2.1, 2.2,2.3: Economic growth, inflation, unemployment

Question 1

What is Gross Domestic Product?

Answer 1

GDP is the value of all newly produced final goods and services produced in an economy within a given time period.

Question 2

<p>What is the difference between nominal and real GDP?</p>

Answer 2

<p>- Nominal GDP is a macroeconomic assessment of the value of goods and services using current prices in its measure.
- Real GDP takes into consideration adjustments for changes in inflation.</p>

Question 3

<p>What are the macroeconomic objectives?</p>

Answer 3

<p>1) Balanced current account (trade) deficit (5% deficit acceptable)

2) Low, stable inflation (2%)
3) Sustained, Strong, Sustainable economic growth
4) Low unemployment

others:
1) maintaining fiscal balance
2) environmental sustainability
3) Fair distribution of income</p>

Question 4

<p>What is the circular flow of income?</p>

Answer 4

<p>- Shows how income circulates between households and firms.

- Households provide firms with FOP's and firms provides households with G&S. Households provide firms with expenditure and firms provide households with factor incomes
- There are also leakages and injections into the economy.
- Output = income = expenditure</p>

Question 5

<p>What are the leakages and injections in the circular flow of income?</p>

Answer 5

<p>Injections: exports, government spending, investment

| Leakages: savings, taxation, imports</p>

Question 6

<p>What are the ways to measure GDP with the circular flow of income?</p>

Answer 6

<p>- Output = Expenditure = Income

- Output: final value of G&S produced
- Income: all factor incomes earned
- Expenditure: C+I+G+X-M</p>

Question 7

<p>What is the difference between income and wealth?</p>

Answer 7

<p>- Income is a flow concept so it is measured over a period of time
- Wealth is a stock concept so it is measured at a single point and it is the value of total assets.</p>

Question 8

<p>What is the difference between GDP and GDP per capita?</p>

Answer 8

<p>GDP per capita is GDP adjusted for population size</p>

Question 9

<p>What is the purchasing power parity?</p>

Answer 9

<p>PPPs are the rates of currency conversion that equalize the purchasing power of different currencies by eliminating the differences in price levels between countries. So $1 will buy the same in each country</p>

Question 10

<p>What are the issues with measuring GDP in developing countries?</p>

Answer 10

<p>- The exclusion of non-market transactions: subsistence farming, informal economy and transactions.

- lack of access to accurate data - difficult to track data.
- income disparities in developing countries.
- </p>

Question 11

<p>What are some issues with comparing GDP over time in a single country?</p>

Answer 11

<p>- composition of GDP changes etc. if defence spending increases, GDP increases but not an increase in living standards.
- Quality of final goods improves over time. Etc. An iPhone 6 today costs about the same today as the original iPhone, but more advanced.</p>

Question 12

<p>What is Gross National Income</p>

Answer 12

<p>- GDP plus net factor income from overseas
- This means wages, rent, interest and profits earned by UK residents overseas minus wages rent interest and profits earned in the UK by foreign residents</p>

Question 13

<p>What should growth rates in be developed and developing countries? (approximate)</p>

Answer 13

<p>Growth of 2.6% is considered really positive for the UK but 6.1% is worrying for China</p>

Question 14

<p>What are the general limitations of using GDP as a measure of living standards?</p>

Answer 14

<p>- Exclusion of non-market transactions especially developing countries.

- Doesn't take into account income inequality
- failure to account for the costs imposed of negative externalities on living standards.</p>

Question 15

<p>What is one issue of using GDP as a long term measure of living standards?</p>

Answer 15

<p>Maybe unsustainable growth: an increase in GDP will only be sustainable as long as it does not deplete natural resources too rapidly nor exploit the environment in a way that diminishes the quality of life of the nation’s households over time</p>

Question 16

<p>What are some alternate measures of living standards?</p>

Answer 16

<p>1) The Human Development Index (HDI) - takes into account of mean years expected years of schooling, life expectancy at birth, and gross national income per capita
2) World Happiness Report - published by the UN - takes into account GDP per capita, freedom of choice, perceptions of corruption, healthy life expectancy, social support and generosity</p>

Question 17

<p>Which country is ranked the highest in the World Happiness Report of 2019 and why?</p>

Answer 17

<p>Finland - social security system (Kela) provides free healthcare, unemployment support, higher education and ‘Kela box’ of supplies for new babies.</p>

Question 18

<p>What is the Easterlin Paradox?</p>

Answer 18

<p>- at a point in time happiness varies directly with income both among and within nations, but over time happiness does not trend upward as income continues to grow.</p>

Question 19

<p>What is inflation?</p>

Answer 19

<p>A sustained increase in the general price level leading to a fall in the purchasing power of money.</p>

Question 20

<p>What is deflation?</p>

Answer 20

<p>a decrease in the general price level (negative inflation)</p>

Question 21

<p>What is disinflation?</p>

Answer 21

<p>a decrease in the rate of inflation (eg inflation was 1% last month and it is now 0.5%)</p>

Question 22

<p>What is stagflation?</p>

Answer 22

<p>a simultaneous increase in inflation and unemployment</p>

Question 23

<p>What is CPI and how do you calculate it?</p>

Answer 23

<p>- check the price of a "basket of goods" from the ONS annual survey (around 700 items)
- apply the increase in the price of the good to the weight of each good in the basket</p>

Question 24

<p>What are the differences between CPI and RPI?</p>

Answer 24

<p>- RPI is an arithmetic mean and CPI is a geometric mean so CPI better as it reflects changes in spending patterns as prices change.

- RPI includes housing costs
- RPI tends to the be higher </p>

Question 25

Give 3 limitations of CPI as a measure of inflation

Answer 25

- important for the basket of goods to reflect UK shopping and purchasing patterns so there may be issues in the choice of goods and the weightage - does not factor in changes in the quality of goods purchased. Price increases may be reflective of quality increases

Question 26

What are the types of inflation?

Answer 26

- demand-pull - cost-push - money supply - wage spiral

Question 27

Give an example of the Easterlin paradox?

Answer 27

US: declines in social capital and social support and increases in obesity and substance abuse with the opioid crisis

Question 28

What is RPI and how is it calculated?

Answer 28

- CPI + housing costs like mortgage interest payments, housing insurance and estate agent fees - excludes richest households and pensioners

Question 29

Explain what is meant by ‘cost-push’ inflation?

Answer 29

inflation due to increases in the cost of wages and raw materials.

Question 30

Give 3 possible causes of cost-push inflation

Answer 30

1) Increase in wages and related costs. Labour costs are more than 50% of total costs for firms 2) Increase in the cost of raw materials, such as commodities (eg oil). These prices are determined by global demand and supply 3) Increase in taxes, particularly indirect taxes like VAT, or a reduction in subsidies

Question 31

Explain what is meant by ‘demand-pull’ inflation

Answer 31

Inflation caused by aggregate demand (AD) rises faster than productive capacity (LRAS)

Question 32

Give 3 possible causes of demand-pull inflation (hint..worker wages overtime)

Answer 32

1) Economy overheating - actual growth> potential growth. 2) Causes linked to AD - as AD increases there is greater pressure on existing factors of production to produce more output. Etc . with labour: workers have to work overtime. Unsustainable so they seek to hire more workers. D>S of labour so wages rise

Question 33

Explain what is meant by ‘menu costs’

Answer 33

constant changes in prices will force firms to reprint their prices

Question 34

Explain what is meant by ‘shoe-leather costs’

Answer 34

people will hold less cash and make more trips to the bank. Also, looking for a bank with the best interest rates as inflation erodes the value of savings.

Question 35

Explain the effects of inflation on consumers/workers

Answer 35

1) If incomes do not rise alongside inflation, it erodes the purchasing power of income etc. pensioners, teachers in the US 2) Fiscal drag: If incomes rise alongside inflation real incomes are not rising but the higher nominal income may move taxpayers into higher tax brackets so they have less disposable income and are worse off. Like an automatic stabilizer. 3) Uncertainity means consumer spending falls because households cannot plan for future spending.

Question 36

Explain the effect of inflation on firms

Answer 36

1) Uncertainty - high inflation associated with unstable inflation, makes it harder for firms to plan for the future. Therefore, cannot invest, higher more workers etc. 2) Reduced international competitiveness - If inflation is higher in the UK, then the price of G&S rise relative to competitors. EVAL- if pound simultaneously falls.

Question 37

Explain the effect of inflation on the government

Answer 37

- Less government revenue from fixed indirect taxes as it erodes real value. - makes the government borrowing more expensive - Pressure to raise the value of state welfare benefits

Question 38

Explain the possible benefits of inflation

Answer 38

1) Benefits for those in debt as it erodes the value of what they owe as there are real negative interests rates 2) Phillips curve: inverse relationship between unemployment and inflation 3) At proper levels it incentivises current consumption

Question 39

What is the impact of anticipated inflation?

Answer 39

If it is expected that inflation will rise now then this may cause a further wage-price spiral or demand-pull inflation high. This is because if people expect prices to rise in the future, they will buy more now so this will cause demand pull inflation

Question 40

What is a wage-price spiral?

Answer 40

Workers demanding higher wages either due to anticipation of inflation, strong trade unions etc. leads the costs of production for firms to rise massively and this will lead to cost-push inflation and erode the value of workers wages causing the cycle to repeat

Question 41

What are some evaluations of inflation?

Answer 41

1) Cause of inflation - demand pull inflation is healthy to a certain extent but supply side inflation can lead to a reduction in growth and employment which is known as stagflatio. 2) Severity of inflation - stable small rate at which inflation is increasing is good but if it is above 5% then it is worrying. 3) Duration of Inflation - if it is in the short term then uncertainty will not be too bad and there will also not be a wage spiral inflation.

Question 42

What are the costs of anticipated deflation?

Answer 42

Consumers delay purchases of non-necessities. Further fall in prices may lead to a further delay in purchases, so a deflationary spiral leading to deep recession/depression Causes fall in AD, multiplier effect, unemployment etc.

Question 43

What is the difference between malignant and benign deflation?

Answer 43

Malignant deflation is demand-side deflation from a recession. This is more worrying as it is more long-lasting. However, benign inflation is caused by SRAS shifting to the right and this comes with higher economic growth and this is a short term issue (etc. linked to raw material prices, exchange rates).

Question 44

What is unemployment?

Answer 44

the total number of people able, available and willing to work at the going wage rate but who cannot find work despite an active search

Question 45

What are the measures of unemployment?

Answer 45

- Claimant Count | - ILO Survey and UK labour

Question 46

Who is part of the labour force in the UK?

Answer 46

is measured by the number of people aged 16 or over who either has a job (employed) or are actively looking for one (unemployed).

Question 47

What is underemployment?

Answer 47

- Those whose employment status is less than desired, typically working in a part-time job when they want a full-time job, or when their skills are not being fully utilised in their current job - government quantifies it as people who want to work more hours

Question 48

What is the Labour Force Survey?

Answer 48

This is the standard way unemployment is measured in the UK of about 45,000 households with 100,000 people

Question 49

Why is the Labour Force Survey internationally comparable?

Answer 49

Conducted according to International Labour Organisation (ILO) methodology

Question 50

Who is counted as unemployed according to the labour force survey?

Answer 50

- without a job, have been actively seeking work in the past four weeks and are available to start work in the next two weeks - out of work, have found a job and are waiting to start it in the next two weeks - Includes people who are unemployed but are not necessarily claiming unemployment benefit (may not qualify)

Question 51

What is the claimant count?

Answer 51

A monthly measure which counts only those people who are claiming unemployment-related benefits (Job Seeker’s Allowance)

Question 52

Who can claim Job Seeker's Allowance?

Answer 52

- Be available, and actively looking for work (very strict oversight of the job search) - Be at least 18, but under State Pension age - Not be in full-time education

Question 53

What are the two types of Job Seekers Allowance?

Answer 53

- Contribution Based: Depends on how much national insurance the person has paid for the last 2 years. Can receive for 6 months. Amount paid may be lowered if the person has other income. - Income-Based: Cannot receive if you work 16 hours or more, or partner works more than 24 hours a week or if combined savings are more than £16,000. No time limit.

Question 54

What are the causes of unemployment?

Answer 54

- Structural - Seasonal - Demand Deficient - Frictional - Real Wage inflexibility

Question 55

What is frictional unemployment?

Answer 55

- unemployment of workers spent between jobs when a worker is searching for a job or transferring from one job to another. - exists due to imperfect information

Question 56

Is frictional unemployment worrying?

Answer 56

No - the transtitional period for workers between jobs is natural and short term

Question 57

What can be done to alleviate frictional unemployment?

Answer 57

Good temporary income support, services to help people find jobs like the internet

Question 58

What is seasonal unemployment?

Answer 58

Some jobs are more focusedon certain seasons (etc. tourism, farming) so this means that on the off seasons, this individuals are temporarily unemployed.

Question 59

What is cyclical unemployment?

Answer 59

- Caused by a downturn in the economy | - lack of demand in the economy leads to many workers being made redundant as labour is a form of derived demand.

Question 60

How does cyclical unemployment induce a hysteresis effect?

Answer 60

If people are out of work for a long time in a recession, it can be difficult to get back into employment because of lack of job experience and decline in motivation. Increases the natural rate of unemployment

Question 61

What are the limitations of the claimant count?

Answer 61

- not universally comparable as not every country has a welfare contribution system - different to compare ways to qualify for it, fraudulently working while claiming benefits, some people may not be actively looking for work and claiming benefits.

Question 62

What does it mean when someone is economically inactive?

Answer 62

who are not in employment or unemployed etc. full-time student, housewife. economically inactive people are not included in the labour force.

Question 63

What are the limitations of the ILO Labour Force Survey?

Answer 63

- sampling errors - limitations of extrapolation: If 100,000 people are asked it may not represent nationwide unemployment. Etc. regional pockets in the North - non-participation rates (particularly high this year)

Question 64

What is real wage unemployment?

Answer 64

occurs when wages are set above the equilibrium level causing the supply of labour to be greater than demand.