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Economics Paper 2 > Economics Paper 2 > Flashcards

Economics Paper 2 Flashcards

(85 cards)

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1
Q

What is the definition of economic growth?


A

Increase in the output of goods and services in an economy over a period of time

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2
Q

How do you measure economic growth?


A

GDP (Growth Domestic Product)

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3
Q

How do you measure GDP?


A

GDP per capita = GDP/Population

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4
Q

What are the limitation of GDP as a measure of growth?


A

Inflation
Populational changes
Statistical errors
The value of home-produced goods
The hidden economy
GDP and living standards
External costs

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5
Q

How is inflation a limitation on GDP as a measure of growth?


A

For example if GDP rises by 5percent and prices rise by 5percent there is no growth

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6
Q

How is statistical errors a limitation on GDP as a measure of growth?


A

Gathering the data needed to calculate national income is a huge task. Unfortunately, errors are made because the information has been entered inaccurately or left out. Therefore, the true value of GDP is never really known.

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7
Q

How is the value of home-produces goods a limitation on GDP as a measure of growth?



A

Some good and services are not traded so are not recorded for example a lemonade stand

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8
Q

How is the hidden economy a limitation on GDP as a measure of growth?



A

sometimes paid work in not recorded and the transactions are part of the hidden economy. People may do a variety of jobs for cash but not record the transactions
For example dealing drugs

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9
Q

How is GDP and Living standards a limitation on GDP as a measure of growth?



A

GDP is used to measure living standards however just because GDP increases doesn’t mean living standards have also. Factors like how much leisure time people have has to be considered

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10
Q

How is external costs a limitation on GDP as a measure of growth?



A

GDP doesn’t take for example environmental costs into consideration.

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11
Q

The Economic Cycle 


A

Boom: Peak of economic cycle where GDP is growing the fastest
Downturn: Period in the economy where GDP grows but more slowly
Recession/Depression: Economic decline and fall in GDP
Recovery: When GDP starts to rise again

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12
Q

What is the effect of Boom on Economic growth, Inflation and Unemployment


A

Economic Growth: highest point, economy strong, high-levels of output
Inflation: high because increase in demand and there might be increase in wages
Unemployment: at its lowest business utilize their workforce and higher more to meet demand

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13
Q

What is the effect of Downturn on Economic growth, Inflation and Unemployment


A

Economic Growth: Growth begins to slow down, demand falls, less business investment
Inflation: still high but decreases as demand falls
Unemployment: starts to increase as business cuts back from hiring or even fire people because of low demand

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14
Q

What is the effect of Recession on Economic growth, Inflation and Unemployment ?


A

Economic Growth: negative, business reduce output due to low demand,
Inflation: falls, deflation may occur (fall in prices) because there is a fall in demand
Unemployment: increases, reduce production and sales

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15
Q

What is the effect of Recovery on Economic growth, Inflation and Unemployment?


A

Economic Growth: growth resumes, starting slowly, consumer and business confidence return, business invest again and production increases
Inflation: low at the start, may increase as demand picks up
Unemployment: starts to fall as business start to rehire workers to meet demand however may take time

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16
Q

What is the impact of economic growth on Employment?


A

Positive Impact: increase demand for labor to meet demand, leads to job creation and lower unemployment rates
Negative Impact: growth may be driven by technological advances which could replace human labor leading to job losses

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17
Q

What is the impact of economic growth on Standards of Living?


A

Positive Impact: leads to higher incomes, improving peoples affordability to healthcare, housing, education
Negative Impact: benefits may be concentrated among the wealthier section of society, some groups standard of living stay the same

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18
Q

What is the impact of economic growth on Poverty?


A

Positive Impact: can reduce poverty by creating jobs and increasing wages
Negatives Impact: some groups may not face a reduction in poverty leading to greater inequality

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19
Q

What is the impact of economic growth on Productive Potential?


A

Positive Impact: increases, encourages investment in technology and infrastructure, this shifts the PPF outward allowing the economy to produce more in the future
Negative Impact: if growth is based on extraction of natural resources it may deplete resources

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20
Q

What is the impact of economic growth on Inflation?

A

Positive Impact: will remain stable as the supply of goods and services grows alongside demand
Negative Impact: can lead to demand-pull inflation, where demand outpaces supply, causing prices to rise. High inflation can erode purchasing power and harm economic stability.

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21
Q

What is the impact of economic growth on The Environment?


A

Positive Impact: With proper regulations and investment in sustainable technologies, economic growth can support environmental preservation by promoting clean energy and reducing pollution.
Negative Impact: Without environmental safeguards, economic growth often leads to increased pollution, and damage to ecosystems.

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22
Q

What is the definition of Inflation?


A

rate at which prices rise and continuing rise in prices

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23
Q

What is the definition of Deflation?


A

period where demand is falling

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24
Q

What is the unit to measure general price level (excluding housing costs)?

A

Consumer Price Index (CPI)

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25
What are the 2 types of Inflation?

Demand-pull and Cost-Push
26
What does Demand-pull inflation mean?

Inflation caused by too much in demand in the economy relative to the supply
27
What does Cost-push inflation mean?

inflation caused by rising business costs
28
What is the relationship between inflation and interest rates?

Interest rates: price paid to lenders for borrowed money Monetarists: economists who believe there is a strong link between growth in money supply and inflation The relationship between inflation and interest rates is that when inflation rises, banks increase interest rates to slow down spending and borrowing. When inflation is low, they lower interest rates to encourage spending and boost the economy.
29
What is the impact of inflation on Prices?

Prices rise Price of goods/services go up People need to spend more money to buy the same item they could have gotten for cheaper before
30
What is the impact of inflation on Wages?

Workers demand for higher wages to keep up with cost of living If wage does not increase might lead to less purchasing power Business might increase wages to attract more staff
31
What is the impact of inflation on Exports?

Negative effect Price of goods increase making exports expensive for foreign buyers Reduce demand for exports might choose cheaper alternative Decline in export competitiveness
32
What is the impact of inflation on Unemployment?

Less unemployment Demand is rising so output needs to increase which requires more workers
33
What is the impact of inflation on Menu costs?

Need to frequently update prices Might update menus, reprinting, price tags, changing labels, Higher menu costs
34
What is the impact of inflation on Shoe Leather Costs?
increased effort and time people spend managing their money to avoid the effects of inflation. inflation high, people reduce the amount of cash they hold, value decreases quickly. more frequent trips to the bank and more online transactions,
35
What is the effect of inflation on Uncertainty?

Reduce Investment business delay new projects due to unpredictable costs Lower consumer spending uncertain about financial situation or future value of money Economic slowdown both business and consumers cautious in their spending and and investment decisions
36
What is the impact of inflation on Business and Consumer confidence?

Business confidence hesitant because uncertain about future costs Consumer confidence falls as they worry about purchasing power and cost of living Decrease in consumer spending, focus on essential purchases
37
What is the impact of inflation on Investment?

Negative impact Increase cost more expensive for business to invest in new project Uncertainty leads to business delay investment due to concern about profitability Reduced Real Returns decrease so investors may seek safer less inflation-sensitive assets reducing investment in the economy
38
What is the definition of unemployment?

those who are actively seeking work are unable to find a job
39
How do we measure unemployment?

International Labor Organization (ILO)
40
What is Cyclical unemployment?

Unemployment caused by falling demand because of downturn in economic cycle example people losing jobs because not enough demand for product so business reduce production
41
What is Structural unemployment?

mismatch between skills workers have and what employers need, this is often due to technological advances example coal workers lose their jobs because economy shift to toward renewable energy and they don't have the skills
42
What is Seasonal unemployment?

Unemployed at certain times of the year because their jobs dependent on seasonal factors example ice rink or ski resort
43
What is Voluntary unemployment?

Unemployment where people choose not work example someone who wants to take a year from not working to travel or doesn't like working
44
What is Frictional unemployment?

Unemployment because people are transitioning between jobs or entering work for the labor for the first time example college graduate looking for job for the first time or someone who quits looking for a better jobs
45
What is the impact of unemployment Output?
Fewer goods/services produced unless there are advances in technology Standard of living is lower
46
What is the impact of unemployment on Use of Scarce Resources?
Unemployment is a waste of resources, skills are not being used and and machinery is not being utilized as their is no one to use it and operate it
47
What is the impact of unemployment on Poverty?
increased as income falls and there are no wages
48
What is the impact of unemployment on Government Spending?

It will increase as unemployed people receive financial benefit
49
What is the impact of unemployment on Tax Revenue?

Tax revenue will fall government has to spend less and might borrow more which will increase national debt or might have to increase tax rate
50
What is the impact of unemployment on Consumer confidence?
Decrease many people don't have a job so will pay less because there is no income low spending
51
What is the impact of unemployment on Business confidence ?

Decrease when firms lay off workers they have to pay them money remaining workers be demotivated as scared it will happen to them. There will be fall in demand because no people have income sales will fall less investment
52
What is the impact of unemployment on Society?

Society will struggle not enough rent for houses, stress, small business have no sales
53
What is the definition of current account on the balance of payments?

it is a record of all transactions relating to international trade
54
What is a current account deficit?

when imports (buying from another country) are greater then exports (selling to other countries)
55
What is a current account surplus?

when exports (selling to another country) are greater than imports (buying from another country)
56
What are Trade in Goods (visible) ?
Trade of physical goods that can be seen and touched e.g machinery
57
What are Trade in Services (invisibles)?

Trade of services rather than physical goods e.g transportation, education
58
What is the relationship between current account and exchange rates?

Trade is influenced by changes in exchange rates.
59
How does a stronger exchange rate affect exports and imports?

If the exchange rate is stronger, exports become more expensive and imports become cheaper.
60
What is the result of fewer exports sold and more imports bought due to a stronger exchange rate?

The size of the current account deficit will increase.
61
How does a surplus on the current account affect the demand for a country's currency?

A surplus leads to rising sales abroad, increasing demand for the country's currency.
62
What happens to exchange rates when there is an increase in demand for a country's currency?

The exchange rates will increase, making the currency stronger.
63
What are the effects of a stronger exchange rate on trade balance?
Exports become more expensive Imports become cheaper Results in fewer exports sold Results in more imports bought Increases the current account deficit
64
How does the balance on the current account impact exchange rates?

A surplus increases demand for the currency Foreigners need to buy the currency to pay for goods Increased demand raises exchange rates A stronger currency results from higher demand
65
What are reasons for deficits and surpluses?

Quality and Price of Domestic Goods Quality and Price of Foreign Goods Exchange Rates between countries
66
How are the Quality and Price of Domestic goods reasons for Deficits and Surpluses?

Quality: If country develops reputation for quality goods = rising sales from buyers, this will drive up demand for exports & help improve current account balance , increases demand from home market as consumers will prefer them to imports Price: Demand for goods/services influenced by the price, If domestic goods are expensive, demand from overseas buyers is likely to fall. This will see a worsening of the current balance.
67
How are the Quality and Price of Foreign goods reasons for Deficits and Surpluses?

Quality: If goods/services from overseas are better from those produced domestically = increase in demand for imports have a negative impact on current balance, size of a current account deficit get bigger, less demand for home produced goods, result in lower domestic output & employment. Price: If foreign goods are cheaper than those produced at home, there will be increase in demand for imports. This will have a negative effect on the current account, reducing the size of a surplus
68
How are Exchange Rates between countries reasons for Deficits and Surpluses?



If currency is strong exports become more expensive for other countries, leading to fewer exports and a deficit. However, imports become cheaper so country may buy more from abroad, increasing the deficit. If currency is weak, exports become cheaper boosting demand and leading to surplus imports become more expensive reducing how much country buys from abroad, helping maintain the surplus. In short, stronger currencies can lead to deficits, while weaker currencies can lead to surpluses.
69
What are the impacts of a Current Account Deficit?

Leakage from the economy Can be inflationary if prices rise abroad Low demand for our exports Problems finding foreign reserves to fund the deficit
70
What are ways that business activity damages the environment?

Visual pollution (litter) Noise pollution Air pollution Water pollution
71
How does the government try to protect the environment?
Taxation Subsidy Regulation Fines Pollution permits Government provision of parks
72
What is Vision Pollution?

when business causes something physically unattractive, e.g. smoke flowing from power plants, construction sites and litter
73
What is Noise Pollution?
when business causes excessive noise that causes disturbance in everyday life, e.g. jet engines, music, loud conversations in pubs, bars, construction sites
74
What is Air Pollution?

when business causes emission to be discharged into the atmosphere. From perhaps burning fossil fuels, emissions from factories
75
How does Taxation protect the environment?
By increasing price of harmful goods, taxes reduce demand, making consumers and businesses less likely to purchase or produce these goods. This helps reduce pollution and encourages environmentally friendly alternatives Example: Carbon tax on industries that emit greenhouse gases
76
How does Subsidies protect the environment?

Subsidies reduce the cost of green alternatives, making them more affordable and attractive for consumers and producers Example: Subsidies for solar panels or electric cars.
77
How do Regulations protect the environment?

Regulations can restrict the amount of pollution companies are allowed to produce or require firms to use cleaner technologies Non-compliance leads to penalties Example: Limits on factory emissions or mandatory recycling programs.
78
How do Fines protect the environment?

Fines make polluting activities costly The risk of financial penalties encourages compliance with environmental laws Example: Fines for illegal dumping of hazardous waste.
79
How do Pollution Permits protect the environment?

The government sets a limit on the total amount of pollution allowed and issues permits
80
How does Provision of Parks protect the environment?

Governments maintain and invest in national parks, forests, and public green spaces, protecting ecosystems and promoting biodiversity This also raises public awareness of environmental protection Example: National parks or nature reserves that conserve wildlife and ecosystems.
81
What is the definition of income inequality?

Unequal distribution of income among individuals or households gap between rich and poor
82
What is the definition of absolute poverty
People don't have enough resources to meet all their basic human needs
83
What is the definition of relative poverty?

earn less than average income level
84
What are the reasons to reduce poverty and inequality?
Meet basic needs: avoid loss of life from starvation and help to grow children healthily Raise standard of living: more access to healthcare and education , boost global economic growth, more employment, income, tax for government Ethical Reasons: moral duty of people and government can help by contributing to charities
85
How can the government intervene to reduce inequality and poverty?

Progressive taxation: Gap between rich and poor closes, people with high income pay more tax, gap closes if government gives poorer people tax Redistribution through benefit payments: use tax to make payments to those with low incomes, help boost incomes of some at risk of poverty Investment in education and healthcare: if educated can be employed, investment in healthcare increases life expectancy, if people healthier productive in workplace, increase economic growth

Economics Paper 2 (2 decks)

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