
- higher business confidence and investment

Costs:
- rising costs as inflation and wages rise
- reduced international competitiveness (due to inc prices as result of inflation)

49
Q

What are the benefits/costs of economic growth on the government?

A

Benefits:
- higher tax revenue (higher income)
- reduced need for gov spending (less benefits as more people employed)
- improvements in gov budget (tax revenue rising)

Costs:
- conflict of growth with other macroeconomic objectives:
rising inflation
higher environmental damage

50
Q

What are the benefits/costs of economic growth on current and future living standards?

A

Benefits:
- current living standards may rise (higher income)
- future living standards may rise (investing in renewable energy)

Costs:
-current living standards may fall (due to opportunity cost some goods may be sacrificed to increase production of others)
- future living standards may fall (damage to environment*)

51
Q

What makes economic growth desirable?

A

Magnitude of growth:
- as pace increases leads to higher inflation

Use of renewable energy:
- sustainable
- improved living standards in the future

Actual vs Potential growth:
- long-term potential growth is more sustainable

Government policy:
-if gov uses tax revenue and redistributes should help minimise costs

52
Q

What is subjective happiness and how can it be measured?

A

-feelings of wellness and satisfaction that cannot be objectively measured
determined by:
financial situation
job satisfaction
friends, family and community
health
personal freedom
personal values

53
Q

What is Easterlin paradox?

A
  • initially as real incomes rise, there will be an increase in subjective happiness
  • however as real incomes rise further, subjective happiness is unlikely to rise any further
54
Q

Why as real incomes rise further, subjective happiness does not also rise further?

A
  • increased importance of non-financial factors as incomes rise
  • importance of relative incomes
  • importance of habit
55
Q

What is UK National Wellbeing?

A
  • economic measure of quality of life conducted in an attempt to look beyond GDP figures by looking at factors such as health, environment and personal well-being
56
Q

What are the pros/cons of UK National Wellbeing?

A

Pros:
- gives more inclusive measure of wellbeing
- provides a guide to policymakers on areas to focus on

Cons:
- harder to measure subjective indicators accurately
- difficult to compare over time and between indicators
- measure is not aggregated (no single measure)

A-level Economics Macro (4 decks)

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