macro Flashcards
(156 cards)
1
Q
What are the macroeconomic objectives?
A
- sustainable economic growth
- low and stable unemployment
- low and stable inflation (2% +/-1%)
- balance of payments acceptable
2
Q
What is monetary policy?
A
A change in economic variables to alter the flow of money e.g. interest rates, exchange rates, QE, helicopter money etc
3
Q
What is fiscal policy?
A
Taxation and gov spending
4
Q
What is the circular flow of income?
A
The model of the economy which shows the flow of goods, services and payments around the economy
5
Q
What are injections in the circular flow of income?
A
- investment
- exports
- gov spending
6
Q
What are leakages in the circular flow of income?
A
- savings
- imports
- taxation
7
Q
What are the key uses of national income data?
A
- rate of economic growth
- living standards
- changes in distribution of income
8
Q
What is GDP?
A
Measures the total value of national output at market prices produced in a given time period (Gross Domestic Product)
9
Q
What is a nominal value?
A
Monetary values for data not adjusted for inflation
10
Q
What is a real value?
A
Adjusted for inflation and prices are held at a level of chosen base year
11
Q
What is PPP?
A
Purchasing Power Parity- measures how many units of one country’s currency are needed to but the same basket of goods that can be bought with another country’s currency
12
Q
What is income?
A
The flow of money going to the Fops- wages, profits, dividends
13
Q
What is wealth?
A
Stock/store of money and assets- savings, shares, property, bonds
14
Q
How much of GDP is spent on consumption?
A
61% household consumption
15
Q
How much of GDP is spent on government spending?
A
23%
16
Q
How much of GDP is spent on investment?
A
15%
17
Q
What are durable goods?
A
Consumed over a long period of time e.g. TV or a car
18
Q
What are non-durable goods?
A
Consumed almost immediately e.g. ice cream or washing powder
19
Q
What is the Marginal Propensity to Consume?
A
How much extra is spent on on consumption as a result of receiving one extra £ of income
20
Q
What is the Marginal Propensity to Save?
A
How much extra is saved as a result of receiving one extra £ of income
21
Q
What is net investment?
A
Gross investment- depreciation
22
Q
What is the accelerator theory?
A
If you increase I, AD goes up and economic growth goes up too, business and consumer confidence goes up and then I goes up again, creating a cycle
23
Q
What is current spending in terms of gov spending?
A
E.g. wages of teachers/public sector workers
24
Q
What is capital spending in terms of gov spending?
A
E.g. spending on building social housing, roads etc
25
Does AD slope upwards or downwards?
Downwards- as PL rises, then the real value of income falls, rise in the PL will make imports cheaper
26
What is the multiplier?
States that any £1 injection into the economy will cause an increase in national income greater than £1 and circulate around the economy until it leaks out
27
How is the multiplier calculated?
1/MPW= 1/1-MPC= 1/MPS
28
What causes SRAS to shift?
- changes in wages
- productivity
- VAT
- subsidies
- supply shocks (Hurricanes/ Natural disasters)
29
Why is LRAS fixed and in a straight line?
As there is a limit on how much a firm can supply because of supply constraints
30
What are examples of supply side policies that cause LRAS to shift?
- technological advances
- productivity
- education and skills
- active workers
- factor mobility
31
What are causes of an inward shift in LRAS?
- natural disasters
- outward labour migration
- trend decline in productivity
32
What are external supply side shocks?
- energy
- raw materials
- commodities
33
What happens in the Keynesian AD diagram when AS becomes vertical?
The economy has reached full employment levels and a further increase would cause inflationary pressures
34
What are examples of demand side shocks?
- housing market bubbles
- stock market crash
- global recession
- rises/decreases in interest rates
35
What are examples of supply side shocks?
- A sudden rise/fall in commodity prices
- sudden increase/decrease in TU action
36
Effects of economic growth in the SR?
- interest rates
- fiscal policy
- commodity prices
- exchange rates
- trading conditions
- confidence
37
Causes of economic growth in the LR?
- investment
- productivity
- labour supply
- research
- innovation
38
What are the benefits of economic growth?
- people have all the basics
- housing standards improve
- literacy improves
- health improves- therefore life expectancy improves too
- jobs created
39
What are the problems with economic growth?
- sometimes is unsustainable- forces gov to step in
- inflation
- gov debt
- inequality
40
What is inflation?
A sustained rise in the general PL across an economy
41
What is deflation?
General decline in prices
42
What is disinfaltion?
Prices are rising but at a decreasing level
43
What is hyperinflation?
When inflation is very high e.g. Germany in 1923 with 29500% inflation
44
What is reflation?
An economies GDP grows following a recession
45
What is stagflation?
Inflation is rising at the same time the economy is in recession
46
What are shoe leather costs?
Costs that people incur to minimise their cash holding during times of high inflation
47
What are menu costs?
Costs a business faces when it decided to change it's prices
48
What is the definition of economically inactive?
People of a working age who are not employed or seeking employment
49
What is underemployment?
Workers do not have as much work as they would like or where a worker has a full time job without fully utilising their skills e.g. a brain surgeon working in Aldi
50
What is unemployment?
People who are not employed but actively seeking employment
51
What are measures of unemployment?
LFS (labour force survey), claimant count (unemployed and claiming job seekers allowance)
52
What is the equation for the employment rate?
Employment rate= those in work/ population of working age
53
What is the equation for the unemployment rate?
Unemployment rate= unemployed/ labour force
54
What is frictional unemployment?
Workers that are in between jobs
55
What is seasonal unemployment?
Specific times of year or a change in season leads to this type of unemployment
56
What is structural unemployment?
Regional unemployment, Sectoral unemployment, technological unemployment
57
What is cyclical unemployment?
Unemployment caused by job loss in recessions
58
What is classical (real wage) unemployment?
Due to wages increasing (employers can't pay everyone a higher wage so therefore they let people go)
59
What are the costs of unemployment?
Loss of income, medical illness, increased suicide risk, increased benefit payments, increased cost to NHS
60
What are policies to reduce unemployment?
- cut interest rates
- cut tax and higher spending
- geographical subsidies
- remove labour market regulations
- higher/lower min wage
61
What does the SR Phillip's curve show?
A trade off between the inflation rate and unemployment
62
What does the LR Phillip's curve show?
No trade off between inflation and unemployment- only believed by neoclassicals
63
What does globalisation refer to?
- migration
- technology
- foreign ownership
- proportion of national output that is traded abroad
64
When is there a surplus on the balance of trade?
When X is greater than M
65
What is meant by the current account?
The value of goods and services exported - the value of goods and services imported + net property income from abroad
66
What are financial and capital accounts?
Show the flows of money between the UK and other countries
67
What is meant by a government deficit?
Gov spending is higher than the tax revenue meaning some money has to be borrowed
68
What is the national debt?
Net total of all the annual deficits and surpluses
69
What is direct tax?
Levied directly on the individuals e.g. income tax
70
What is indirect tax?
Levied on goods and services meaning if you don't buy them, you don't pay the tax, also levied through companies e.g. VAT
71
What is meant by a progressive tax?
The proportion of income paid in taxed rises as income rises
72
What is meant by regressive tax?
The proportion of income paid in tax decreases as income increases
73
What is meant by Proportional tax?
The proportion of income paid in tax remains constant as income rises
74
What is meant by pro-cyclical tax?
Tax revenue rises in booms and falls in a recession
75
What is a structural deficit?
Gov have a deficit over the cycle period provided the size of the deficit is equal to capital expenditure by gov
76
What is QE?
BoE created electronic money and used it to buy gov bonds (IOUs) from the private sector (mainly pension funds)- private sector then had money instead of bonds to spend into economy (bought shares, houses/ invested) and by buying bond the interest rate paid on bonds to go down encouraging lending/borrowing
77
What was the positive money estimated regarding QE?
Around 8p of every £1 of QE found it's way into the economy
78
What are the downsides of QE?
- creates inequality
- may be impossible to reverse
79
What is a liquidity trap?
Following GFC, central banks reduced the interest rates dramatically with did not stimulate demand (due to high amounts of debt and low animal spirits- they were unsure of the future so saved)
80
How can the gov affect exchange rates?
- buying and selling currency
- changing interest rates to cause hot money currency flows
81
What are market based supply side policies?
Aim to improve the efficiency of markets by making them fully free markets by removing any barriers that exist meaning reducing the role of the state
82
What does the Laffer curve show?
Free market economists argue that high marginal tax rates provide a strong disincentive to work
83
What are interventionist based supply side policies?
Aim to make free markets more efficient by correcting the market failures they believe exist meaning the government should intervene more
84
What does it mean by increasing incentives (a supply side policy)?
- Reducing income tax
- Reducing benefits
- subsidising workers
- R&D
85
How can competition be promoted (a supply side policy)?
- privatisation
- deregulation
- competition policy
86
What are supply side policies that aim to reform the labour market?
- improve mobility
- reduce TU power
- migration
87
Which supply side policies improve the skills of labour?
- quality education and training
- immigration of skilled workers
88
How are countries classified?
- High and low income
- Developed, developing emerging
89
What are the BRICS countries?
Brazil, Russia, India, China, South Africa
90
What are the characteristics of developing countries?
- low per capita incomes
- low amounts of human capital
- poor health
- high population
- high unemployment
91
What is the difference between economic growth and economic development?
- EG- (GDP) increase in goods/services produced in an economy
- ED- reduction/elimination of poverty, unemployment and inequality
92
What is HDI?
Human Development index- has 3 indicators which are health, education and income (score between 0-1 and the higher the better)
93
What is IHDI?
Adds inequality as a fourth indicator to HDI
94
What is the Harrod-Domar model?
States that increased savings leads to increased investment with leads to higher capital stocks leading to higher economic growth which then starts again by leading to increased savings
95
What is FDI?
Foreign Direct Investment- investment by a private company into a private company in another country taking form of asset purchasing (company/factory) and is a long-term committed investment and no loan repayments are needed
96
What is Green field FDI?
Setting up an entirely new operation
97
What is brown field HDI?
Investing in an existing company
98
What are the advantages of FDI?
- Infrastructure improvement
- capital deepening
- more training
- increase in technology
- more competition
- creates more jobs
99
What are the disadvantages of FDI?
- Inequality (captured by elites)
- land grabs
- limited job creation effects
100
What are remittances?
Migrants send money home to relatives which creates significant invisible exports
101
What are free market development strategies?
- trade liberalisation
- promote FDI
- remove gov subsidies
- Privatisation
- free floating exchange rate
102
What are interventionist development strategies?
- trade protection
- managed exchange rates
- infrastructure development
- state education
103
What is the Lewis model?
Assumes industrial workers are more efficient than agricultural workers- gov should encourage industrialisation
104
What is foreign aid?
Fills the savings gap and the trade gap and can be in the form of grants and loans
105
What is the IMF?
Promote economic stability including the exchange rate and provides temp funding to countries in financial crisis
106
What is the WTO?
The World Trade Organisation- promoted trade liberalisation and acts as a forum for international trade agreements to settle disagreements between members
107
What would a fully globalised world look like?
- free trade of goods and services
- free movement of capital
- free interchange of tech
108
What are the causes of globalisation?
- increased trade of goods and services
- growth of multi national companies
- increased foreign ownership of firms
109
How does globalisation impact consumers?
- increased choice
- lower prices
- increased global incomes
- better quality of choices (specialisation)
110
How does globalisation impact producers?
- increased specialisation
- tax avoidance
- exploitation
111
What is absolute advantage?
Countries should just specialise in producing what it is best at and trade with other countries with what they're best at
112
What is comparative advantage?
Able to produce a good/service at a lower opportunity cost than it's trading partners
113
What are the benefits of trade?
- specialisation
- EoS
- lower prices
- increased choice
- innovation
114
What are the costs of trade?
- over specialisation
- structural unemployment
- risky
- loss of culture
- sovereignty
115
What are the causes of TOT in the SR?
- demand/supply of exports
- relative inflation rates
- exchange rates movements
116
What are the causes of TOT in the LR?
- rising incomes
- productivity improvements
- technological advance
117
What are forms of protectionism?
Tariffs, quotas, subsidies, exchange rate manipulation
118
Why do countries use protectionism?
Protect infant industries, protect jobs, prevent dumping, prevent unfair competition of cheap labour
119
What is a tariff?
A tax imposed by a gov of a country on imports or export- it will cause domestic supply to increase from Q1 to Q3. Consumer surplus will decrease because of the higher prices, producer surplus will increase
120
What are negatives of a tariff?
121
What are the positives of a tariff?
122
What is a quota?
Sets a physical limit on the quantity of a good that can be imported into a country. This will cause the S of domestic goods to increase because of the limit. Consumer surplus will be reduced because of the increase in P, Producer surplus will increase because they are supplying more at a higher price
123
What are the negatives of quotas?
Economic welfare loss
124
What are the positives of quotas?
More domestic supply
125
What is a trading bloc?
A group of countries who have signed an agreement to reduce protectionist barriers between themselves
126
What is a true customs union?
No custom posts, identical product standards, common currency
127
What are the benefits of free trade?
Massive increase in consumer surplus
128
What are the negatives of free trade?
Lose jobs (only Q2 produced domestically- lose Q2 to Q1)
129
What are the advantages of being in the eurozone?
- reduced exchange rate costs
- more trade and EoS
- increased FDI
- price stability
- price transparency
130
What are the disadvantages of being in the eurozone?
- transition costs
- loss of monetary policy independence
- inability to change the value of a currency
- economic shocks
131
What is trade creation?
Moving from a higher cost producer to a low cost producer which can be from joining a customs union
132
What are the causes of trade creation?
- structural unemployment
- reducing social cohesion
- increased crime
133
What is the assumption made when discussing trade creation?
That neither country is initially in a customs unions
134
What is trade diversion?
Movement from a low cost foreign producer to a high cost producer within a customs union
135
What is an example of trade diversion?
A country enters a customs union and has to impose a tariff on what was previously the lowest cost producer who is not in a customs union
136
What are criticisms of the WTO?
- Rich countries exploit developing country workers
- environmental damage
- forces poor countries to lower trade barriers
- gives rich the power to set rules
137
What is the current account?
Payments related to the purchases of goods and services
138
What is the capital account?
Flows of money for savings, speculation
139
What is the financial account?
Flows of financial capital in and out and is split into FDI, portfolio investment and other investments
140
What are international capital flows?
- Speculators looking for quick profits
- trade finance
- banks operating across borders
- FDI
- individuals (remittances/holidays)
141
What are the advantages of international capital flows?
- economic growth
- provides capital not available domestically
- can lead to tech transfer
142
What are the disadvantages of international capital flows?
- potential systemic risk
- potential for foreign ownership
- encourages firms and govs to over borrow
143
What is liquidity crisis?
A lack of cash, or assets that can be easily converted into cash across financial institutions
144
What is a capital crisis?
There are not enough assets that can be turned into cash
145
What is a financial crisis?
Can be liquidity or capital crisis and occur at a commercial bank level
146
What is a default?
When a country refuses or cannot pay their debts
147
What is debt restructuring?
Used by countries to avoid the risk of defaulting on existing debts and involves modifying terms to make debt more manageable like reducing interest rates or extended payback period
148
If demand for the £ increases what does this mean?
People are buying the £ with the $ and the price in $ for £ will increase
149
What would happen if the S of £ on the FOREX market was high?
The price of £ in terms of $ will increase
150
What is a floating exchange rate?
Rates are determined by demand and supply of currencies
151
What is a fixed exchange rate?
Value of one currency is fixed against another
152
What are managed exchange rates?
Determined by free market forces but govs can intervene by buying foreign currency or selling currency reserves
153
What is the Marshall-Lerner condition?
A fall in the value of the currency will cause an improvement in the current account of the BoPs where the combined PED of imports and exports is greater than 1
154
What is the J curve?
Suggests PED of exports and imports is inelastic in the SR due to existing contracts and lack of knowledge
155
What are the benefits of being internationally competitive?
- current account surplus
- international investment
- employment
- economic growth
- wage growth
156
What are gov policies that encourage competitiveness?
- supply side policies
- exchange rate policies
- macro stability
