AL The Macroeconomy

Question 1

Economic growth

Answer 1

Is the increase in a country’s real national output. This is caused by increases in the quality or quantity of factors of production which cause an outward shift in the PPF

Question 2

Economic development

Answer 2

Refers to living standards, freedom and life expectancy. Development is also concerned with how sustainable the economy is and whether the needs of future generations can be met

Question 3

Sustainability

Answer 3

Suggests that resources have the be used effectively and efficiently so they can be maintained for future generations. Growth is sustainable when the rate of growth can be maintained in the long run. Fast economic growth today could mean that resources are depleted creating problems for future generations. Unsustainable growth occurs around the boom and bust sections of the business cycle. If growth is excessive there could be inflation in the average price level, wages and assets as well as excessive credit

Question 4

Short run growth

Answer 4

The percentage increase in a country’s real GDP and it is usually measured annually. It is caused by increases in AD

Question 5

Long run economic growth

Answer 5

Occurs when the productive capacity of the economy is increasing and it refers to the trend rate of growth of real national output in an economy over time. It is caused by increases in AS

Question 6

Potential output

Answer 6

What the economy could produce if resources were fully employed

Question 7

Output gaps

Answer 7

Occurs when there is a difference between the actual level of output and the potential level of output. It is measured as a percentage of national output

Question 8

Negative output gap

Answer 8

Occurs when the actual level of output is less than the potential level of output. This puts downward pressure on inflation. It usually means there is the unemployment of resources in an economy so labour and capital are not used to their full productive potential. There is a lot of spare capacity in the economy

Question 9

Positive output gap

Answer 9

Occurs when the actual level of output is greater than the potential level of output. It could be due to resources being used beyond normal capacity. If productivity is growing, the output gap becomes positive. It puts upward pressure on inflation

Question 10

The business cycle

Answer 10

Refers to the stage of economic growth the economy is in
Goes through periods of booms and busts
Real output increases when there are periods of economic growth (recovery)
The boom is when economic growth is fast
During recessions real output falls and negative growth
Governments might increase spending to stimulate
During growth governments may receive more tax revenue since consumers spend and earn more

Question 11

Characteristics of a boom

Answer 11

High rates of economic growth
Near full capacity or positive output gaps
Near full employment
Demand-pull inflation
Consumers and firms have a lot of confidence which leads to high rates of investment
Government budgets improve due to higher tax revenue and less spending on welfare payments

Question 12

Characteristics of a recession

Answer 12

Negative economic growth
Lots of spare capacity and negative output gaps
Demand-deficient unemployment
Low inflation rates
Government budgets worsen due to more spending on welfare payments and lower tax revenues
Less confidence amongst consumers and firms which leads to less spending and investment

Question 13

Trade liberalisation (cause of economic growth)

Answer 13

Free trade is the act of trading between nations without protectionist barriers. World GDP can be increases since output increases when countries specialise. Living standards might increase and there could be more economic growth

Question 14

Promotion of FDI (cause of economic growth)

Answer 14

The flow of capital from one country to another to gain a lasting interest in an enterprise in the foreign country. Can help create employment, encourage innovation of technology and help promote long term sustainable growth. Provides LEDCs with funds to invest and develop

Question 15

Microfinance schemes (cause of economic growth)

Answer 15

Involves borrowing small amounts of money from lenders to finance enterprises. It increases the incomes of those who borrow and can reduce their dependency on primary products. Could be a multiplier effect from the investment of the loans. They are small loans for usually unbankable people to break away from aid and gives borrowers financial independence. Detach the poor from high interest helping businesses to be set up or spent on immediate consumption. Data collection may not be reliable if there is dishonesty regarding where the money was spent

Question 16

Privatisation (cause of economic growth)

Answer 16

Assets are transferred from the public sector to private sector. The government sells a firm so that it is no longer in their control. Gives incentives firms to operate efficiently which increases economic welfare because they have a profit incentive. Firms also achieve allocative efficiency and higher quality. Revenue is raised for the government in a one-off payments

Question 17

Development of human capital (cause of economic growth)

Answer 17

Skills base would improve, improving productivity and allowing more advanced technology to be used. The country can move their production up the supply chain from primary to tertiary services which earn more

Question 18

Infrastructure development (cause of economic growth)

Answer 18

High supply costs delay and it reduces the mobility of labour. Physical infrastructure is transport, energy, water and telecommunications

Question 19

Development of tourism (cause of economic growth)

Answer 19

Tourism can create jobs and shift away from primary product dependency. Developing countries have a MPC which creates a multiplier effect. It diversifies the economy making it more attractive to FDI and infrastructure. Can also earn foreign currency for developing countries. Little revenue is retained since travel agents and hotel owners repatriate profits and there is overcrowding and the loss of habitats. Income is unstable since it relies on the business cycle of other countries. Investing can be risky and expensive. Locals could feel stigmatised by tourism and environmental damage

Question 20

Development of primary industries (cause of economic growth)

Answer 20

Some developing countries have an abundance of raw materials so some governments might choose to exploit this for a comparative advantage. Primary industries may be the only source of income for most families

Question 21

Fairtrade schemes (cause of economic growth)

Answer 21

Ensures farmers can receive a fair price for their goods so have a guaranteed income and certainty about sales and can plan for the future. Can support community development and social projects and ensure working conditions meet a minimum standard. Encourages sustainable production, promotes environmental protection and stop child labour. Could distract from other policies and development and may distort price signals. Increases prices which does not help those not on fair trade who have to deal with a lower market price. Could make farmers reliant on the sale of the produce but promotes self sufficiently and encourages independence

Question 22

Aid (cause of economic growth)

Answer 22

Consumers in LEDCs have a higher propensity to consume than save due to limited incomes so capital inflows can fill the savings gap. Provides temporary assistance to a country and reduce human capital inadequacies or to pay off debt. Can improve infrastructure making the country more productive. Benefits are limited by corrupt leaders, size of payments and potential for dependency on aid

Question 23

Debt relief (cause of economic growth)

Answer 23

The partial or total forgiveness of debt. Is a principal cause of poverty since it hampers development. Financial resources are diverted from infrastructure, education and healthcare. If a country defaults it can make it hard to borrow more in the future. Forgiveness can allow a country to import more and increase standard of living. It improves government finances so public services could be funded instead. If debt is forgiven it could encourage more borrowing in the future and there could be corruption

Question 24

Costs of consumers of economic growth

Answer 24

Does not benefit everyone equally especially those on low and fixed incomes if inflation is high
Higher demand-pull inflation due to spending
More shoe leather costs so have to find the best prices
Benefits of consumption may not last due to the law of diminishing returns

Question 25

Costs to firms of economic growth

Answer 25

More menu costs as a result of higher inflation so have to keep changing prices

Question 26

Costs to the government of economic growth

Answer 26

Increase spending on healthcare if the consumption of demerit goods increases

Question 27

Costs to current and future living standards of economic growth

Answer 27

Damage to the environment in the long run due to increased negative externalities from the consumption and production of some goods and services

Question 28

Benefits to consumers of economic growth

Answer 28

The average consumer income increases as more people are in employment and wages increase Consumers feel more confident in the economy which increases consumption and leads to higher living standards

Question 29

Benefits to firms of economic growth

Answer 29

More profits that increase investment and higher business confidence Could develop new technologies to improve productivity and lower average long run costs Take advantage of economies of scale If growth in export markets firms might face more competition so are more productive and efficient and have higher sales opportunities

Question 30

Costs to the government of economic growth

Answer 30

Budget might improve since fewer people require welfare payments and more people are paying tax

Question 31

Benefits to current and future living standards of economic growth

Answer 31

People may show more concern about the environment Development of technology to produce more greenly Higher average wages so higher quality goods consumed Public services improve increasing life expectancy and education

Question 32

Real GDP

Answer 32

The value of GDP adjusted for inflation

Question 33

Nominal GDP

Answer 33

The value of GDP without being adjusted for inflation. Misleading because it can make GDP appear higher than it really is

Question 34

Total GDP

Answer 34

The combined monetary value of all goods and services produced within a country's borders during a specific time period

Question 35

GDP per capita

Answer 35

The value of total GDP divided by population. Useful for comparing the relative performance of countries

Question 36

GNP

Answer 36

The market value of all products produced in an annum by the labour and property supplied by the citizens of one country. It includes GDP plus income earned from overseas assets minus income earned by overseas residents. GDP is within a country's borders while GNP includes products produced by citizens of a country whether inside the border or not

Question 37

GNI

Answer 37

The sum of value added by all producers who reside in a nation plus product taxes, subtract subsidies not included in the value of output plus receipts of primary income from abroad

Question 38

The use and limitations of national income data to compare differences in living standards between countries

Answer 38

GDP does not give any indication of income distribution and therefore living standards May need to be recalculated in terms of purchasing power to account for international price differences which is determined by the cost of living and inflation rate Large hidden economies which are not accounted for Gives no indication of welfare

Question 39

Importance of using PPP exchange rates when making international comparisons of living standards

Answer 39

Estimates how much the exchange rate needs adjusting so that an exchange between countries is equivalent according to each currency's purchasing power. Helps to minimise misleading comparisons between countries

Question 40

National debt

Answer 40

The amount of money the government has borrowed at one time through issuing securities

Question 41

Factors influencing the size of national debts

Answer 41

The accumulation of a government deficit over time If continuously running and deficit, debt increases If size of deficit reduces, the rate of increase of the total debt is slower but still increase When running a surplus the size of the debt decreases

Question 42

The significance of the size of national debts

Answer 42

Cost of borrowing could increase since the government is increasing demand for credit by borrowing If confidence is lost in the government, interest may have to be raised to encourage investors to finance debt Could lead to higher taxes and austerity measures especially if uncontrollable Fiscal deficit could be inflationary if it increases AD More spending could lead to crowding out of the private sector leaving fewer funds since the government is borrowing

Question 43

The three dimensions of the HDI

Answer 43

Education, life expectancy and standard of living measured by real GDNI at PPP per capita. It measures economic and social welfare of countries. Education combines the mean number and expected years of schooling. The standard of living component measures GNI adjusted to PPP per capita to account for remittances. A value close to 1 shows a high level of economic development. A value close to 0 suggests a low level of development

Question 44

Advantages and limitations of using the HDI to compare levels of development between countries and over time

Answer 44

Does not consider how free people are politically, human rights, gender equality and cultural identity Does not take the environment into account Does not consider the distribution of income Allows for comparisons between countries Provides a broader comparison than GDP Education and health are important to consider and shows success of government policies

Question 45

Measure of economic welfare (MEW)

Answer 45

An alternative to GDP. It takes national output and then adjusts it to include a value for leisure time and unpaid work. This increases the welfare value of GDP. The value of environmental damage caused by industrial production and consumption is also considered

Question 46

Human poverty index (HPI)

Answer 46

Measures life expectancy, education and the ability of citizens to meet basic needs in developing and developed countries. Education considers adult literacy rate and meeting basic needs is measured by the percentage of underweight children and people not using improved water sources

Question 47

Multidimensional poverty index (MPI)

Answer 47

Measures poverty in developing countries. It works with income based measures and considers the lack of education, poor health and low living standards. Poverty can be assessed on an individual level and the intensity of poverty can be measured by considering what is deprived

Question 48

Gender related development index (GDI)

Answer 48

Measures the relative inequality between men and women. It combines HDI with a consideration of gender

Question 49

Kuznets curve

Answer 49

States that as society develops, inequality increases since the wages of industrial workers rise faster than farmer's. Then wealth is redistributed through government transfers and education. Inequality is a transitional phase and once nations develop inequality reduces. It can be argued that the rate of return on capital increases so as the right get richer with returns on their investments, inequality increases

Question 50

Characteristics of LEDCs

Answer 50

Low life expectancies High mortality rates High dependency ratio Low GDP Fast population growth Low levels of education Poor standard of living Poor nutrition, lack of access to clean, safe drinking water and a lack of sanitation Poor or absent health care provision

Question 51

Characteristics of MEDCs

Answer 51

Long life expectancies High income per capita High levels of education Slow population growth per year Low mortality rates Urban and city populations are large

Question 52

BRICS economies

Answer 52

Characterised by fast growth and recent industrialisation. Have significant influence in global affairs and all are part of G20. Rely heavily on industry. Lot of potential for innovation especially in renewable energy. All seeing a considerable increase in demand for a higher standard of living

Question 53

Working age populatoin

Answer 53

Between 18 and 65 who are actively looking for work. These are the economically active members of the population

Question 54

Economic inactivity

Answer 54

Those who are not actively looking for jobs. Some are discouraged from the labour market since they have been out of work for so long. If it increases the size of the labour force may decrease which means the productive potential could fall

Question 55

Unemployed

Answer 55

Those able and willing to work but are not employed. They are actively seeking work and usually looking to start within the next two weeks

Question 56

Labour productivity

Answer 56

A measure of output per worker per hour. It is equivalent to how much real GDP is produced per unit of labour per hour

Question 57

Natural rate of unemployment

Answer 57

The unemployment rate when the labour market is at equilibrium. Is the difference between those who are willing to have a job at current wages and those who are willing to have a job. Caused by supply-side factors. Includes frictional, structural and under skilled workers. Inflation does not have a tendency to increase at this rate. There is no demand-deficient unemployment. In the long run the unemployment rate reverts to the natural rate

Question 58

Full employment

Answer 58

The state when all factors of production are used to their productive potential. It maximises the output. Could put upward pressure on the price level. Could also be wage inflation increasing costs of production for the firms. Crime rates may fall and standards of living increase. Inequality and poverty might fall. Consumers and firms have more confidence encouraging long term sustainable growth. Government budgets might improve so aim for as near to full employment as possible in productive work

Question 59

Consequences of unemployment

Answer 59

Less disposable income so lower living standards Psychological consequences Large labour supply, wages fall and reduced costs Firms may lose profits if spending falls Inferior goods sales may rise Costs firms to retrain workers Workers could lose existing skills Government may have to spend more on benefits Less tax revenue due to less disposable income Opportunity cost to society Negative externalities as crime and vandalism

Question 60

Structural unemployment

Answer 60

Occurs with a long term decline in demand for the goods and services in an industry. Worsened by the geographical and occupational immobility of labour. If workers do not have transferable skills or it is not easy to move somewhere jobs are available then these unemployed will remain unemployed in the long run. Globalisation also contributes since production moves abroad where there are lower labour costs

Question 61

Frictional unemployment

Answer 61

The time lag between leaving a job and looking for another job. Not particularly damaging since it is only temporary

Question 62

Seasonal unemployment

Answer 62

Occurs during certain points in the year

Question 63

Cyclical unemployment

Answer 63

Caused by a lack of demand for goods and services during periods of economic decline or recessions. Linked to a negative output gap. Firms close or make workers redundant because profits are falling due to decreased spending and need to reduce costs. Could also be caused by increases in productivity so less workers are needed

Question 64

Real wage unemployment

Answer 64

Wages above market equilibrium may cause unemployment because labour supply exceeds demand. Classical economists argue that by letting wages fall to equilibrium there would be no unemployment. Cutting wages during weak consumer spending would cause further falls in consumer spending and there would be even lower growth

Question 65

Difficulties in measuring unemployment

Answer 65

Some of those in employment might claim benefits while some unemployed may not reveal this in a survey

Question 66

The claimant count

Answer 66

Counts the number of people claiming unemployment benefits. Have to prove they are actively looking for work

Question 67

Evaluating the claimant count

Answer 67

Not every unemployed person is eligible for or claims benefits. Those with partners on high incomes are not eligible even if unemployed. Generally underestimated the level of unemployment

Question 68

The labour force survey

Answer 68

Asks people if they have been out of work for 4 weeks, able and willing to start working within 2 weeks and should be available for 1 hour per week. The part time unemployed are less likely to claim benefits so gives a higher figure

Question 69

Policies to correct unemployment

Answer 69

Supply side for structural because the labour market can be improved with education Demand side for cyclical since reduce negative output gap side and shift AD right Significant time lags with supply side Market based supply side could lead to more unequal distributions of wealth

Question 70

Closed and open economies

Question 71

The circular flow of income between households, firms, the government and the international economy

Question 72

The effect of changes in injections and withdrawals on national income

Question 73

The multiplier process

Question 74

The significance of the multiplier to shifts in AD

Question 75

Marginal propensity to consume

Question 76

Marginal propensity to save