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Economics > 4.2.3 Economic Performance > Flashcards

4.2.3 Economic Performance Flashcards

1
Q

What is the difference between short run and long run growth?

A

SR growth - the percentage increase in a country’s real GDP, measured annually and caused by increases in AD
LR growth - when the productive capacity of the economy increases, refers to the trend rate of growth of real national output in an economy in a period of time, caused by increases in AS

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2
Q

What is the potential output of an economy?

A

What the economy could produce if resources were fully employed

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3
Q

What is economic growth?

A

Long term expansion of the productive capacity of an economy

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4
Q

What are the demand-side determinants of short run growth of real national income?

A

Anything that impacts AD (C,I,G,X,M)

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5
Q

What are the supply-side determinants of short run growth of real national income?

A

Lower costs of factors of production

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6
Q

What is the long run trend rate of economic growth?

A

The average sustainable rate of economic growth over a period of time

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7
Q

What are the costs of economic growth on consumers?

A
  • Inequality - those with low/fixed incomes might feel worse off if there is high inflation
  • Demand-pull inflation due to higher spending
  • Shoe leather costs - consumers might have to spend more time/effort finding best deal while prices rise
  • Law of diminishing returns - benefits of more consumption might not last after first few units
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8
Q

What are the costs of economic growth on firms?

A

Menu costs due to high inflation - have to keep changing prices to meet inflation

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9
Q

What are the costs of economic growth on the government?

A

Might have to increase spending on healthcare if consumption of demerit goods increases

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10
Q

What are the costs of economic growth on the environment?

A

High levels of growth could lead to damage to the environment in the long run due to increase in negative externalities from the consumption and production of more goods and services

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11
Q

What are the benefits of economic growth on consumers?

A

Higher employment rate and wages increase - increases average consumer income
Increased confidence - more consumption - higher living standards

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12
Q

What are the benefits of economic growth on firms?

A
  • More profits and higher levels of business confidence - increased investment - could lead to production of new technologies, improving productivity and lowering average costs in long run
  • Economies of scale as firms grow
  • More growth in export markets - more competition between firms - become more productive and efficient, more sales opportunities
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13
Q

What are the benefits of economic growth on the government?

A

Government budget might improve as less people need welfare payments and more people will be paying tax

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14
Q

What are the benefits of economic growth on the environment?

A

As consumer incomes increase, some people may show more concern about the environment
Could lead to development of technology to produce goods and services more greenly

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15
Q

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

A

Higher average wages - consumers can enjoy more goods and services of a higher quality
Public services improve as governments have higher tax revenues, so they can afford to spend on improving services, this could lead to an increase in life expectancy and education levels

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16
Q

What does an increasing gradient of actual growth above the trend growth (LRAS) represent in the economic cycle?

A

Boom

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17
Q

What does a decreasing gradient of actual growth below the trend growth (LRAS) represent in the economic cycle?

A

Recession

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18
Q

What does an increasing gradient of actual growth below the trend growth (LRAS) represent in the economic cycle?

A

Recovery

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19
Q

What does the difference between the actual growth and trend growth above the trend growth (LRAS) represent in the economic cycle?

A

Positive output gap

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20
Q

What does the difference between the actual growth and trend growth below the trend growth (LRAS) represent in the economic cycle?

A

Negative output gap

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21
Q

What is an output gap?

A

The difference between the actual level of output and the potential level of output

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22
Q

What is a positive output gap?

A

When the actual level of output is greater than the potential level of output, putting upwards pressure on inflation

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23
Q

How does a positive output gap occur?

A

Due to resources being used beyond the normal capacity, such as if labour works overtime

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24
Q

What is the effect on the output gap if productivity is growing?

A

It becomes positive

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25
Q

What is a negative output gap?

A

When the level of output is less than the potential level of output, putting downward pressure on inflation

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26
Q

How does a negative output gap occur?

A

Unemployment of resources in an economy, so labour and capital are not used to their full productive potential, meaning there is a lot of spare capacity in the economy

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27
Q

What are the main methods of measuring unemployment?

A

The claimant count and the Labour Force Survey

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28
Q

What is the claimant count?

A

The number of people claiming JSA (Job Seekers Allowance), where they have to prove they are actively looking for work

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29
Q

What is the problem with the claimant count?

A

Count could be too low as not every unemployed person is eligible or bothers claiming JSA

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30
Q

What is the Labour Force Survey?

A

A internationally recognised sample/questionnaire

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31
Q

What is the problem with the Labour Force Survey?

A

People are able to lie on the questionnaire

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32
Q

What is the benefit of the Labour Force Survey over the claimant count?

A

Since the part time unemployed are less likely to claim JSA, this method gives a higher unemployment figure than the claimant count

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33
Q

What is voluntary unemployment?

A

People choosing to remain unemployed, choosing not to work at the current wage rate

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34
Q

What might discourage people from participating in the labour market and remain voluntarily unemployed?

A

A high income tax rate

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35
Q

What is involuntary unemployment?

A

People are willing and able to work at the current wage rate, but cannot find work
Usually cyclical as it is caused by a fall in AD
Occurs when there is an excess supply of labour which ‘sticky wages’ are unable to correct

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36
Q

What is seasonal unemployment?

A

Unemployment that occurs during certain points in the year, for example, during the summer, more people will be employed in the tourism industry when demand increases

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37
Q

What is frictional unemployment?

A

Unemployment in the time between leaving a job and looking for another job
This is the reason why 100% employment is not possible as there is always frictional unemployment
Not damaging as it is only temporary

38
Q

What is structural unemployment?

A

Long term unemployment due to occupational immobility that occurs when an economy changes the industries jobs are in, as well as geographical immobility

39
Q

How is occupational immobility caused?

A

Changes in industry, affecting mostly those with poor education or a lack of transferable skills

40
Q

How can geographical immobility be caused?

A

The cost of living in an area, or ‘family ties’

41
Q

What is cyclical unemployment / demand deficiency?

A

Involuntary unemployment caused by a lack of aggregate demand for goods and services, usually occurs during periods of economic decline or recessions, linked to the a negative output gap
Firms are either forced to close or make workers redundant as their profits are falling due to decreased consumption, so they need to reduce their costs

42
Q

What is real wage / classical unemployment?

A

Unemployment caused by wages being above the market equilibrium, as the supply of labour exceeds demand
Classical economists argue that there would be no unemployment if wages were let to fall to the equilibrium level

43
Q

What is the natural rate of unemployment?

A

The unemployment rate when the labour market is at equilibrium, representing the difference between those who are willing to have a job at the current market wage level, and those who are willing and able to have a job, caused by supply-side factors
Includes the frictional and structural levels of unemployment

44
Q

What does the unemployment rate revert to in the long run?

A

The natural rate of unemployment

45
Q

What are the consequences of unemployment for consumers?

A

Unemployed consumers have less disposable income decreasing their standard of living

46
Q

What are the consequences of unemployment for firms?

A

Firms have a larger supply of labour to employ from with a higher rate of unemployment, causing wages to fall, helping firms reduce their costs
Consumer spending falls due to less disposable income, so firms may lose profits

47
Q

What are the consequences of unemployment for workers?

A

Workers’ resources are wasted with unemployment
Could lose their existing skills if they are not fully utilised

48
Q

What are the consequences of unemployment for the government?

A

May have to be more spending on JSA as unemployment rate increases, incurring an opportunity cost as money could have been spent elsewhere
Less revenue from income tax and indirect taxes on expenditure as they unemployed have less disposable income to spend

49
Q

What are the consequences of unemployment for society?

A

Opportunity cost to society as workers could have produced goods and services if they were employed
Negative externalities such as crime and vandalism if the unemployment rate increases

50
Q

What is inflation?

A

The sustained rise in the price level over time

51
Q

What is deflation?

A

The sustained fall in the price level in an economy over time (negative inflation rate)

52
Q

What is disinflation?

A

The falling rate of inflation, where the price level is rising but to a slower extent

53
Q

What does inflation mean for the cost of living and purchasing power of money?

A

Cost of living increases and the purchasing power of money decreases

54
Q

What does disinflation mean for the cost of living and purchasing power of money?

A

Goods and services are relatively cheaper now than a year ago and the purchasing power of money has increased

55
Q

What is the aim of deflationary government policies?

A

To reduce AD, but they don’t necessarily result in deflation

56
Q

What is demand-pull inflation?

A

Inflation due to aggregate demand growing excessively, putting pressure on resources

57
Q

What causes demand-pull inflation?

A
  • Depreciating exchange rate - less imports and more exports, causing AD to rise
  • Lower taxes - more disposable income - more consumption
  • Lower interest rates - less saving and cheaper borrowing costs - more consumption
58
Q

What is cost-push inflation?

A

Inflation due to increased production costs for firms

59
Q

What causes cost-push inflation?

A
  • Increase in costs for raw materials, labour (wages) and oil prices
  • Indirect taxes - costs of cigarettes/fuel increase
  • Depreciation in exchange rate - imports more expensive, pushing up price of raw materials
  • Expectations of inflation - if consumers expect prices to rise they might ask for higher wages to make up for this, triggering more inflation
60
Q

What is Fisher’s equation of exchange?

A

MV=PQ

M - money supply
V - velocity of circulation
P - price level
Q - quantity of output

61
Q

What is the Quantity Theory of Money?

A

Inflation caused by the money supply increases at a faster rate than national income
The value of expenditure on goods is equal to the value of total output (MV=PQ)
Assuming the velocity of circulation remains constant and the quantity of output is constant

62
Q

Explain the Quantity Theory of Money.

A

When the money supply increases consumers have more money to spend causing AD to shift right, firms then increase supply in short run, causing an inflationary positive output gap, resulting in more workers being employed, increasing wages, increasing the cost for firms so they put up prices
This inflationary pressure means the real value of money falls, so money can buy less, leading to a contraction in demand
Workers demand higher wages to make up for increase in inflation, leading to left shift in SRAS, returning the output in the economy to equilibrium with a higher price level

63
Q

What are the consequences of inflation on consumers?

A

Those with low/fixed incomes are hit hardest by inflation as the cost of necessities becomes more expensive
The purchasing power of money falls, affecting those with high incomes the least
Those with loans will benefit as the value of the repayment is lower, as the amount owned doesn’t increase with inflation, decreasing the real value of debt

64
Q

What are the consequences of inflation on firms?

A

High inflation means interest rates are likely to be higher, so cost of investing will be higher so firms are less likely to invest
Workers might demand higher wages inline with inflation, increasing costs of production for firms
High inflation creates uncertainty decreasing business/consumer confidence as they are not aware of what costs will be, so less investment/consumption

65
Q

What are the consequences of inflation on the government?

A

Government will have to increase value for state pension and welfare payments as cost of living is increasing

66
Q

What are the consequences of inflation on workers?

A

Real income falls with inflation, so workers will have less disposable income
If firms face higher costs there could be more redundancies when firms try to cut their costs

67
Q

What are the consequences of deflation on consumers?

A

Real value of debt is higher, so consumers with high levels of debt find it harder to pay it off, as a larger proportion of their income will be used to make repayments
As consumers have less disposable income, the level of spending in the economy falls, worsening the effects of a recession

68
Q

What are the consequences of deflation on firms?

A

Spending is discouraged as goods and services will be cheaper in the future, so consumers believe that if goods are cheaper tomorrow, it is not worthwhile buying them today, resulting in economic decline and less profits for firms
As consumers have less disposable income, consumption decreases, lowering profits for firms

69
Q

What are the consequences of deflation on workers?

A

As firms make lower profits, wages are likely to fall
Discouraged spending can result in economic decline and increasing rates of unemployment
There could be even lower growth and worse rates of unemployment if the real interest rate increases

70
Q

What is the impact of world commodity prices on domestic inflation?

A

If world commodity prices increase (e.g. oil prices), cost-push inflation is caused in the UK
If there is a world boom (e.g. in USA), commodity prices are pushed up, leading to imports becoming more expensive

71
Q

How does a negative output gap relate to unemployment?

A

There is an unemployment of resources in the economy, so labour is not being used to its full productive potential

72
Q

How does a negative output gap relate to inflationary pressures?

A

It puts a downward pressure on inflation

73
Q

How does a positive output gap relate to unemployment?

A

Resources are being used beyond their normal capacity, so labour could be working overtime

74
Q

How does a positive output gap relate to inflationary pressures?

A

It puts upwards pressure on inflation

75
Q

Explain the conflict between economic growth and the current account.

A

There will be more spending in general due to the increase in national income and disposable income for consumers, leading to more spent on imports, worsening the current account deficit

76
Q

How can the conflict between economic growth and the current account be solved?

A

Increasing tariffs, or being an export-led growth economy (e.g. China/Germany)

77
Q

Explain the conflict between economic growth and inflation.

A

Growth leads to more consumption as more people have disposable income due to greater employment, so AD is increased, which could lead to demand-pull inflation
This is especially true if there is a positive output gap and AD increases faster than AS

78
Q

How can the conflict between economic growth and inflation be solved?

A

Increasing stamp duty, or monetary policy (increasing interest rates)

79
Q

Explain the conflict between economic growth and the government budget deficit.

A

Reducing a budget deficit requires less expenditure and more tax revenue, decreasing AD, resulting in less economic growth

80
Q

How can the conflict between economic growth and the government budget deficit be solved?

A

Increasing taxes or cutting government spending

81
Q

Explain the conflict between economic growth and the environment.

A

High growth can lead to high levels of negative externalities such as pollution and the usage of non-renewable resources, due to more manufacturing, which is associated with higher levels of carbon dioxide emissions

82
Q

Explain the conflict between economic growth and equal distribution of income.

A

Growth leads to higher incomes, and more disposable income, increasing consumption, leading to higher revenues for firms, which tends to benefit business owners and the wealthy, increasing inequality

83
Q

How can the conflict between economic growth and equal distribution of income be solved?

A

Increasing tax brackets inline with national income increase

84
Q

Explain the conflict between higher living standards now compared to the future.

A

More consumption today leads to higher living standards, limiting consumption in the future, and therefore limiting the living standards in the future

85
Q

How can the conflict between higher living standards now compared to the future be solved?

A

Increase spending on infrastructure so that people in the future can benefit from spending now

86
Q

Explain the conflict between unemployment and inflation.

A

In the short run there is a trade-off between the level of unemployment and the inflation rate
As economic growth increases, unemployment falls due to more jobs being created, but this causes wages to increase, leading to more consumer spending and an increase in the average price level, causing inflation

87
Q

How is the trade-off between the rate of unemployment and the rate of inflation illustrated?

A

The Phillips curve

88
Q

What causes the trade-off between inflation and unemployment to worsen on the short run Phillips curve?

A

A right shift in AD (extension in SRAS)

89
Q

What causes the SRPC to shift right (when there is no trade-off)?

A

SRAS shift left (cost-push inflation)

90
Q

What does the long run Phillips curve represent?

A

The natural rate of unemployment, where there is no trade-off between unemployment and inflation

91
Q

Describe how moving up the SRPC will result in moving up the LRPC.

A

The government decides to boost AD, increasing inflation and decreasing unemployment, and workers want higher wages to work or do extra hours
Moving up SRPC, workers suffer from ‘money illusion’, and inflation goes up due to higher wages, but real wages haven’t gone up, so workers in the long run will quit, increasing unemployment
This shifts SRPC so that starting point and end point are along LRPC

92
Q

What is the solution to the trade-off between inflation and unemployment?

A

Supply-side policies, increasing the quantity and quality of FoP, shifting LRPC left and LRAS right

Economics (10 decks)

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