2022 Advance Information Flashcards
1
Q
Define ‘economic growth’.
A
The rise in an economy’s national income over a period of time (usually a year)
2
Q
Define ‘GDP (Gross Domestic Product)’.
A
The total value of goods and services produced in an economy in a year
3
Q
What are the 3 benefits of using GDP as a measure of growth?
A
Relatively simple measure
Allows for comparison between countries - widely adopted
Allows for comparison between years to assess growth rate
4
Q
What are the 8 limitations of using GDP as a measure of growth?
A
Value of home-produced goods Inflation Black market Environmental damage/improvement Population Income inequality Cost of living Statistical errors
5
Q
How is the black market a limitation of using GDP as a measure for economic growth?
A
It involves the unrecorded transaction of goods, leading to the GDP being underestimated
6
Q
How is the value of home-produced goods a limitation of GDP as a measure of growth?
A
Goods that are produced at home and aren’t sold (eg. home-grown food, homemade clothes) aren’t recorded, leading to the GDP being underestimated
7
Q
Define ‘the economic cycle’.
A
The overall state of the economy as it goes through four stages in a cyclical pattern
8
Q
What are the 5 stages of the economic cycle?
A
Growth Boom Downturn Recession Recovery
9
Q
What are the 4 features of the ‘Growth/Recovery’ stage of the economic cycle?
A
GDP starts to rise
Unemployment falls due to increase in demand
Prices start to rise
Business/consumer confidence increases
10
Q
What are the 4 features of the ‘Boom’ stage of the economic cycle?
A
Peak of the cycle
Economy is doing well
Jobs are created as demand rises
New firms enter the market
11
Q
What are the 4 features of the ‘Downturn’ stage of the economic cycle?
A
Economy still growing but slower
Demand for G&S begins to fall
Unemployment starts to rise
Firms stop expanding due to falling profits
12
Q
What are the 4 features of the ‘Recession’ stage of the economic cycle?
A
Bottom of the cycle
Economy isn’t doing well - GDP begins to fall
Unemployment rises sharply due to fall in demand
Bankruptcies are common
13
Q
What are the 4 positive impacts and 2 negative impacts of economic growth?
A
Pros: Increased employment Improved standards of living Improved poverty rates Increased productive potential
Cons:
Increased inflation
Risk of environmental damage
14
Q
Define ‘inflation’.
A
The general and persistent rise in the prices of goods and services over a period of time
15
Q
Define ‘deflation’.
A
The general and persistent fall in the prices of goods and services over a period of time
16
Q
Define ‘CPI (Consumer Price Index)’.
A
Measure of the general price level which includes house prices and council tax
17
Q
In 4 steps, how is the consumer price index measured?
A
- Government records prices of 720 G&S purchased by a sample of 180,000 families every month
- Weights added to prices to account for proportion of expenditure
- Average monthly price worked out
- Price compared to base year price to set inflation rate
18
Q
What are the 4 types of inflation?
A
Deflation - fall in prices
Low and steady (1-3%)
High inflation (> 8%)
Hyperinflation (>15-20%)
19
Q
What are the 2 possible causes of inflation?
A
Demand-pull inflation
Cost-push inflation
20
Q
How does demand-pull inflation occur?
A
When any component of AD increases, causing AD to shift out, GDP to increase and prices to go up
21
Q
How does cost-pull inflation occur?
A
When the costs of production for all firms are rising, causing prices to be pushed up by firms
22
Q
What is the relationship between inflation and interest rates?
A
Low interest rates leads to increased borrowing, increased spending and therefore demand-pull inflation
23
Q
What is the impact of inflation on prices?
A
It increases them, reducing the purchasing power of money
24
Q
What is the impact of inflation on wages? (3 effects)
A
Workers need them to increase to compensate for loss in purchasing power - achieved through negotiation with employers
Firms may need to increase prices due to this - can lead to a spiral developing
Demand for higher wages can cause conflict between employers and unions, leading to strikes
25
How does inflation affect exporters?
Their goods become less attractive and internationally competitive so demand for them decreases
26
What is the impact of inflation on unemployment?
If caused by increase in demand, unemployment decreases as labour is derived demand
27
Define 'menu cost'.
The administrative cost of firms replacing signage/labels as prices increase
28
Define 'shoe leather cost'.
Cost of funding new suppliers of raw materials as prices continually increase
29
What is the effect of inflation on uncertainty?
Increases it - makes investment decisions more difficult
30
What is the impact of inflation on business and consumer confidence?
Consumers may become more anxious - less willing to borrow money and save more
Businesses may postpone growth plans or reduce spending on product development - less likely to take risks
31
What is the impact of inflation on investment?
Declines due to uncertainty and a lack of business confidence
32
Define 'unemployment'.
When people are actively seeking work but unable to find it
33
In what 2 ways is unemployment measured?
Labour Force Survey (LFS)
| Claimant Count - number of people who've claimed unemployment benefits
34
What are the 5 types of unemployment?
```
Cyclical
Structural
Frictional
Seasonal
Voluntary
```
35
What is cyclical unemployment?
Unemployment linked to the economy cycle that occurs due to low levels of AD in the economy during a recession/depression
36
What is the issue with cyclical unemployment?
Dependent on the cycle - unless economic growth occurs, it is hard for it to be reduced
37
What is structural unemployment?
Unemployment that occurs due to a change in the structure of an economy
38
What are the 3 types of structural unemployment?
Sectoral
Technological
Regional
39
What is sectoral unemployment?
Structural employment that occurs due to the decline of a particular industry
40
What is technological unemployment?
Structural unemployment that occurs due to the replacement of certain jobs by automated machinery
41
What is regional unemployment?
Structural unemployment that occurs in a particular region of a country
42
What is the issue with structural unemployment?
Workers need to be adaptive and perhaps need to retrain or relocate
43
What is frictional unemployment?
Short-term unemployment that occurs as people transition from one job to another
44
What is seasonal unemployment?
Temporary unemployment due to workers only being required during a certain season
45
What is voluntary unemployment?
Unemployment from people choosing not to work due to the idea of work or the level of wages
46
What is the impact of unemployment on output?
Levels of output lower than they should be - productive potential not being fully exploited
Output could increase due to increased productivity caused by introduction of new technology
47
What is the impact of unemployment on the use of scarce resources?
Resources wasted, leads to lower national incomes
48
What are the 5 effects on unemployment on individuals?
A fall in income
Lower standard of living
Loss of homes - unable to pay mortgage
Family breakups
Lower self-esteem
49
What are the 4 effects on unemployment on businesses?
Redundancy packages paid to laid-off employees
Demotivation of workers
Spare capacity - unused machinery and desks
Fall in demand - especially for luxury goods
50
What are the 5 effects of unemployment on the economy?
Lower national income - people don't contribute to the GDP
Wastage of resources
Fall in tax revenues
Increased government spending
Increase in taxes and debt in the long-run
51
What are the 4 effects of unemployment on the local community?
Fall in community spirits
Crime rate increases
Businesses start to struggle - bankruptcy and foreclosure
Community rends to look shabby - areas look run-down
52
Define 'balance of payments'.
A statistical statement that records an economy's transactions with other countries relating to international trade
53
Define 'exports'.
Goods or services produced in one country that are sold in another country
54
Define 'imports'.
Goods and services brought in from abroad for sale
55
What does the current account show?
The exports and imports between countries over a period of time, usually a year
56
What are the 3 reasons a country might have a current account deficit?
Income - high domestic income = greater ability to spend on foreign imports
Price - domestically produced goods are more expensive
Non-price - Exports may use inferior technology
57
What are the 2 advantages and 3 disadvantages of a current account deficit?
Pros:
Less demand-pull inflation
Financial account surplus
Cons:
Less economic growth
Unemployment increasing
Greater government spending to support unemployment
58
What are the 6 possible causes of a current account surplus?
Weak domestic income growth causing lower demand for imports
Strong growth in foreign countries - higher demand for exports
Exports more competitive than imports quality-wise
Exports more price competitive than imports
Lower rates of domestic inflation
Weak exchange rate
59
What are the 8 steps in the chain of reasoning for a current account surplus?
1) X > M
2) Injections > Leakages
3) AD↑ ((X-M)↑)
4) Economic growth ↑ (export-led growth)
5) Demand-pull inflation pressure
6) More jobs - labour is derived demand
7) Unemployment ↓
8) Increased incomes
60
Define 'exchange rate'.
Value of one currency in terms of another
61
What is the effect of a strong exchange rate on the current account?
Strong Pound Imports Cheaper Exports Dearer
| Worse for net trade - can cause current account deficit
62
What is the effect of a weak exchange rate on the current account?
Weak Pound Imports Dearer Exports Cheaper
| Better for foreign trade - can cause current account surplus
63
What are the 5 business activities that damage the environment?
```
Mining
Power generation
Chemical processing
Agriculture
Construction
```
64
What are the 4 ways businesses damage the environment?
Visual pollution
Noise pollution
Air pollution
Water pollution
65
Name 6 ways the government can reduce environmental damage.
```
Taxation
Subsidies
Regulation
Fines
Pollution permits
Provision of parks
```
66
In what 2 ways does taxation help reduce environmental damage?
Taxes imposed on those who damage the environment
| Helps balance social cost by placing it on those responsible
67
How do subsidies help reduce environmental damage?
Grants and tax allowances act as incentives for companies to become more environmentally friendly
68
How does government regulation help reduce environmental damage?
Laws, legislations and permits can be put in place to limit the amount of environmental damage firms can make
69
How do fines help reduce environmental damage?
Reduces firms' profits - acts as an incentive to comply to environmental laws
70
How do pollution permits reduce environmental damage (2 steps)?
Puts physical quota on how much pollution companies can expel
Money transacted when buying permits can be reinvested into the environment
71
How does the provision of parks help reduce environmental damage?
Helps increase number of trees and greenery - especially within urban environments
72
Define 'income inequality'.
The differences in income that exist between different groups of individuals in the economy
73
Define 'absolute poverty'.
Conditions where household income is insufficient to afford basic necessities of life (food, clothing and shelter)
74
Define 'relative poverty'.
When households receive less than 60% of the average median income as their income
75
Give 3 reasons why poverty and inequality need to be reduced.
To meet basic needs
To raise standards of living
Ethical reasons
76
Give 3 ways the government reduces inequality and poverty.
Progressive taxation
Redistribution through benefit payments
Investment in education and healthcare
77
How does progressive taxation reduce inequality and poverty?
Proportion of income paid rises as taxpayer's income does - places the burden of taxation more heavily on the rich
78
How does redistribution through benefit payments reduce inequality and poverty?
Payments help boost incomes of at-risk people in society
79
How does investment in education and healthcare reduce inequality and poverty?
Education - people become more employable by learning new skills
Healthcare - affects key indicators: reduces child mortality rates, increases life expectancy and reduces suffering
80
What is fiscal policy and what are its two 'instruments'?
The use of government spending, taxation and no borrowing to achieve macroeconomic objectives
Government spending
Taxes
81
What are the two types of government expenditure?
Mandatory spending - pensions, unemployment benefits
| Discretionary spending - building new schools and infrastructure
82
What are the two types of taxes used in fiscal policy?
Direct taxes - imposed on individuals and firms
| Indirect taxes - placed on spending eg. VAT
83
What are the 3 types of taxation?
Progressive - more income you earn, the greater the tax
Proportional - everyone pays the same percentage based on their income
Regressive - everyone pays the same tax regardless of income, affects poor more than wealthy
84
Define 'budget surplus'.
When the government's income is greater than their expenditure
85
Define 'budget deficit'.
When the government's expenditure is greater than their income
86
State and explain the two types of fiscal policy.
Expansionary - lower taxes and increase government spending to boost the economy and increase AD
Contractionary - increases taxes and lower government spending to slow down the economy and decrease AD
87
What is the aim and 6 steps of fiscal policy being used to combat inflation?
```
Aim: Stable prices
1. Too much inflation - AD growing too fast (Boom)
2 Pursue contractionary policies (FP)
3. Taxation↑, Govt. spending↓
4. Consumer's disposable income↓
5. C↓, AD↓
6. Inflationary pressure is reduced
```
88
What is the aim and 6 steps of fiscal policy being used to combat a recession?
```
Aim: Economic growth
1. Recession - low AD (Bottom of the cycle)
2 Pursue expansionary policies (FP)
3. Taxation↓, Govt. spending↑
4. Consumer's disposable income↑
5. C↑, AD↑
6. Economic growth is stimulated
```
89
What are the 6 steps of fiscal policy being used to combat a current account deficit?
1. Heavy reliance on imports and low exports (M > X)
2. Domestic incomes are high
3. Pursue contractionary policies (FP)
4. Taxes↑
5. Disposable income↓
6. Less demand for imports - current account deficit reduced
90
What are the 3 advantages of fiscal policy?
Government can stimulate/simmer the economy
Can be localised on areas, industries and income groups that need it the most
Government capital spending can increase quality of factors of production in the economy
91
What are the 3 disadvantages of fiscal policy?
Time lags/time gaining approval and effect
Conflicts with other macroeconomic objectives
Can have impacts on the government budget/national debt
92
What 5 factors are used to evaluate fiscal policy?
Size of income tax cut - detrimental to standards of living?
Type of tax rise/cut - regressive?
Impact on budget deficit - capacity to spend?
Focus on particular region - benefits everyone?
Consumer confidence - people likely to spend or save?
93
Define 'monetary policy'.
The use of interest rates and the money supply to control aggregate demand in the economy
94
Define 'interest rates'.
The price of borrowing and the reward for saving
95
Define 'base rate'.
The minimum interest rate commercial banks are permitted to lend at
96
What is the effect of the base rate on commercial banks' interest rates?
Base rate ↓, IR ↓
| Base rate ↑, IR ↑
97
What are the 6 steps of monetary policy being used to combat low economic growth?
1) Economic growth is slow
2) Pursue expansionary policies (MP)
3) Interest rates ↓, Quantitative easing ↑
4) C↑, I↑, (X - M)↑
5) AD↑, GDP↑
6) Economic growth increases
98
What are the 6 steps of monetary policy being used to combat inflation?
1) Too much inflation
2) Pursue contractionary policies (MP)
3) Interest rates ↑, Quantitative easing ↓
4) C↓, I↓
5) (X - M)↓, AD↓
6) Inflation is reduced
99
What are the 6 steps of monetary policy being used to combat high unemployment?
1) Too much unemployment
2) Pursue expansionary policies (MP)
3) Interest rates ↓, Quantitative easing ↑
4) More attractive to borrow, less attractive to save
5) C↑, I↑, (X - M)↑, AD↑
6) Unemployment is reduced
100
What are the 6 steps of monetary policy being used to combat a current account deficit?
1) Economy struggling with current account deficit
2) Pursue contractionary policies (MP)
3) IR↑, QE ↓ - attractive to save
4) M↓
5) (X - M)↑, AD↑
6) Current account deficit is reduced
101
What are the 2 effects of increased interest rates on the economy?
Consumers - incentivised to save, less likely to borrow
| Firms - reluctant to invest
102
What are the 6 steps of quantitative easing?
1. Electronically created money for Bank of England
2. Central Bank buys back government bonds from commercial banks, pension funds and insurance firms
3. Central Bank gives firms more cash to spend
4. Investment into small firms encouraged - injection into circular flow
5. Greater investment (I↑) and consumption (C↑)
6. AD↑
103
What are the 3 advantages of monetary policy?
Direct and powerful effect on household spending
Interest rates can be adjusted quickly and frequently
Arguably quicker than fiscal policy
104
What are the 4 disadvantages of monetary policy?
Policy trade-offs - trying to achieve one policy will lead to another being unsatisfied
Some time lags in it taking effect
Low interest rates in a deep recession may not work - people lack confidence to spend
Quantitative easing difficult to control - interest rates preferred
105
What 3 factors does the effectiveness of monetary policy depend on?
The size of the interest rate increase/reduction
Consumer and investor confidence
Proportion of people affected
106
Define 'supply-side policies'.
Government measures designed to increase aggregate supply in the economy
107
What do supply-side policies aim to do?
Improve the quality and quantity of the factors of production
108
What are the four types of supply-side policies?
Labour market policies
Incentive-related policies
Product market policies
Capital market policies
109
What are the 3 types of labour market policies?
Improving health and education - makes workers more productive and employable
Restoring work incentives for workers
Reducing trade union power/minimum wage
110
What are the 3 types of incentive-related policies?
Lowering taxes on work and enterprise - stimulates investment
Incentive to invest in R&D
Incentive to invest in capital
111
What are the 3 types of product market policies?
Privatisation - promotes competition by breaking up state monopolies
Deregulation - relaxing regulations that restrict competition
Helping small firms
112
What are the 3 types of capital market policies?
Investment in infrastructure
Investment into technology
Investment into R&D
113
What are the 6 advantages of supply-side policies?
Achieves economic growth and low/steady inflation without any tradeoff
Encourages R&D - better quality of goods and services, SOL↑
Induces competition
Increases productivity
Encourages innovation
Higher incomes for workers
114
What are the 5 disadvantages of supply-side policies?
Some can cause harm to consumers, workers or the environment
Time lags - takes time for benefits to be repeated
Expensive - worsens the government budget
Difficult to get them politically approved
Some can increase income inequality
115
What are the 4 types of policy trade-offs?
Inflation vs Economic growth
Inflation vs Unemployment
Economic growth vs Current account deficit
Economic growth vs Environmental damage
116
What are the 6 features of a boom where contractionary demand-side policies are used?
```
Unsustainably high economic growth
High inflation
Very low unemployment
High current account deficit
Greater environmental damage
Rising inequality
```
117
What are the 6 features of a recession where expansionary demand-side policies are used?
```
Low economic growth
Low inflation
Very high unemployment
Low current account deficit
Lower environmental damage
Falling/rising inequality
```
118
Define 'free trade'.
International trade that is conducted without any restrictions
119
What are the 5 advantages of free trade?
Lower prices
Increased choice for consumers
Wider markets for businesses
Provides new job opportunities
Cultural tolerance
120
What are the 4 disadvantages of free trade?
Domestic businesses shut down as they can't compete with MNCs - reduces competition
Overspecialisation
Wastage of resources
Overreliance on imports - current account deficit
121
Define 'protectionism'.
The restriction of free trade/protection against imports
122
What 6 reasons do countries use protectionism for?
Preventing a current account deficit (X < M)
Helping infant industries grow
Protecting jobs and small businesses
Preventing 'dumping' of foreign goods
Generating government revenue
Offsetting low wage competitions from LDCs
123
Define 'infant industries'.
New industries yet to establish themselves
124
Define 'dumping'.
When an overseas firm sells large quantities of a product below cost in the domestic market
125
What are the 6 disadvantages of protectionism?
Retaliation - can lead to trade wars
Unemployment if exports fall - labour is derived demand
May harm LDCs - stops access to rich markets
Loss of choice
Increased cost of production for firms importing raw materials
Cost-push inflation - higher prices
126
What are the 3 types of protectionism?
Tariffs
Quotas
Subsidies
127
Define 'tariff'.
A tax on imports
128
How do tariffs reduce the level of imports?
Increases the price of imports, incentivising consumers to buy domestically
129
What are the 2 advantages of tariffs?
Generates government revenue
| Improves current account (X > M)
130
What are the 2 disadvantages of tariffs?
Higher prices for consumers
| Cost-push inflation
131
What 3 factors does the effectiveness of tariffs depend on?
The product taxed
How long it is kept
Size of tariff
132
Define 'quota'.
A physical restriction on how many goods can be imported
133
How do quotas reduce the level of imports?
Limits the number of goods imported to a country
134
What are the 2 advantages of quotas?
More demand for domestic goods
| Economic growth and employment (M↓, AD↑)
135
What are the 2 disadvantages of quotas?
Expensive and difficult to monitor
| Higher prices and less choice for consumers
136
What 2 factors does the effectiveness of quotas depend on?
Size of quota
| Type of good it is placed on
137
How do domestic subsidies reduce the level of imports?
Reduces the price of domestic goods and makes them more attractive
138
What are the 4 advantages of domestic subsidies?
Less likely to lead to retaliation
Improved quality of domestic goods - export-led growth
Increased employment
Improvement of current account
139
What are the 4 disadvantages of domestic subsidies?
Costs government money - potential impacts on inflation
Opportunity cost
Takes time to work/not guaranteed
Inefficiency due to overreliance
140
What 3 factors does the effectiveness of domestic subsidies depend on?
Size of subsidy
How long it is given for
Which industry receives it
141
What are the 6 factors that affect the demand for a currency?
```
Demand for exports ↑
Increased FDI in home country
Relatively high interest rates
Relatively low inflation
Increased tourism
Increased speculation of appreciation
```
142
What are the 6 factors that affect the supply of a currency?
```
Demand for imports ↑
Increased FDI in foreign countries
Relatively low interest rates
Relatively high inflation
Decreased tourism
Increased speculation of depreciation
```
143
How does the demand for exports increasing affect the exchange rate? (2 steps)
1) Demand for home currency increases
| 2) Causes currency to appreciate
144
How does the demand for imports increasing affect the exchange rate? (2 steps)
1) Increase in demand for imports leads to more supply of home currency available
2) Causes the currency to depreciate
145
How does increased FDI in a country affect its exchange rate? (2 steps)
1) Causes demand for home currency to increase
| 2) Causes currency to appreciate
146
How does increased FDI in foreign countries affect the home country's exchange rate? (2 steps)
1) Domestic companies investing in foreign countries leads to FDI in other countries
2) Causes home currency to depreciate
147
How do relatively high interest rates affect the exchange rate? (2 steps)
1) They can attract more "hot money" inflow - demand for currency increases
2) Currency appreciates
148
How do relatively low interest rates affect the exchange rate? (2 steps)
1) Can cause "hot money" flow outwards
| 2) Causes currency to depreciate
149
How does relatively high inflation affect the exchange rate? (3 steps)
1) Can cause exports to become less competitive
2) Preference for imports increases
3) Supply of currency increases - depreciation
150
How does relatively low inflation affect the exchange rate? (3 steps)
1) Domestic goods become more competitive
| 2) Demand for exports increases - appreciation
151
How does increased tourism affect the exchange rate? (2 steps)
1) Increased demand for foreign currency
| 2) Appreciation
152
How does decreased tourism affect the exchange rate? (2 steps)
1) Tourists leave the domestic economy - increased supply of currency
2) Depreciation
153
How does increased speculation of appreciation affect the exchange rate?
1) Demand for currency increases
| 2) Appreciation
154
How does increased speculation of depreciation affect the exchange rate?
1) Supply of currency increases
| 2) Depreciation
155
Define 'depreciation'.
When one currency gets weaker against another
156
Define 'devaluation'.
When the official exchange rate is intentionally reduced in strength against another currency
157
How does a depreciation of a currency affect the 4 macroeconomic objectives?
Economic growth: ↑
Inflation: ↑
Unemployment: ↓
CA: improves
158
How does a depreciation of an exchange rate affect the current account? (3 steps)
Weak Pound Imports Dearer Exports Cheaper
Demand for imports decreases, demand for exports increases
(X - M)↑ - current account improves
