3. Economic Performance Flashcards
(102 cards)
1
Q
What is short-run economic growth?
A
Growth based on increased utilisation of unemployed resources
2
Q
What is long-run economic growth?
A
Growth based on increasing the potential output level of the economy
3
Q
How is short-run economic growth shown on a PPC curve?
A
Closer to the actual PPC boundary
4
Q
How is long-run economic growth shown on a PPC curve?
A
Shifting PPC further out, involves expanding an economy’s capital
5
Q
What are the Determinents of short-run growth?
A
- Increases in aggregate demand (AD)
- Increases in short-run aggregate supply (SRAS)
Tends to be an increase in AD
6
Q
How is short-run growth measured?
A
Percentage change in GDP
7
Q
How else is short-run growth referred to as?
A
Actual growth
8
Q
What are the Determinents of long-run growth?
A
- Increases in the economy’s productive capacity
- Increases arise from improvements in the ‘supply side’ of the economy
- These improvements result in either quantity and/or quality of the factors of production available to an economy
- Shown as a rightward shift of the LRAS curve
9
Q
What factors would increase long-run growth?
A
- Increases in the labour force (labour supply)
- Improvements in labour productivity
- Capital investment
- New technology
- Education
- Government policy
10
Q
What are increases in the labour force as a factor of long-run growth?
A
- Population size limits the labour supply but it can be increased by allowing more immigration into the economy
- Increasing retirement age, or encouraging economically inactive to enter the work force
- Making it less financially attractive to be out of work (less unemployment benefits, increasing incentives to take work (cutting income tax))
11
Q
What are improvements in labour productivity as a factor of long-run growth?
A
- Increase in workforce’s skill level
- Should therefore boost long-run growth
12
Q
What are capital investments as a factor of long-run growth?
A
- Contributes to long-run and short-run growth (increases in LRAS)
- More investment in capital stocks (equipment, premises)
- Government can encourage businesses investment by creating a more stable macroeconomic climate - investement with greater confidence
- Tax incentives
13
Q
What is new technology as a factor of long-run growth?
A
- Advanced technology leads to improved capital equipment productivity
- Technology improvements therefore raise the ability of an economy to produce more output with given capital stock
14
Q
What is education as a factor of long-run growth?
A
- Improvements in education leads to improved workers productivity
- Occupational immobility can be reduced if education provides preparation for a variety of occupations
15
Q
What is government policies as a factor of long-run growth?
A
Referred to as ‘supply-side’ policies
- ‘Trend growth’ estimated at. Between 2% and 2.5% a year in the UK
- Actual short-run rate of economic growth can rise above the long-run trend growth rate for short periods of time, long-run growth rate represents the overall long-term limit to economic growth
16
Q
Benefits of economic growth?
A
- Higher living standards
- Easier to find jobs
- Improved social indicators (less crime)
- Increased tax revenue
- Reduced welfare expenditure
- Lower absolute poverty
- Greater international government status
17
Q
Costs of economic growth?
A
- Increased inflation if short-run rises too quickly
- Depletion of natural resources
- Increases on inequality
- Increased negative externalities (congestion, pollution)
18
Q
What is cyclical unemployment?
A
Unemployment caused by insufficient aggregate demand within the economy
19
Q
What is frictional unemployments?
A
Unemployment resulting from ‘friction’ due to movements into and out of the job market, i.e. it occurs when people are between jobs
20
Q
What is structural unemployment?
A
Unemployment resulting from mismatches between the labour supply available and the labour demand for differently skilled labour
21
Q
What is voluntary unemployment?
A
Where people are unwilling to accept a job at the going wage rate despite there being jobs available
22
Q
What is involuntary unemployment?
A
Where people are unable to find employment at the current market wage rate
23
Q
What is real wage unemployment?
A
Unemployment that exists when the real wage is not allowed to fall to the market clearing level where labour demand equals labour supply
24
Q
What is the natural rate of unemployment?
A
The rate of unemployment that consists of all voluntary, structural and frictional unemployment
25
Why may the natural rate of unemployment increase?
If replacement ratio is too high
26
How is the replacement ratio calculated?
Replacement ratio = disposable income out of work/disposable income in work
27
What is trend growth?
The rate of growth in LRAS over time, representing the maximum potential capacity of the UK economy
28
What is sustainable growth?
Economic growth that does not compromise the economy’s ability to grow in the future
29
How is sustainable growth maintained?
Maintained into long-run growth and does not rely on non-renewable resources to generate growth (which would only contribute once)
30
What are examples of government plans for sustainable growth?
‘Green’ subsidies, proposed ban of petrol cars, intent to go carbon neutral by 2050
31
What is the economic cycle?
The repeated pattern of fluctuations in short-run economic growth and how it differs from the trend growth of an economy
32
What does the economic cycle focus on?
Repeated patterns that occur over a number of years
33
What are the repeated phases on the economic cycle called?
Business cycle or trade cycle
34
What is ‘boom’ in the economic cycle?
Period above the average short-run economic growth
35
What is ‘downturn’ in the economic cycle?
Period where short-run economic growth falls from above average to below average
36
What is ‘recession’ in the economic cycle?
Two successive quarters of a year where short-run economic growth is negative
37
What is ‘recovery’ in the economic cycle?
When short-run economic growth starts to increase after a recession
38
What are output gaps?
The difference between actual growth and trend growth
39
What is long-run/trend growth?
Refers to the growth in the productive capacity of the economy
40
What is short-run/actual growth?
Will rarely be in perfect synchronisation with the trend growth rate
41
What is the difference between long-run and short-run growth rates?
Output gaps
42
What is a positive output gap?
Where actual growth is higher than trend growth (would be greatest in a boom)
43
What is a negative output gap?
Where actual growth is below trend growth (would be greatest in a recession)
44
What is the multiplier-accelerator model?
An explanation of the trade cycle where multiplier and accelerator effects combine to magnify cyclical fluctuations in encoding growth
45
What is the inventory cycle?
Changes in inventory levels held by businesses may lead to exaggerated increases or decreases in industrial output - contributing to economic growth
46
What are asset price bubbles?
Where a rise in an assets price becomes self-fulfilling and the price rises beyond the level that normal demand and supply conditions would generate, eventually leading to sharp falls in its price when the bubble is burst
47
What is animal spirits?
The collective feeling of consumer and business confidence the effects economic decisions, such as those affecting consumption and investment
48
What is herding?
Consumer and investor behaviour often moves in similar directions at the same time - in the same way as herd behaviour in groups of animals
49
Whta is excessive growth in credit?
Excessive credit levels mean sharp rises and sharp falls in consumer spending - magnifying the economic cycle
50
What are economic shocks?
Explain the movements form one phase to another of the economic cycle
51
What is full employment?
The level of employment where those who are economically active (either in work or seeing work) can find work if they are willing to accept jobs at the going wage rate
52
What are demand-side factors of unemployment?
Lack of aggregate demand
53
What are supply-side factors in unemployment?
Issues with productive potential of the economy, connected with the economy’s long-term aggregate supply
54
What are consequences of unemployment?
- Risk of poverty
- Health issues
- Crime levels may rise
- Lower tax revenues for the government due to fewer people working and a decrease in spending
- Increased government spending
- Deskilling of the workforce
- Wasted resources
- Less pressure on wages to rise
55
What is deflation?
A fall in the average price level over time
56
What is inflation?
The annual increase in the general price level (measured by the consumer price index)
57
What is disinflation?
Rate of inflation falls but is still positive
58
What causes inflation?
- Demand-pull inflation
- Cost-push inflation
59
What is demand-pull inflation?
Inflation a caused by excessively high levels of aggregate demand beyond what’s needed for full employment
60
What is cost-push inflation?
Inflation that occurs due to rises in costs of production by firms
61
What is the quantative theory of money?
Alternative explanation for inflation - only cause of inflation is excessively high levels growth in money supply
62
What is velocity circulation?
The rate money circulates the economy
63
What are uncompetitive exports?
If UK inflation is high, exports become less price competitive and demand may fall
64
What are menu costs?
Costs associated with having to update menus for changes in prices
65
What are search costs?
Costs associated with researching information for the best economic transaction
66
What are shoe leather costs?
Costs of time and money in making the best decisions
67
What is fiscal drag?
Taxpayers pulled into higher tax brackets despite incomes not rising
68
What is inflation uncertainty?
Businesses being more cautious of production or expansion plans
69
What is policy response?
Governments globally committed to achieving low inflation implement deflationary policies if inflation rises
70
What are the problems of higher inflation?
- Uncompetitive exports
- Men costs
- Search costs
- Fiscal drag
- Uncertainty
- Policy responses
71
What are the two types of deflation?
- Benign deflation
- Malevolent deflation
72
What is benign deflation?
Fall in a price level due to increases in aggregate supply (due falling costs of production)
73
What is malevolent deflation?
Fall in price level due to fall in aggregate demand
74
What are the consequences of deflation?
- Delays in consumption
- Rising real value of debt
- Wage rigidity
- Good deflation turns into bad deflation
75
What are delays in consumption?
If deflation exists, people are more likely to wait to purchase so they get a lower price
76
What is rising real value of debt?
Deflation is likely to cause falls in prices and income
77
What is wage rigidity?
Where wages are sticky and don’t fall in line with falling prices
78
What is a commodity?
A homogenous product (all output of product is identical) that is often used as basic production input e.g. oil, copper, minerals
79
What is good deflation turned bad deflation?
Happens if it is prolonged - prices fall because of expanded AS, people delay purchases and AD falls
80
What is an open economy?
An economy where foreign trade accounts for a significant portion of GDP
81
How does other countries economies impact UK inflation?
- Increase foreign growth increases demand for UK exports - generated demand-pull inflation
- Recessions in trading partners eases demand-pull due to reduced spending
- Increased overseas growth increases demand of UK commodities and basic production materials
- Exchange rates between currencies
82
What are the macroeconomic policies?
- Economic growth (positive but stable growth in GDP)
- Price stability (2% inflation rate)
- Minimising unemployment
- Stable balance of payments on current account (mainly exports and imports)
- Balancing the budget (between govt spending and taxation)
83
When to negative outputs gaps occur?
When actual growth is below the trend growth
84
What happens to cyclical unemployment if negative output exists?
Cyclical unemployment increases
85
Whta diagrams are negative output gaps shown on?
AD/AS diagrams
86
What increases to solve negative output gaps?
Increase in AD
87
What are positive output gaps?
When the actual growth is above the trend growth
88
What do positive output gaps lead to?
Rising rises - increased inflation
89
How do firms try to maintain positive output gaps?
Finding cost increasing (such as paying higher wages to attract workers), which leads to inflationary pressures
90
What is the solution to falling positive output gaps?
Reduce AD
91
What is the Phillips Curve?
Shows negative correlation between rate or wage growth and level of unemployment in the UK economy - suggests there can be a trade-off between inflation and unemployment
92
What does the short-run Phillips curve show?
When unemployment falls, inflation rises
- Higher wages increase costs of production, leading to higher inflation as firms raise selling prices to cover higher wage costs
93
Why is there a trade-off between unemployment and inflation?
As unemployment falls, trade union workers feel more confident claiming higher wages given that with labour shortages, they will be unlikely to lose their jobs
94
What is the short-run Phillips curve?
The apparent trade-off between achieving low inflation but with higher unemployment
95
What is long-run Phillips curve?
How in the long-run the economy will move towards the non-accelerating inflation rate of unemployment (NAIRU), regardless of the rate of inflation
96
What is the money illusion?
Where workers in the short run confuse nominal wages and real wages
97
What is adaptive expectations?
Where workers trade time to adjust their expectations of the inflation rate to match the actual inflation
98
What are implications for policy makers?
- Trade-offs may exist
- Reductions in unemployment may only be temporary
- Speed if adjustment process for inflationary expectations unclear
- If adjustment process is quick, benefits may be short-lived
99
What is NAIRU?
Natural rate of unemployment - unemployment is at a constant rate of inflation
100
101
What happens when actual unemployment rate < NAIRU?
Inflation rises
102
What happens when actual unemployment rate > NAIRU?
Inflation falls
