Macro 3.2.3 Economic performance Flashcards
Growth, unemployment, inflation/deflation and balance of payments (34 cards)
what are the costs and benefits of economic growth for living standards
Benefits:
* higher disposable income - firms make higer profits so higher wages for workers
* higher employment - more demand for goods and services so firms produce output needed labour
* higher profit for firms - households spend more, invest in capital, trigger accelerator effect
* fiscal divided for government - income, Vat and corporation tax will all rise
Costs:
* inflation - higher demand pull inflation, erode purchasing power so not as high living standards
* income inequality - income from cities mean agriculture suffer from lower income, poor quality jobs from growth and lack of welfare state
* environmental costs - air pollution, deforestation, soil erosion caused by negative externailities in production causing more welfare loss
* current account defecit - household income rise so increase imports as people spend more decreasing exports
define economic growth
increase in production of economic goods and services in one period of time compared to a previous period
what factors increase the productive capacity of the economy
Q squared CELL
increase in the quantity or quality of capital, enterprise, land or labour
define economic growth
increase in reeal GDP in an economy in a year caused by an increase in AD or an increase in LRAS
what causes economic growth
- increase in AD is due to short run growth (actual growth)
- increase in LRAS is due to long run growth (potential growth)
diagram of economic growth via AD, explain it and examples of actual growth
- when there is a shift in AD the economy uses up spare capacity to increase output of goods and services
- AD shift to the right so closing negative output gap as moving towards Yfe so produce more goods and services
diagram using PPF and Keynsian
examples:
* lower interest rates
* lower income / coproation tax
* high consumer confiedence
* higher government spending
* weaker exchange rate
diagram of economic growth via LRAS, explain it and examples of potential growth
- when there LRAS shifts right there is an increase in the productive capacity in the economy as the Yfe increases to show potential growth
- LRAS increases due to the increase in quantity or qaulity of factors of production (CELL) or increase productive efficiency
diagram of PPF and classical
examples:
* increase in labour productivity
* increase in workfoce size (immigration)
* investment
* infrastrucutre improvements
* increase in competition
* new resource discoveries
what are the pros and cons of economic growth
Pros:
* rising income leads to better living standards
* better job prospect
* less unemployment
* affordablity of goods and services
Cons:
* high inflation levels
* income inequality
* environmental costs
* current account defecit
what are inflationary spirals
- hyperinflation so short run growth at LRAS increase posiitve output gap increases price level whcih increases wages to increase business costs lead to shift in LRAS back to full employment but price level increase even more which decrease standard of living
what are weaknesses of GDP
- doesnt reflect indiviudal circumstances, could only be a small proportional of very wealthy people
- work/output is left out of GDP
- only be growing in certain geographical areas
- can distort markets
- need more holistic gage of living standards rather than just GDP
what are the causes, cost and solution of youth unemployment
Cause:
* less businesses due to covid and many decide to cut labour costs to be profitbale again
* poor education
* lack of work experience
Cost:
* lack of output of goods and services
* reduce tax revenue
* low living standard
Solution:
* improve education to align with markets
* promote apprenticeship
* job opportunities through investent in infrastrucutre, innovation and new industries
2 ways of measuring unemployment
- Labour force survey (LFS) - study of the employment circumstances of the UK population as they have to fill out questionnaire
- Claimant count - meausre of the number of people claiming benefits principally for the reason of being unemployed, based on administrative data
what are the benefits and consequences of unemployment
Pros:
* greater pool of workers for firms to chose most productive workers
* low inflation
* improved current account position
* time for workers to find suitable job
Cons:
* lost output
* deterioration of government finance
* social costs
* lost income
policies to reduce cyclical unemployment
- expansionary fiscal policy - increased government spending / reduced tax revenue (stimulate and boost AD to shift right)
- expansionary monetary policy - decrease interest rates, more people will borrow so consumption increases causing more investment from businesses causing AD to shift right
conflict of objectives, higher prices, time lags, consumer confidence
government policies to reduce real wage unemployment
- reduce minimum wage - bring wages down towards the equilibrium to close the gap
- reduce strength of trade unions - bring wages down towards the equilibrium to close the gap and bring employment towards equlibrium
strong negative impact on workers and standard of living
real wage unemployment is when wages in the labour market are forced above equilibium to create excess supply so need polocies to bring down the price level
government poloices to reduce structural unemployment
- interventionist supply side policies - increased government spedning on education/training, subsidies for in work teaining, government spendign on infrastrucutre and grants or low cost borrowing
- market based supply side policies - reduced benefits to force workers to gain skills where needed, deregulate hiring/firing laws
government polices to reduce frictional unemployment
- interventionist supply side policies - more and better resources for job centres, subsidies to private job agencies, government spednign on infrastrucutre
- market based supply side policies - reduced benefits
what is the importance of each component of AD and how do they vary depending on economic conditions
- Consumption (C) - many economies consumption is the largest, tends to be stable and less volatile than other components
- Investment (I) - highly volatile, especially during recession when business may delay or reduce capital expenditures
- Government spending (G) - policy tool to stabilize the economy during recessions and boost AD
- **Net exports (X-M) **- countries with trade surplus (X>M) positively contribute to AD while those with trade defecit (X<M) detract from AD
define inflation
the sustained increase in average price level of goods / services in an economy
what are the pros and cons of inflation
Pros:
* workers with higher wages
* consumption is natural
* firms encourage to increase output
* can keep unemployed low in a recession
* reduces real value of debt
* improvement of government finances
Cons:
* lower purchasing power
* erosing of savings
* lower export competitiveness
* wage/consumer price spirals
* fiscal drag
* inflationary noise
define deflation
- a general decline in prices for goods and services
what are the 2 types of deflation
- Benign (good) - there is an external shock causing a fall in costs to firms like fall in raw material price causing AD to shift right to reduce unemployment
- Malign (bad) - there is when there is a shcok to the economy like Covid which shift AD to the left increases spare capacity and unemployment
what are the main causes for inflation
- demand pull inflation - caused by excess demand where economy is close to ull capacity and there is a positive output gap
- cost push inflation - rising wage costs in the labour market, increasing raw material costs from domestic and overseas suppliers, rising import prices due to a falling exchange rate
- administered prices - changes in regulated prices (water bills), chnages in inidirect taxes and subsidies, chnages in environmental taxes
define disinflation
refers to a slowdown in the annual rate of price inflation
consumer prices are still increasing but slower
