Economic Performance Flashcards
(75 cards)
1
Q
What is inflation?
A
“The rate of change in the average price level over time.”
2
Q
Why does inflation erode the value of money?
A
If wages remain constant, when prices rise consumers are worse off in real terms. Inflation erodes the value of money.
3
Q
What are methods to measure inflation?
A
The CPI (Consumer Price index)
The RPI (retail price index)
4
Q
Who compiles the CPI and RPI?
A
The Office of national statistics (ONS).
They use a basket of goods and services 700 items weighted based on their relative importance.
5
Q
What is demand pull inflation?
A
Caused by excessive demand in the economy for goods and services. C + I + G + (X-M)
Consumption is the largest component of AD although any stimulant will create some demand pull inflationary pressure.
6
Q
What are the causes of demand pull inflation?
A
Reduced taxation
Low interest rates
Rise in consumer spending
Improved availability of credit
A weak exchange rate
Faster growth in other countries
General increase in confidence
Certainty
7
Q
Demand pull inflation diagram analysis
A
- begin with equilibrium
- if interest rates cut, borrowing on credit become more attractive and saving less rewarding (consumption rises)
- leads to a rise in AD to AD1
-in the short run, factor resource remain unchanged. If demand for goods rises faster than supply, prices will be pulled up to p1.
8
Q
What is cost plus inflation?
A
When firms respond to rising costs of production by increasing prices.
They try to protect profit margins, they may absorb some increases in their costs but it’s not indefinite (costs are added to the consumer)
9
Q
What are the causes of cost plus inflation
A
Wage increases - wage price spiral
High raw material costs
Higher taxes
Higher import prices
Natural disasters
10
Q
Cost push inflation diagram analysis
A
-begin with equilibrium
- if wage rates increases, so will a firms cost of production
- Sras will reduce to sras1 because firms will reduce supply faced with higher costs.
- rising costs have pushed up prices to p1
11
Q
What is deflation?
A
A decrease in the general price level
- disinflation refers to price increasing at a slower rate
12
Q
What are the causes of deflation?
A
- Occurs during period of low growth.
- Consumers delay purchasing decisions a price fall - consumption slows significantly.
- Firms will lose the confidence to invest harming AD.
13
Q
What is Benign and malign deflation?
A
Benign - when prices fall due to lower production costs for producers
Malign - when there is a significant fall in demands
14
Q
How do change in world commodity prices effect domestic inflation?
A
Many commodities bought in the UK are price elastic - a rise in the world price of commodities feed through uk inflation.
15
Q
What is the PPI?
A
The producer price index shows the rate of change of prices of producers.
Imported products like crude oil and chemicals have fallen in price for the 12 months to February 2020.
16
Q
How change in other economies can affect inflation in the UK?
A
Emerging market create a growing demand for goods and services globally - demand pull.
Thea markets increase productive capacity leading to lower cost products feeding through into lower prices.
The economic performance of the EU and US impact the demand for UK products
17
Q
What is the current account?
A
A record of a country’s transactions/tradewith the rest of the world.
18
Q
What are the 3 sections of the Balance of payments?
A
The current account (required)
(Trade in goods & services, investment income and transfers)
The Financial account
(Transactions in financial assets, investment flow’s & government transactions)
The Capital account
(Transfer of assets by individuals)
19
Q
What is a surplus?
A
When the sum of exports of goods, services, investment income and transfers is greater than imports.
20
Q
What is deficit?
A
When the sum of exports of goods, services, investment income and transfers is less than imports
21
Q
What does trade in goods measure?
A
The net exports (x-m) of visible goods.
22
Q
Why has the UK run a large deficit on the trade in goods component of the current account?
A
- increase in demand for consumer goods
- decline in the UK manufacturing sector (secondary production outsourced to low wage economies)
- lower production of primary materials
- strong currency makes imports more affordable and exports less attractive
23
Q
What does trade in services measure?
A
The net exports (x-m) of invisible items.
24
Q
Why has the UK run a large surplus on the trade-in services component of the current account?
A
- UK shifted to tertiary sector employment - provision of services
- specialisation meant the UK is more competitive and offers better services at lower costs
- London developed as a prime financial centre, become a source of wealth generation in the UK.
25
When did the Uk run a deficit on it's trade balance?
Since 1998 the UK has run a deficit on its trade balance.
Trade in goods is 35% as a proportion of the total trade in goods and services.
In 1985 the proportion was 75%
26
What is investment income?
- Generated by UK-owned overseas assets.
- The profits and dividends are sent back to the UK as a credit item or investment income on the current account.
- debit items occur as foreign investments into the UK yield profits which are sent back to the country of investment origin.
27
What are transfers?
Payments made or received usually by the government to or from other countries.
(payments for membership of the EU, Foreign Aid)
28
Why is there a persistent deficit on the current account?
1) demand for goods increases with consumer spending. We have a high MPC imported goods in the UK, so improvements in economic growth and consumer spending feed into an increased, persistent deficit.
2) UK firms have become less competitive in the manufacturing of goods. Unable to compete with low-wage economies, globalisation has widened so has the UK's reliance on Imported goods.
3) The exchange rate is too strong. Exports are less competitive and imports are relatively more affordable.
4) deficit shows an unbalanced economy. Primary and secondary activity is shrinking while tertiary grows significantly.
29
How to redress the balance?
1) controlling consumer spending will reduce the demand for imports. May improve the balance of payments but may affect other aspects of the economy
2) investing in the supply side of the economy will improve the productivity of UK firms (quality and price competitiveness). Enhanced productivity gives rise to higher exports through greater output.
3) depreciation of the exchange rate, making exports price competitive. Will increase the price of imports (problematic if we cannot produce alternatives domestically)
4) improve macroeconomic conditions in the UK. Will encourage investment and domestic growth as well as reduce our reliance on imports.
30
What factors influence a country current account balance?
Improving productivity - lowers unit costs and benefits competitivity
Inflation - reduces competitiveness by raising prices making exports less attractive
Strong exchange rate - exports are expensive, lowering demand for domestic products and imports are cheaper lowering unit costs.
Economic activity in other countries - impacts open economies such as the UK
31
What is a negative output gap?
Occurs when actual output is below the trend rate.
It indicates low demand so there will be a reduction in inflationary pressures.
Cyclical unemployment will occur as a result of lower demand
32
Negative output gap graph analysis:
During a recession, operating at point X firms don't employ as many workers as they don't need to produce as many goods as demand has fallen.
As the economy recovers, moving to a positive output gap, cyclical unemployment Will reduce.
33
What is a positive output gap?
When actual output Is above the trend rate.
This indicates high demand, there will be an increase in inflationary pressures.
Cyclical unemployment will fall as a result of high demand.
34
Positive output gap graph analysis?
If the economy is in a boom, operating at Y, firms must employ more workers to meet the increased demand.
Cyclical unemployment will have fallen and inflationary pressures will impact the economy.
35
Why are AD/AS diagrams essential for economist?
They clearly demonstrate conflicts in policy objectives.
E.G
A government wishing to pursue a policy of expanding output and employment through tax cuts is faced with the prospect of higher inflation. Greater consumer spending might worsen the bop deficit on current account.
36
Why is there an inherent opportunity cost in government spending?
-macroeconomic policy conflicts are inevitable due to the nature of the structure of the economy. Governments must prioritise objectives as it's rare that all 4 will be achieved.
- because government finance is scarce, or must be carefully directed.
The approach to reconciling conflicts can be split between Keynesian and monetarists.
37
What factors make up a Keynesian approach to reconciling conflict?
1) governments intervene through expansionary fiscal policy (higher spending and borrowing) in recessions.
2) there is no “crowding out”
3) the multiplier effect is significant
4) reducing unemployment is more important than controlling inflation
5)LRAS can be horizontal
Generally advocate fiscal policy
38
What factors make up a monetarist approach to reconciling conflict?
1) The economy is inherently stable, and markets work efficiently with minimal intervention (distorts natural equilibrium)
2) government spending “crowds out” private sector investment.
3) control of the money supply is crucial in keeping inflation low
4) more important to keep inflation low than to control unemployment.
5) LRAS is very steep in nature
Generally advocate monetary policy
39
How did Keynesian economics come to be?
John Maynard Keynes considered his theories in the 1930s and through post-war Britain and into the 1960s keneysian economic theory was favoured by the UK government.
40
How did monetarist economic theory arise?
Supply-side shocks in the 1970s (oil and commodity prices and labour market disruption) couldn't be reconciled by the application of Keynesian economics
Free market economics, led by Milton Friedman gained popularity. It argued, that control of the money supply was crucial to controlling inflation and minimal government intervention that encouraged more free-market supply Side flexibility was important.
41
How was monetarism challenged by traditional Keynesians?
Towards the late 1980s, the relationship between the money supply and inflation began to break down.
The UK Recession of 2008-12 brought Keynesians back to the forefront of debate. With Interest rates at a historic low (0.5%) and stimulating little supply-side expansion, Keynesians argued for the short-run expansion of the budget deficit to stimulate the economic.
42
What were the changes in monetary policy from 1999 to 2007
1999/2000 - interest rates were at 6% in response to high levels of AD and the potential risk to inflation.
Interest rates fell up to 2003 to stimulate AD
They fell further after a rise in 2006-7 and reached a low of 0.5% in March 2009.
43
What were the changes in monetary policy from 2007 to 2013?
QE through the BoE has totalled £375bn in response to the recession of 2008. Due to the low interest rates, the BoE had to look for other measures to stimulate the economy as interest rates have limited or zero movement downwards.
In 2013, the Governor of the BoE announced a policy of forward guidance (designed to indicate to the government, firms and consumers what levels interest rates will be. Reduces speculation and stabilises expectations.
- the BoE indicated they wouldn't increase the interest rates until the rate of unemployment fell below 7%
44
What were the changes in fiscal policy from 2000 to 2008?
Early 2000s - government spending as a % of GDP increased within fiscal rules laid down by Chancellor of the day Gordon brown. Only borrowing to fund capital projects and the budget should balance through the economic cycle.
A modest budget deficit was running until 2007 but the 2008 recession placed a huge strain on government tax revenues and expenditures, reaching a peak of 7.5% of GDP.
45
What are the 3 conflicts that arise through economic decision making?
Unemployment vs inflation -by creating unemployment demand will fall leading to lower inflation
Economic growth vs the balance of payments - a policy of growth (expansionary fiscal policy) will lead to higher employment and demand. High income will increase consumption which will be spent on exports - leading to a deterioration in the BoP.
Economic growth vs. inflation - a positive output gap will lead to increased demand and inflationary pressures.
46
What were the changes in fiscal policy from 2007 to 2013?
The OBR was created in 2010 to provide independent analysis and greater credibility for the UK’s public finances (abandoning the previous government fiscal rules).
2012/13 - the UK public sector net debt was £1,185bn - £18,606 per person
The current government has focused on reducing the budget deficit and tightening government spending.
47
What is unemployment?
The number of people looking for work but who can't find a job at a point in time.
More precisely those in the labour force who are eligible and want to work (economically active) but can't find a job.
48
What's the distinction between the level and rate of unemployment?
Level = the number of people who are unemployed
Rate = the number of unemployed as a % of the labour force
unemployed/labour force X 100 = rate
49
What is the JSA?
Job seekers allowance is a benefit for people who are not in full time employment (less than 16 hrs a week) and are capable and looking for work.
50
What is the claimant count?
The number of people claiming JSA.
51
What is ILO?
The labour force survey is a quarterly survey of approximately 60,000 households compiled by the ONS (who study the employment circumstances of the UK population).
52
How does the claimant count problematically underestimate unemployment statistics?
1) not all eligible candidates sign up
2) self employed workers who are temporarily unemployed tend to not claim
3) under 18s or over 60s = illegible
4) changing JSA criteria
53
How does the claimant count problematically overestimate unemployment statistics?
1) some people claiming JSA aren't seeking work actively
2) some have jobs in black economy and still claim benefits
54
Is the the labour force survey (ILO) better than the claimant count?
1) Internationally recognised. 2) potential for data analysis. 3) picks up trends in sectors. 4) better guide for policy makers. 5) generally more accurate.
BUT
1) costly to compile
2)subject to sampling and extrapolation errors
55
what determines the consequences of unemployment?
extent of the consequences depend of the rate and duration of unemployment.
the economy, businesses and unemployed will experience the consequences>
56
what are the consequences of unemployment for the economy?
Resources are being wasted so the productive potential will decrease from y to x. There loss in consumer and capital goods on the PPF graph.
57
what are the consequences of unemployment for businesses?
1) reduced demand for goods and services
2) reduced productivity
3) less incentive to invest
4) less morale and productivity of remaining workforce who are perhaps concerned over future job losses.
58
what are the consequences of unemployment for the unemployed
1) Lower living standards
2) social costs
3) financial costs
4) de-skilling
5) reduced chances of finding work
59
What is cyclical unemployment?
Linked to the economic cycle and occurs when there is a negative output gap.
It indicates that there is low demand (demand deficient unemployment)
60
How can the economic cycle help us understand cyclical unemployment?
A recession may lead to hysteresis, people remain unemployed due to a loss of skills they missed in the workplace.
if an is economy operating in a recession (point x) firms don't need to hire a lot of workers as they don't need to produce as many goods as demand has fallen.
As the economy recovers and moves to a positive output gap, cyclical unemployment will reduce.
61
what is meant by frictional unemployment?
- unemployment as workers move between jobs, mainly career moves or geographical changes.
- usually short term and exists as workers don't have perfect, instant information about job opportunities.
- always fictional unemployment in an economy
62
what is meant by seasonal unemployment?
- workers are unemployed at different times of the year, occurs in seasonal industries (leisure, tourism & farming)
-Can apply to retail as more workers are employed over busy periods (Christmas)
-Seasonality in employment can distort unemployment figures, hence unemployment is seasonally adjusted to smoothen the fluctuations in employment levels for accuracy.
63
what is meant by structural unemployment?
when long term shifts in the structure of the economy impact the job market.
Structural unemployment tends to increase in line with globalisation - workers must gain and re-train skills to find work (timely and costly)
64
Give an example of structural unemployment and its effects.
UK shift to tertiary employment away from primary & secondary due to low wage economies in eastern Europe and the far east.
High skilled workers may be unable to find work as their is limited demand for their labour as production and supply is outsourced to other countries.
65
what is meant by technological unemployment?
When improved capital which may be more productive and efficient than labour, replaces labour as a factor of production.
66
what is meant by regional unemployment?
- linked to structural unemployment, occurs when there is unemployment in particular towns, cities or regions.
E.G the jobs lost in Bradford and surrounding communities as a result of the decline of the textile industry
67
why does regional unemployment occur?
because a local area has specialised in the production of a good or service that is no longer demanded or produced in cheaper economies - as a result demand drops locally.
68
Evaluate the effects of demand side unemployment.
1) when cyclical unemployment occurs, this is represented by a shift in AD to AD1 to the left
2) may occur through seasonal or frictional factors
3) unemployment of Y1-FE has been created as consequence
4) RNO will reduce to Y1 indicating a lower rate of economic growth
5) price level reduced to P1 indicating a lower rate of inflation. A government may need to weigh up benefits of this versus the lower rate of economic growth and higher rate of unemployment.
69
Evaluate the effects of supply side unemployment.
1) if a firm experiences an increase in costs (due to higher wages) they may decide to reduce their supply
2) in response to cyclical unemployment, they may scale back production so they aren’t left with surplus stock they cant sell or may be expensive to hold.
3) supply will shift SRAS to SRAS1 and create unemployment of Y-Y1
4) as a result RNO has fallen and there has been an increase in price level from P to P1 (indicating inflation)
70
What is globalisation?
the process by which businesses or other organisations develop international influence or start operating on an international scale.
71
How has globalisation impacted employment and unemployment in the UK?
- competition from low costs economies mean a decline in UK manufacturing
- 22% to 11% in the last decade (traditional industries undercut by foreign imports)>
- emerging markets (BRICS & MINT economies) allowed new market development and exports of high quality UK goods have created employment.
72
What's the difference between employment and the employment rate?
employment - number of people over 16 in paid work
employment rate - proportion of those between 16 and 64 paid in work.
73
why is there a difference between male and female economically inactivity rates?
women are 7 times more likely to be economically inactive due to looking after the home or family.
(10 times more likely when comparing them as the 30s demographic)
74
when making policy decisions what are the most important industries to take account of?
the level of demand for the sector how many workers it consists of.
75
