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Economics > chapter 8 - economic performance > Flashcards

chapter 8 - economic performance Flashcards

1
Q

supply-side influence on the economy

A

anything which shifts the position of the SRAS or LRAS curve (relates to changes in the economy which is affected by the available factors of production)

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2
Q

demand-side influence on the economy

A

anything which shifts the aggregate demand curve

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3
Q

what is the trend growth rate? (definition)

A

the rate at which output can grow, on a sustained basis, without putting upward or downward pressure on inflation

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4
Q

definition of unemployment

A

All those without paid employment who are actively seeking work (does not include the sick, disabled etc…)

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5
Q

The Claimant count:

A

Unemployment measurement of all those claiming benefits

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6
Q

Labour force survey ILO measure of unemployment

A

all those seeking work irrespective of whether they are entitled to benefits or not

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7
Q

what does the term ‘economically active’ mean?

A

all those in employment or actively seeking employment

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8
Q

what does the term ‘economically inactive’ mean?

A

all those not seeking paid employment e.g. children, pensioners, full-time students

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9
Q

what are some costs of unemployment?

A
  • lower GDP (productively inefficient)
  • loss of tax revenues
  • high cost of benefits
  • associations of higher levels of crime + consequentially higher costs of policing
  • unemployed are likely to suffer from poor health leading to increased costs of healthcare
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10
Q

what is fricitonal unemployment?

A

those inbetween jobs for a short period of time (not a major concern for Government)

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11
Q

what is structural unemployment?

A

caused by the decline of major industries such as coal mining. The structurally unemployed lack the skills that the new expanding industries need - occupationally immobile. Many are geographically immobile

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12
Q

what is technological unemployment?

A

caused them humans are replaced by technology (a form of structural unemployment)

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13
Q

what is cyclical unemployment? Also known as demand deficient

A

caused by a recession and a lack of aggregate demand and therefore associated with a negative output gap.

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14
Q

what is classical unemployment?

A

occurs as a result of real wages being above their market-clearing level leading to an excess supply of labour. High levels of minimum wages above the equilibrium level will lead to classical unemployment

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15
Q

what is voluntary unemployment?

A

when a worker chooses not to accept work at existing wage rates.

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16
Q

what is the unemployment trap?

A

When benefits are generous and wages are low meaning people don’t have an incentive to find work.

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17
Q

what is the replacement ratio?

A

out of work disposable income/ in work disposable income
- the closer it is to 1, the lower the incentive to find work

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18
Q

what are some barriers to occupational mobility of labour

A
  • time + cost of education and training
  • physical + personal attributes
  • legal barriers (e.g. illegal in some countries for women to work)
  • discrimination or cultural barriers
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19
Q

barriers to geographical mobility of labour

A
  • time and cost of relocating
  • lack of access to transport
  • legal barriers e.g. visas needed to work abroad
  • discrimination and cultural barriers may discourage some people from moving
  • family and friends
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20
Q

what are the best policies for dealing with structural unemployment?

A

Supply-side policies and the regional policy

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21
Q

what do supply-side policies include?

A
  • competition policy along with regulation of businesses
  • cuts in direct taxes, and cuts in benefits to create incentives to work. Welfare reform is cutting benefits and reduces the unemployment trap
  • creation of a flexible labour market
  • investment in R&D, infrastructure
  • control of inflation to create a stable environment for businesses to prosper
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22
Q

what is the regional policy?

A

investment in infrastructure projects as they are very labour intensive and providing grants/subsidies to encourage inward investment from foreign multi-nationals e.g. Toyota.

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23
Q

cons of supply side policies

A
  • take many years before they begin to benefit an economy
  • successful education and training is very expensive
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24
Q

how could the fiscal policy be used to decrease unemployment?

A
  • can be used to boost aggregate demand and therefore reduce cyclical unemployment
  • cuts in direct taxes could encourage consumer spending and therefore create more jobs
  • increased Government spending on infrastructure projects could create more jobs
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25
Q

what is inflation?

A

a general sustained rise in the average price level

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26
Q

what is disinflation?

A

when the rate of inflation is declining

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27
Q

what is deflation?

A

a fall in the general average price level

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28
Q

what is the consumer price index (CPI)?

A

a measure of how the prices of a range of products and services that people buy on a regular basis change from month to month

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29
Q

what’s the difference between the current CPI and old RPI as a measure of inflation?

A

CPI excludes housing costs making it a more reliable way of measuring price changes within shops.
- Also more reliable for international comparisons as is similar to index used in Europe

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30
Q

What are limitations of the CPI as a measure of inflation?

A
  • measures ‘average’ household spending patterns and therefore not applicable for everyone e.g. weighting of tobacco will be irrelevant for non-smokers (different groups experience different rates of inflation)
  • do not include house prices even though mortgage repayments are a high proportion of spending for lots of households
  • may over-estimate inflation as it doesn’t account for improvements in goods or services
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31
Q

what is CPIH?

A

based on CPI however it includes housing costs such as mortgage interest payments

32
Q

what is creeping inflation?

A

a situation where prices rise a few percent on average each year.
- do not consider it to be a problem -> can be a sign of economic growth

33
Q

what is accelerating and hyperinflation?

A
  • very unpredictable and damaging for society and an economy
34
Q

what is demand-pull inflation?

A
  • when aggregate demand exceeds aggregate supply and firms may rise prices due to increased demand.
  • normally occurs when economy is near full capacity and struggles to expand production
  • shortages of key skilled workers meaning firms find it difficult to fill vacancies meaning they may be forces to raise wages (increased costs) to attract workers.
  • equally prices of raw materials are likely to rise to meet increased demand
35
Q

what is cost-push inflation?

A

caused by increased costs of production:
- increased wages not offset by increased production cause prices to rise as firms try to pass on these extra costs in the form of higher prices
- depreciation of the currency will lead to cost-push inflation (increased costs of imports)
- increased indirect taxes
- if demand is elastic, firms may rise prices to raise their profit margins

36
Q

What do Monetarist Economists believe is the cause of inflation?

A

an increase in the money supply due to the Quantity of Money Theory

37
Q

what is the Quantity of Money Theory?

A

Money supply x velocity of circulation of money = the general price level x real GDP

  • The velocity of circulation of money is predictable and therefore assumed to be constant
  • Real GDP changes slowly over time and is also assumed constant
  • therefore changes in the money supply will lead directly to a change in the price level
38
Q

what is the Velocity of Circulation of money?

A

The number of times that a unit of currency is used in transactions to purchase goods and services in a year

39
Q

how might monetary policy be used to reverse a period of deflation?

A

Increasing the money supply through lowering interest rates (and quantitive easing)

40
Q

what is the impact of inflation on businesses?

A
  • firms may lose competitive advantage in the longer term due to possibly cutting back on investment when business planning is difficult and hard to predict future cash-flows and profitability. -> Firms may lose sales, reduce the numbers employed and even close altogether. Increased structural unemployment and lower economic growth
  • firms that export may lose competitive advantage if domestic inflation is higher than the price level abroad. -> loss of demand for labour, higher unemployment, lower economic growth
  • cash-flow problems if costs are rising faster than prices can be raised. Firms may cut back on investment and lose competitive advantage
41
Q

what is the impact of inflation on people?

A
  • individuals with fixed incomes e.g. pensioners will see their real income fall as they aren’t index linked
  • workers with little industrial muscle may struggle to negotiate pay rises in line with inflation and will see their real incomes fall = increase in inequality
  • if government does not raise personal tax allowances in line with inflation, the burden of tax will increase. The low paid may be dragged into the tax bracket and find themselves worse off (fiscal drag)
42
Q

how does the monetary policy help with inflation?

A

rising interest rates to reduce AD
- consumers spend less on consumer durables often financed by loads
- income effect: mortgage repayments increase and therefore less disposable income
- consumers feel less wealthy as stocks and share prices fall, so do house prices. Consumers feel less wealthy = save more and spend less
- consumers are encouraged to save more
- exchange rate rises

43
Q

how does fiscal policy help decrease inflation?

A

increasing direct income taxes cut disposable income and consumption falls.
- can also help to decrease cost-push inflation by cutting indirect taxes or corporation taxes

44
Q

how do supply-side policies help to reduce inflation?

A
  • aim to shift the LRAS curve to the right
  • creating more flexible labour markets = more skilled workforce which is more likely to be productive, increasing output.
  • competition policy = prices are run down due to increased competition and greater innovation (fewer workers needed, less wages)
  • greater investment in infrastructure, the telecommunications network (less workers and goods in congestion = wastes time) and research and development = should reduce costs for industry in longer term
45
Q

what does the Phillips curve suggest about inflation?

A

That there is a trade off between unemployment and inflation (mainly demand-pull inflation and cyclical unemployment). As inflation tends to rise when the economy is strong and booming.
- However they argue that in the long run high rates of inflation lead to lower economic growth and higher unemployment

46
Q

difference in monetarist views vs Keynesian views on the trade off between low inflation and high unemployment

A

monetarist- trade off is only in short run as they believe in NAIRU unemployment
Keynesian - the trade off can persist for decades

47
Q

what is malign deflation and describe a graph showing it

A

Deflation caused by a lack of aggregate demand and excess supply. Usually associated with a recession as a fall in AD causes a fall in investment and a subsequent negative multiplier effect. and can be dangerous. Graph = AD2 line below original AD curve with a lower price level and lower output

48
Q

what is benign deflation and describe a graph showing it

A

Caused by an increase in productive potential meaning there’s an excess of aggregate supply. Not necessarily bad as suggests growth. Graph = shift right of LRAS curve meaning a second SRAS curve.

49
Q

What are possible economic costs of deflation?

A
  • Consumers may hold back on spending if expected that prices will drop further -> leading to further fall in AD
  • increases the real value of money and therefore the real value of debt -> people may cut back on spending thus causing a further fall in AD
  • lower profit margins for firms -> increased unemployment as firms try to reduce costs
50
Q

what does hysteresis mean?

A

The longer someone is unemployed, the harder it is for them to return to the workforce. Could increase the natural rate of unemployment

51
Q

How can fiscal policy be used to reduce deflation?

A
  • Government could cut direct taxes to increase consumer spending => increased incentives for firms to invest thus net injections > net withdrawals leading to positive multiplier effect
  • Government could increase spending on infrastructure projects creating more employment and increased consumer spending.
52
Q

What are the limitations of using the fiscal policy to reduce deflation?

A
  • Tax cuts could be saved when consumer confidence is low (paradox of thrift) which would not increase domestic demand
  • Reduced tax revenue is likely to lead to an increased budget deficit. Rise in Government spending is likely to have the same effect unless running a budget surplus before
53
Q

How may conventional monetary policy be used to reduce deflation?

A

The central bank may cut interest rates to encourage consumers to borrow more for spending and firms to borrow more for investment. Cuts in interest rates should also discourage saving reduce costs of mortgage repayment s=> more disposable income.
- Cuts in interest rates should cause depreciation of the currency on the exchange market making exports cheaper. This may boost demand for exports boosting injections and causing the positive multiplier effect

54
Q

How may unconventional monetary policy be used to reduce deflation?

A

If cutting interest rates doesn’t work die to paradox of thrift the central bank may resort to quantitive easing.

55
Q

what is the balance of trade in goods?

A

exports of goods - imports of goods

56
Q

arguments that a current account deficit doesn’t matter

A
  • as long as foreigners are willing to lend it doesn’t matter
  • if the deficit is caused by importing capital equipment then it should yield extra exports in the future which may reduce the deficit
57
Q

arguments that a current account deficit does matter?

A
  • it can indicate a loss of competitiveness due to low productivity or innovation and can result in low economic growth and high unemployment
  • imports are a withdrawal from the circular flow of income and could cause a negative output gap
  • a continued deficit leads to foreign debt that needs to be paid for
58
Q

arguments that a current account surplus doesn’t matter?

A
  • shows the countries industries are internationally competitive
  • associated with high GDP and employment
59
Q

arguments that a current account surplus does matter

A
  • can lead to a positive output gap and demand-pull inflation due to exports being an injection into the circular flow of income
60
Q

What is primary income balance?

A

Earnings of a country’s citizens from employment or ownership of assets overseas minus earnings of overseas residents from employment or ownership of assets in that country

61
Q

What is secondary income

A

Transfers of money paid with no exchange of goods.
- mainly foreign aid
- e.g. a Christmas present of money to the bank account of a relative living abroad

62
Q

Reasons for an economy having a trade gap

A
  • poor productivity + supply-side weakness (could be due to low levels of training, lack of investment, low level of R&D)
  • high overvalued exchange rate (a strong pound) would make exports expensive
  • competition of new economies
63
Q

what is the trend level of output?

A

what the economy is capable of producing when working at full capacity

64
Q

what is actual output?

A

The level of real output produced in the economy in a particular year

65
Q

What are the causes of change in the phases of the economic cycle

A
  • fluctuations in aggregate demand due to consumer and business confidence
  • supply-side factors e.g. changes in technology
  • multiplier/accelerator interaction
66
Q

what is a positive output gap?

A

When the level of actual real output in the economy is greater than the trend level of output

67
Q

What is a negative output gap?

A

The level of actual real output is lower than the trend level of output

68
Q

What are benefits of economic growth?

A
  • increases standards of living
  • reduces poverty
  • can increase the economic welfare of a community through increased tax revenues
  • greater business confidence, higher profits, increased investment
69
Q

costs of economic growth

A
  • uses up finite resources such as oil
  • leads to pollution through increased output
  • can widen inequality in the distribution of income and wealth
  • growth in population, more mouths to feed, more people who are poor
70
Q

How might hysteresis increase the natural rate of unemployment?

A

Those losing their jobs due to recessions may lose skills & work ethic the longer they are out of work. Thus the cyclical unemployed could become structural unemployed

71
Q

Factors that determine the natural rate of unemployment?

A
  • it is made up of structural, voluntary and frictional unemployment
    = the replacement ration
    = level of technological development of industries
72
Q

what causes short run Economic growth?

A

Anything that causes aggregate demand to rise

73
Q

characteristics during a boom

A
  • inward migration may be attracted by the work
  • demand for luxury goods are high
  • demand for imports are high
  • workers are working over time
74
Q

In what period do people start to think that house and asset prices are too high

A

stagnation

75
Q
A

Economics (7 decks)

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