What is Short run economic growth?
The percentage change in the real GDP of a country from one year to the next.
What is Long run economic growth?
occurs when the productive capacity of the economy is increasing
How is SR growth shown on a PPF diagram?
The PPF would remain constant, it is a movement from point A to B.
How is long run growth shown on a PPF diagram?
PPF would shift outwards
How does increased capital investment lead to economic growth?
- Economies of scale and better competitiveness
- Investment helps to sustain export-led growth
- Bigger capital stock can lift productivity/incomes
What is a positive output gap?
occurs when the actual level of output is greater than the potential level of output. ( usually means there is the unemployment of resources in an economy)
What is a negative output gap?
occurs when the actual level of output is less than the potential level of output. (It could be due to resources being used beyond the normal capacity)
How do you illustrate an output gap on a AD AND SRAS DIAGRAM?
A negative output gap is between Ye and Y1, and a positive output gap is between Ye and Y2.
What are some of the benefits of economic growth?
- Higher living standards, reducing absolute poverty e.g higher GNI per capitaL-
- Accelerator effect
What are some of the economic and social costs of economic growth?
- Risks of higher inflation and higher interest rates
- Environmental effects
What are the characteristics of a boom?
High rates of economic growth
- Near full capacity or positive output gaps
- (Near) full employment
What are the characteristics of a recession?
Negative economic growth
- Lots of spare capacity and negative output gaps
- Demand-deficient unemployment
What is a recession?
two consecutive quarters of negative GDP growth
What problems may a positive output gap cause?
Main problem is rising demand-pull and cost-push inflationary pressures
What are the possible effects of a negative output gap?
- unemployment
- less inflationary pressures
Why may growth not be sustainable?
Fast growth may deplete supplies of natural resources and create future environmental problems meaning future growth may be weak.
What are 3 methods of measuring national income?
Income method ( wage) = Expenditure method (consumption = Output method ( primary, secondary)
What is net investment?
Net investment is total capital expenditure minus depreciation of assets. Net investment gives an indication of how much the effective productive capacity of a firm is increasing
What does deprication mean?
A decline in value for example, if a machine breaks down and is no longer useable..
What is gross investment?
It is the total amount the economy spends on new capital goods.
When is net investment postitive?
Net investment can only be positive if capital accumulation is > depreciation and depreciation always occurs
Suppose, in the first year of business, a firm invested £2 million on new machines. In this first year, the gross investment (£2m) would be the same as the net investment (£2m) – because there is no depreciation.
However, in the second year, let us imagine one machine worth £0.5m breaks down.
In the second year, if the firm spends an extra £1.3 million on buying new machines. Then in the second year:
Gross investment = £1.3 million
Depreciation = £0.5 million (the machine that broke down)
Net investment = £0.8 million
At the end of the second year, the firm has machines with £2.8 million which are working.
If a firm has depreciation of £5 million, but only spends £3 million on capital expenditure, What is the net investment?
Then it is seeing negative net investment of £ -2million. The productive capacity of the firm will be declining which may affects its ability to produce goods in the future.
What are costs to a consumer of economic growth?
Consumers could face more shoe leather costs, which means they have to spend more time and effort finding the best deal while prices are rising.
The benefits of more consumption might not last after the first few units, due to the law of diminishing returns.
What are menu costs and how is this a problem due to economic growth?
This is the cost of changing price lists. When inflation is high, prices need frequently changing which incurs a cost.
However, modern technology has helped to reduce this cost.
Why would there be income inequality when there is high economic growth?
Low skiled workers may find it hard to get the higher wages than high skilled workers, in which high wages are linked to an increase in responsibility( although this could cause stress on employer, reducing productivity)
What is Says law?
Supply creates its own demand
Why does supply create its own demand?
If a businessman produces a good, then he will be keen to sell it. This production creates wages for workers and income for the businessman. Therefore, the production has increased wealth and leads to demand for other goods.
What are 2 evaluations of Says law?
Liquidity trap
Excess saying :Paradox of thrift (is a concept that if individuals decide to increase their private saving rates, it can lead to a fall in general consumption and lower output.)
What are 3 ways of creating Long run economic growth?
Innovation ( new tech)
Increase spending on education and training
increasing the population size
What is the diagram to show Long run economic growth ?
What are 2 examples of Demand side shocks?
Consumer confidence boosted ( house price increase meaning increase in C)
Major trading patrners go into recession ( reducing demand for our exports)
What are 2 supply side shocks?
1) A poor harvest would reduce the supply of food increase price, reducing capacity.
2) Discover of a new source of material which greatly reduces the price.
What are 4 things that cause cycal instability?
Excessive growth of credit
Animal spirits
Destabilising speculation and asset price bubbles
herding
How does Excessive growth in credit and levels of debt create instability?
when credit is cheap and consumers feel confident, they often spend more and accumulate debt. Increase in AD. This may lead to rising interest rates. high debt may also bring down spending as people will have to pay off what they owe,
What is another effect on firms due to the higher interest rates?
Firms could also delay investment projecys and become cautious
How does Asset price bubbles lead to Cyclial instability?
A market bubble occurs when the price of an asset is predicted to rise significantly. This causes it to be traded more, price rises beyond asset true value. The bubble then ‘bursts’ when the price suddenly falls to its ordinary level. This causes panic and investors try and sell their assets. It results in a loss of confidence and it can lead to economic decline or a depression.
How can the behavior of people cause economic instability?
“Animal Spirits” - human behaviour is often guided by instincts and emotions, rather than economic realities.
What is herding?
Herding is the act of reacting to the behaviour of other economic agents rather than the market.
How does Herding lead to cyclial instability?
This might be because some investors think other economic agents are better informed about the market, so they follow their actions.
Leads to reckless speculation
What is Speculation?
investment in stocks, property, or other ventures in the hope of gain but with the risk of loss.
What is GDP?
it is the total value of goods and services produced within an economy in a given period of time.
What is GNP?
is the total value of all final goods and services produced within a nation in a particular yeat plus net income from overseas investments and remittances.
Thats why GNP is higher than GDP
What does Standards of living mean?
refers to the amount of goods and services consumed by households in one year. ( RNI/ population)
What is remiitance income?
Are transfers of money across national boundaries by migrant workers.
Would do we assume about GDP?
HIGH GDP = High standards of living
What are problems with using real GDP per capita as indicator of standard of living?
Human happiness ( Quality of life)
Black market
Non market activiites
GDP is not distrubted on a GDP per capita basis
Why is Human happiness a better way to measure standards of living rather than GDP?
Happiness is determined by many other things rather than goods and services such as changes in number of worked and working conditions.
Why is the shallow economy a better way to measure standards of living rather than GDP?
Offical GDP doesn’t take into account the black market so GDP statistics are inaccurate. The hidden economy for drugs and prositiution was 10bn in the recent estimate, which would increase GDP per capita
Why is non market activites a better way to measure Standards of living rather than GDP?
Not all activites have a market price attached to them such as services of housewives/ house -husbands ( 2008 survey estimated that the average stay at home parent’s salary would be around £30000)
What does GDP is not distrubted on a GDP per capita basis mean?
It is not distrubted on a GDP per capita basis e,g, france may have a higher GDP than ghana. but ghana may have a higher standards of living due to inequality spilit, in income, most of wealth is concentrated with rich
What is the Lorenz curve?
The Lorenz curve is a way of showing the distribution of income (or wealth) within an economy.
What is the diagram to show a poor country lorenz curve?
In this Lorenz curve, the poorest 20% of households have 5% of the nation’s total income.
The poorest 90% of the population holds 55% of the total income. That means the richest 10% of income earners gain 45% of total income.
The X axis is CUlumative polpulation and Y is Culumative income.
The closer the Lorenz curve to the line of equality means what?
The more fairly distrubted income is distrubted in the economy ( developed countries)
What could be an alternative measure of GDP?
Human development index
3 things taken into account
1) life expectancy
2) Years of schooling
3) Standards of living ( GDP PER CAPITA)
What would be the 3 points to talk about in the question ‘Discuss the extent to which GDP per capita is a good way of measuring standards of living?
1) It fails to take account of the unoffical economy ( black market)
2) GDP is not distributed on a GDP per capita basis
3) It doesn’t take into account the negative externalities ( e.g. GDP might be growing, buliding new factories but leads may lead to global warming)
What is evaluation for the point It fails to take account of the unoffical economy ( black market) for the question Discuss the extent to which GDP per capita is a good way of measuring standards of living?
The extent to which this is a problem though, depends on the size of the hidden economy ( if hidden economy is a big proportion of real GDP then GDP statisctics is wrong (give example of drugs and prositution)
The size of the hidden is dependent on how regulation and enforcement.
What is evaluation for the point GDP is not distrubted on a GDP per capita basis? for the question Discuss the extent to which GDP per capita is a good way of measuring standards of living?
The extent to which this is a problem though depends on where it is in relation to the Lorenz curve.
The size of the inequality of income and wealth depends on the polictial instability e.g. if the governement don’t care, they won’t tax the poor sufficiently to give to poor which would solve the issue of inequality of macro objective.
What is evaluation for the point ) for the question Discuss the extent to which GDP per capita is a good way of measuring standards of living?
It depends on the size of the externality ( if it is small then GDP would still increase Standards of living and only bring a small effect on the negative spillover.
Eval 2
It depends on the extent of which firms follow CSR, if they are environmentally friendly they would use sustainable methods. By doing this in the LR there will be a minimal negative spill over.
What is Purchasing Power Parity?
PPP measures calculation tells you know much thingsd would cost if all countries used the same currency e.g. dollar so for example if ghana GDP was 60,000 and Sweeden GDP was 20000 the first in sweeden could buy more with the 20000 due to differences in inflation.
What are the 3 points for the question Dicuss the impacts on the UK economy of a general recovery inthe EU?
1) Fall Unemployment ( there will be increase in AD)
2) Rise in investment
3) Increase in inflation
What is the evaluation for the point a fall in Unemployment for the question discuss the impacts on the UK economy of a general recoverty in the EU?
It depends on the size of the revovery a large size recovery will lead to a more demand for exports, meaning the workers employed, meaning more dispoable income and C spending
This depends on the MPC, if this high there will be an increase in demand meaning the recovery is sped up but if low the recovery will be slower.
What is Evaluation for the point a rise in investment for the question Discuss the impacts on the UK economy of a general recovery in the EU?
depends on the interest rate on the borrowing in the economy
eval 2 depends on spare capacity
if there is lots of spare capacity in the economy even if interest rates are low then investment may not increase as there is spare capacity.
What is the evaluation point for an increase in inflation for the question discuss the impacts on the UK economy of a general recovery in the EU (25 marks)
People on fixed incomes lose out
Eval 2 depends on the level of government welfare provided ( adjusted to inflation ( triple lock)
What does Unemployment?
Are those peope able, avaliable and willing to work but cannot find a job despite an active search for work.
What is Claimant count?
The number of people offfically claiming unemployment related benefits ( must be actively seeking work)
What is the labour force survey?
All those actively seeking and avaliable for work, whether or not they are claiming benefits.
What are 2 problems of Unemployment figures?
1) Much hidden unemployment ( a bus driver who has trained to be a surgent they have the skills)
2) High rate of labour migration affects accurracy
What are the 4 causes of unemployment?
Seasonal
Strucural ( mismatch of skills and job opportunites as pattern of labour demand changes)
Frictional ( unemployment between moving jobs)
Cyclial ( the demand for labour is derived from the demand for the goods and services that labour produces)
What is occuptional and geographical immobility?
When a job is available but the unemployed lack the skills to do the job.
When the unemployed lack the ability to move to where the job openings are.
What is real wage unemployment?
Arises from the wage rate being above the MCP in the labour market. Unemployment in the excess supply.
What are some of the causes of real wage unemployment?
high NMW
- strong trade unions
What is voluntary unemployment?
When someone chooses not to work at the current wage rate. This is due to the following:
- welfare payments that are generous relative to wages
- a high rate of income tax discouraging people from entering the labour market.
What is Involuntary unemployment.
when they are willing and able to work at the current wage rate, but they cannot find work. It is usually cyclical, since it is caused by a fall in AD.
What is the natural rate of unemployment?
The level of unemployment when the labour market it at equilibrium.
Those that are still unemployed don’t have a job due to structural/frictional/seasonal unemployment
What is the diagram for the natural rate of unemloyment and describe it?
Q1 equalles those who choose to work at that wage rate and Q2 = those who choose not to work at that wage rate. The difference is the natural rate of unemployment.
What are the factors affecting the size of the natural rate of unemployment ?
1) The level of welfare benefits ( higher benefis then wages, discentivse people not to work
2) The level of income tax in the economy
3) Trade unions power and milltancy ( if trade unions are powerful they could push wage rates encouraging more peope into work.
When does an economy operate at the natural rate of unemployment?
In the long run
What would be the impact of inflation of an economy operating at the natural rate of unemployment?
Non-accelerating
Do emerging technologies counter the risk of high economic growth?
Yes As per capita increases, wealth can be used to buy cleaner fuels like natural gas.
What is inflation, deflation and disinflation?
Inflation: An increase in the average general price level
Deflation A fall in the average general price level. Represents a rise in the purchasing power of money.
Disinflation = A fall in the rate of inflation
What is demand-pull inflation and Cost push inflation?
Too much money chasing to few goods ( Demand is not matched with the output of goods and services)
respond to rising costs by increasing prices in order to protect their profit margins.
What are examples of cost push inflation?
A rise in indirect tax
A rise in the cost of imported raw materials
A rise in wages
What does the Quantity Theory of Money state and what is fishers equation of exchange ?
bascially too much money chasing too few goods leading to greater demand pull inflation.
MV=PT
where M = the supply of money
V = the velocity of circulation (number of times a unit of currency is used)
P = the price level
Q = the quantity of goods sold (real GDP)
What is the policy implication of the Fisher equation of exchange?
To avoid inflation, the money supply needs to be strictly controlled
What are some criticisms of Fisher’s equation?
- difficult to measure Q as some are illegal/hidden
- M also difficult to define (m1 m2 m3 m4)
What are 7 consequences of inflation?
1) Uncertainty
2) Savings are eroded
3) People on fixed incomes lose purchasing power
4) Possibility of a wage-price spiral
5) Loss of international competitiveness
6) Show leather costs
7) Menu costs
What does Uncertainty mean?
Inflation affects prices and costs to businesses making it difficult to plan for the future
What are Savings are eroded?
Money put in banks or loaned out loses it value
What does People on fixed incomes lose purchasing power mean?
Prices rise while incomes don’t
What does Possibility of a wage price spiral mean?
Higher prices may lead to workers demanding higher wages as they don’t want their real standards of living falling .
What does a lose of international competitiveness mean?
The economy will become internationally noncompetitive if we are assuming that other countries don’t have inflation or have a lower rate of it. Exports are expensive and imports cheaper.
What does Uncertainty depend on 3 things?
1) How much stock the business hold for the future
2) May matter less for products with an inelastic demand
3) How much raw materials are domestic/ foreign.
What does How much stock the business hold for the future mean?
Won’t affect you for a while untill you need to buy new stock if you have a warehouse
What does may matter less for products with an inelastic demand?
An increase in costs can be passed onto price to consumers.
What 3 things does Savings are eroded depend on?
1) If interest rate is greater than inflation rate
2) Less money in banks available for investment
3) Made worse if there is a disincentive to save and AD increases.
What 2 things does People on fixed incomes lose purchasing power depend on?
1) The amount of people on fixed incomes ( if there is a little it won’t make a difference)
2) The level of government welfare provided (adjusted to inflation) e.g tripple lock
What is the triple lock?
Basic state pension will rise by annual rise of 2.5%, the highest rate of inflation and average earnings growth. Which ever is the highest is what it will go up by.
What are 2 things that Possibility of a wage price spiral depends on?
1) Trade union power
2) Skills of workforce.
What are 2 things that Loss of international competitiveness depends on?
1) prices/inflation in other countries
2) PED of exports ( few substitutes, necessities, brand loyalty. PED is different for different people.
What is the intro for the question discuss the main causes of inflation?
# Define inflation Uk and BOE consider low inflation and stable inflation (up to 2% p/a) acceptable
What are 3 main causes of inflation?
Explansionary fiscal policy
Cost push inflation
Increase in money supply
What does the Expansionary fiscal policy involve?
decreasing tax rate and increasing government
What is the evaluation for expansionary fiscal policy?
Uncertainity. Inflation is bad because it affects price and costs of a firm, making it very difficult to plan for the future.
What is evaluation squared for expansionary fiscal policy for why inflation occurs?
The extent of this depends on how much stock firms hold for the future.
What does cost push inflation involve?
Cost push inflation ( if the government puts an indirect tax on goods, if the good is Inelastic, must of the good gets passed on to the consumer.
What is evaluation on the indirect tax?
This is bad because people on fixed incomes lose out
What is evaluation squared for the indirect tax?
Depends on the level of govt welfare provided ( adjusted to inflation ( triple lock)
What does the money supply involve?
The amount of money in the economy is not matched by the output of goods and services ( too much money chasing to few goods. E.g. when interest rates are low, consumer spending increases.
What is the evaluation for the money supply?
This will mean a loss of international competitiveness. If we assume there is no or low inflation in other countries. Exports are expensive and imports cheaper.
What is evaluation squared for the money supply?
Depends on the Ped of the exports
What are the 3 points for the question Discuss the fact inflation is better than deflation?
1) Mild inflation is acceptable ( 2%) in an economic recession its stimulates economic growth, deflation doesn’t
2) Deflation has big problems e.g. if consumers think prices are falling then they may choose not to spend in hope that the prices will keep falling.
3) Deflation can improve our international competitiveness
What is the evaluation for the Mild inflation acceptable in an economic recession to stimulate economic growth?
However due to this economic growth, this may lead to a possibility of wage price spiral leading to multiplier effect causing excessive inflation
What is evaluation squared for Mild inflation acceptable in an economic recession to stimulate economic growth?
Skills or the workforce.
What is the evaluation for the point Deflation has big problems e.g. if consumers think prices are falling then they may choose not to spend in hope that the prices will keep falling.
Depends on the PED of the good. If good has an inelastic Ped then consumers will be unresponsive to any changes to price.
What is the evaluation squared for the point Deflation has big problems e.g. if consumers think prices are falling then they may choose not to spend in hope that the prices will keep falling. ?
The degree of elasticity depends on the availability of subsitutes, and the quality of goods among other goods.
What does Deflation can improve our international competitiveness mean?
If our country has deflation and the other country has inflation, there will be a rise in exports, stimulating economic growth.
What is evaluation for the idea that deflation can improve our international competitiveness?
Self correcting mechanism - because our goods are more attractive to other countries, there will be more demand leading to a shift in AD, leading to inflation.
What is evaluation squared for the idea that deflation can improve our international competitiveness?
Although even though our exports are cheaper, other countries may not demand our goods much more, so the effect on deflation will still be minimal.
How does deflation discourage spending?
Deflation discourages spending because it makes goods and services cheaper in the future. Consumers believe that, if goods are cheaper tomorrow, it is not worthwhile buying them today. This can result in economic decline and increasing rates of unemployment.
How does deflation increase the real value of debt?
This means that consumers with high levels of debt find it harder to pay it off, since a larger proportion of their income will be used to make repayments.
What is the diagram of the SR philips curve and what are the implications of it?
As economic growth increases, unemployment falls due to more jobs being created. However, this causes wages to increase, which can lead to more consumer spending and an increase in the average price level.
What is a evaluation point for government policies trying to reduce the rate of inflation?
One problem is that once inflation goes up people expect it to remain high, ‘adaptative expectations’ e.g. people using the past to predict the future. If inflation is high today, people will expect it to be high tommorow as well, leading to inflation being embedded in the economy.
