Economic Performance Flashcards
(26 cards)
What is an output gap
An output gap 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.
What is a negative output gap
A negative output gap 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. This means there is a lot of spare capacity in the
economy.
What is a positive output gap
A positive output gap occurs when the actual level of output is greater than the potential level of output.
It could be due to resources being used beyond the normal capacity, such as if labour
works overtime. If productivity is growing, the output gap becomes positive. It puts
upwards pressure on inflation.
Countries, such as China and India, which have high rates of inflation due to fast and
increasing demand, are associated with positive output gaps.
What are characteristics of a boom (6)
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 revenues and less spending on
welfare payments
What are characteristics of a recession
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
What are the two main measures of unemployment in the UK and how do they differ?
The Claimant Count counts those claiming benefits like JSA, but underestimates unemployment. The Labour Force Survey (LFS) includes those actively seeking work (1+ hr/week), and usually gives a higher figure as it includes part-time and non-claimants.
What are the effects of rising unemployment on consumers firms workers govt. and society?
Consumers: Lower income and well-being.
Firms: Lower wages, but lower demand and possible retraining costs.
Workers: Wasted skills, skill loss.
Government: Higher benefit costs, lower tax revenue.
Society: Lost output and increased crime (negative externalities).
What are the main types of unemployment (4)?
Structural: Long-term industry decline (e.g., tech replacing labour).
Frictional: Time between jobs.
Seasonal: Job loss in off-seasons.
Cyclical (Demand-deficient): Caused by low demand or high productivity.
Who are the economically inactive and why does it matter?
Carers, retirees, or discouraged workers. High inactivity reduces the labour force and the economy’s productive potential.
How do globalisation and migration affect UK employment?
Globalisation: Jobs move abroad, causing structural unemployment.
Migration: Increases labour supply and competition, but improves skills and productivity.
What are inflation, deflation, and disinflation?
Inflation: Sustained rise in general price level.
Deflation: Fall in the average price level (negative inflation).
Disinflation: A slowing rate of inflation — prices still rise, but more slowly.
What causes demand-pull inflation (4)?
Depreciation in exchange rate
Fiscal stimulus (more gov spending or lower taxes)
Lower interest rates
Rising exports due to growth in export markets
What causes cost-push inflation (4)?
Rising raw material prices (e.g., oil)
Rising wages (e.g., from trade unions)
Higher inflation expectations
Higher indirect taxes
Depreciation raising import costs
Monopoly pricing
How does inflation affect consumers?
Hurts those on low/fixed incomes most
Reduces purchasing power
Reduces real value of debt repayments for borrowers
How does inflation affect firms?
Higher borrowing costs with high interest rates
Rising wage demands increase costs
Reduces global competitiveness
Uncertainty lowers investment confidence
How does inflation affect the government and workers?
Government: Must raise pensions/welfare to match cost of living
Workers: Real incomes fall; may face redundancy if firms cut costs
: What is demand-pull inflation?
Demand-pull inflation occurs when aggregate demand grows faster than aggregate supply, causing upward pressure on prices.
What is cost-push inflation?
Cost-push inflation occurs when firms face rising production costs and increase prices to maintain profit margins.
What happens to output in demand-pull vs cost-push inflation?
Output usually rises with demand-pull inflation but may stagnate or fall with cost-push inflation.
What is the balance of payments?
It records all financial transactions between a country and the rest of the world, including imports, exports, and capital flows.
What is included in the current account?
The balance of trade in goods and services, income flows, and current transfers.
What does a current account surplus mean?
More money is flowing into the economy than out (exports > imports).
What does a current account deficit mean?
More money is flowing out than in (imports > exports), which could lead to financing issues if persistent.
What factors affect the current account balance(5)?
Economic growth (affects imports/exports)
Exchange rate changes
Productivity and competitiveness
Global economic conditions
Raw material prices
