Macro Year 1 Flashcards
(86 cards)
1
Q
What is the definiton of GDP?
A
The total value of the goods and services produced within a country within a year.
2
Q
What are the three methods of measuring GDP?
A
The output method, the inome method and the expenditure method
3
Q
What is GDP per capita
A
The total value of all goods and services produced within a country over a year divided by population.
4
Q
Whats the difference between real and nominal GDP
A
Real = adjusted for inflation
nominal = not adjusted for inflation
5
Q
Which country has the lowest GDP in the world?
A
Tuvalu, $62.28 million in 2023
6
Q
What is the USA’s GDP
A
$27.36 trillion (2023)
7
Q
What is Chinas GDP?
A
US$ 17.89 trillion (2023)
8
Q
What is the UK’s GDP?
A
3.381 trillion USD 2023
9
Q
What is Nigeria’s GDP?
A
$362.81 in 2023
10
Q
What is GNI? Why is it sometimes used instead of GDP?
A
Gross national income is the sum of a country’s gross domestic product plus net income from abroad.
It is often used due to an increasingly globalised world to take into account money earned from TNCs
11
Q
What are Purchasing power parities (PPP)? Why are they used in international comparisons?
A
Purchasing power parity is a measure of the price of specific goods in different countries and is used to compare the absolute purchasing power of the countries’ currencies. They are useful as it takes into account the cost of living between countries, so makes a fairer assement of the value of a currency as it assesses how much it can actually buy
12
Q
What is a famous form of PPPs?
A
The big-mac index
13
Q
What are the problems of using GDP to compare living standards
A
- Inaccuracy of data - GDP does not take into account certain economic activity such as the hidden economy or home based services such as care or subsistence farming, so GDP will be lower than the real value
- Inequalities - GDP does not take into account income inequalities within a country, a rise in GDP may be due to an increase in income of a particular group of people, so a rise in GDP would not increase living standards eveywhere.
- Quality - a good may cost the same in two countries but be of different quality and thus add more to living standards
14
Q
How is UK national wellbeing measured?
A
In 2010, the UK Prime Minister launched the Measuring National Wellbeing report it asks 4 key questions about life satisfaction, anxiety, happiness and
worthwhileness, where people answer on a scale of 0 “not at all” to 10 “completely”.
15
Q
What is the relation between The relationship between real incomes and subjective happiness
A
happiness and income are
positively related at low incomes i.e. if you are poor and your income increases,
you will be happier, but higher levels of income aren’t associated with increases
in happiness. This is known as the Easterlin Paadox. Easterlin found that although higher income correlates with greater happiness at lower income levels, this effect diminishes after $75k over time as income no longer is used to buy goods and services which directly increase quality of life, so toher factors affecting happiness - eg work/life balance, take over. In addition, increases in happiness as a result of an increase in income tend to diminish in the long run due to a proocess known as hedonic adaptation.
16
Q
What is the definition of AD?
What are the components of AD?
A
AD is the total demand for final goods and services in an economy at a given time.
Consumption, Investment, Goovernment spending, exports and imports
17
Q
What is the formulae of AD
A
AD = C + I + G + (X - M)
18
Q
What is the relative significance of the factors of AD?
A
Consumption = 66%
Government Spending = 18%
investment = 17%
Exports = 29%
Imports = 30%
19
Q
What is the AD curve
A
The AD curve is the same as the demand curve for an individual market, but instead of showing the relationship between price and output, it shows the relationship between price level and real GDP. Like the demand curve, the AD curve is downward sloping. The X axis shows the general price level, and the Y axis shows real GDP
20
Q
What are the four reasons the AD curve is downward sloping?
A
- Income effect: As a rise in prices is not matched straight away by a rise in income,
people have lower real incomes so can afford to buy less, leading to a contraction
demand.
● Substitution effect: If prices in the UK rise, less foreigners will want to buy British
exports and more UK residents will want to buy imported foreign goods because they
are cheaper. The rise in imports and fall of exports will decrease net exports so AD
will contract.
● Real balance effect : A rise in prices will mean that the amount people have saved
up will no longer be worth as much and so will offer less security. As a result, they will
want to save more and so reduce their spending, causing a contraction in AD.
● Interest rate effect: Rising prices mean firms have to pay their workers more and so
there is higher demand for money. If supply stays the same, then the ‘price of money’
i.e. interest rates will rise because of this higher demand. Higher interest rates mean
that more people will save and less will borrow and will also mean that businesses
invest less, so AD will contract.
21
Q
What is the difference between a movement and a shift along the AD curve
A
A movement along the AD curve is caused by a chang in the GPL, caused by inflation or deflation. A shift of the AD curve is caused by a change in any other variable, which is shown by a new line being formed next to the original ad curve. Again, as with demand, a shift to the right represents anincrease in AD and a shift to the left represents a fall in AD.
22
Q
What is Consumption? Explain What factors influence it
A
Consumption is consumer spending on goods and services.
1. Asset prices - if asset prices are high, consumers will experience a positive wealth affect, as they feel better off. This will increase their confidence, so thus increase MPC and decrease MPS, as they have the security of their assets
2. Disposable income - Keynes argued this is the biggest determinent: as people earn more, they tend to have more money left over after spending on necesities, so consumption will tend to rise
3.Debt availability - if debt is widely available, lower income houe holds are more able to take out loans to finance large spending projects
4.interest rates - interest rates are the cost of borrowing and the reward for saving. If interest is high, it will be more expensive to take out loans, and much more beneficial to save. Thus, MPS will rise and people.
5. Confidence - If consumers are confident about the future outlook of the economy, they will spend a larger part of their income. conversly, if they feel insecure in their jobs, their MPS will rise as they want to save for unexpected consequences.
6.Taxation - If taxes are high, disposable income will fall, meaning consumption will fall
23
Q
What is investment? What is the difference between gross and net investment?
A
Investment is the addition of capital stock to the economy, which increases the productive capacity of the economy by increasing the stock of capital available for production.
Gross investment is the total amount spent on investment, and ignores the impact of depreciation. Net investment is the actual spending on the addition of capital, this takes into account depreciation. N = G - D
24
Q
What factors influence the rate of investment in the economy?
A
- Expectations about future demand - if the economy is growing and is expected to continue, firms will be confident that demand of their products will grow, so will wish to invest as they want to prepare for the future (international demand is also a factor). Animal spirits are key here - buisnesses need to be confident of the economic outlook so that they believe investment will be profitable. This will increase the Marginal Propensity to Invest
- Government incentives - governments may offer tax breaks or grantsto encourage investment. Levels of regulation are important aswell
- Interest rates - Most investment is done through borrowing. High interest rates
mean that borrowing is more expensive, so a business needs to be more confident of
good profits in order to cover the extra costs of borrowing. A rise in interest rates increases the opportunity cost of a business using retained profits as they are able to get higher interest
payments than before. - Retained profits - if reatined profits are larger, I.e because corp. tax is low, buisnesses will have higher retained profit so may increase investment
25
What is the accelerator effect?
What is the formula
The accelerator effect happens when an increase in national income (GDP) results in a proportionately larger rise in capital investment spending, as firms try to anticipate and match future economic growth.
**I=α⋅ΔY**
Where:
𝐼 is investment.
Δ𝑌 is the change in output or demand.
α is a constant that represents the "acceleration coefficient" (i.e., how sensitive investment is to changes in demand).
Thus, a larger increase in demand (Δ𝑌) leads to a proportionally larger increase in investment (𝐼)
26
What is government spending?
What influences it?
Money spent by the public sector on the acquisition of goods and provision of services.
* position in the trade/buisness cycle - governments may use Counter-cyclical fiscal policy counterbalance to smooth out the fluctuations of the business cycle by adjusting monetary policy During a recession, the government may increase spending or cut taxes to stimulate demand and boost economic activity. During a boom, the government may reduce spending or raise taxes to slow down the economy and prevent overheating.
* Fiscal Poicy - some governments may have different views on the ideal levels of government spending, so adjust taxation and government spending accordingly. Labour tend to tax and spend more than the tories
27
What is Net trade? what factors influence it?
Net trade is the total exports minus the total imports.
* real income - most imported and exported goods are normal goods, so an increase in the real income in the uk will tend to increase imports, and an increase in the real income of trading partners will increase exports
* exchange rates - This affects the relative price of UK goods and overseas goods. SPICEE (strong pound imports cheap exports expensive) and WIDEC (weak pound imports dear and exports cheap)
* state of the world economy - If the UK trading partners are having a boom, their consumers will tend to demand more UK exports, so theUK trade balance will increase
* degree of protectionism - The degree of protectionism will incluence the competitiveness of UK exports or foreign Imports
* non price factors - UK goods may be highly sought after due to changes in consumer preferences.
28
What is Aggregate Supply?
Aggregate supply is the total supply of goods and services produced within an economy at a given overall price level in a given time period.
29
What is the distinction between the short run and long run?
The short run is a period of time where at least one factor of production is fixed. In the long run, all factors of prooduction are variable.
30
What is the Short run AD curve?
The relationshiip between planned national ooutput and the general price level in the short run
31
Why is sras upwards sloping?
In the short run, firms will have little ability to vary their outputs, as some factors of production will be fixed. if they want to increase output, they may need to do so by increasing the intensity of the utilisation of existing inputs, I.e by paying workers overtime. firms will pass this increased cost on to the consumer in the form of higher prices, increasing GPL.
32
What factors affect sras?
Anything that affects the costs of production - supply side shocks!
* wages, oil prices, raw material costs - if costs of inputs rise, it will be more expensive to produce the same amount of a good or service, so SRAS will shift to the left
* import prices - A weaker pound will lead to an increase in the price
of imports and this will cause SRAS to decrease as production becomes more expensive.
* Taxes - an important cost of production, will become more expensive to proudcue the same amount of output, so supply will shift to the left
33
What is Long run aggregate supply? What are the two different schools of lras.
In the long run, all factors of production can be changed.
Classica economists believe lras is verical, to represent the level of output the macroeconomy will always converge at. This is known the natural rate of output shown as Yfe). However, Keynesian ecnomists believe that an economy can produce at a level of output below Yfe in the long run. They believe lras bends, starting off as elastic and becoming increasingly inelastic, as at the elastic section, the economy is in a recession and there is mass unemployment of factors of production. therefore, the economy can increase output without experiencing any form of inflationary pressure.
34
What factors influence the position of LRAS
Q2CELL - the quality and quantity of the factors of production
* technological advances - provements in technology shift the LRAS curve to
the right, meaning more can be produced. This is because it will speed up
production, so more goods can be produced with the same amount of resources.
* Increased laboour productivity - the more productive labour is, the more output can be produced with the same amount of resources in the same time, shifting LRAS to the right
* Changes in education - a better trained workforce will increase efficiency
* competition - by breaking up monopolies, competition is increased, meaninng firms will have a greater incentive to invest into research and development to increase quality and decrease cost, increasing LRAS
* Migration - if net migration is positive, the workforce will continue to grow, so the productive capacity of the economy will increase
35
What is the circular flow of income?
A simplified model of the economy which shows the movement of money and goods and services. In the model, households supply labour to firm in return for income, which they use to spend on the output of the firms.
36
What are the three injections and the three withdrawls from the circular flow of income?
* injections - Exports (x), givernment spending (G), investment (I)
* Withdrawls - Imports (M), Taxation (T), Savings (S)
37
Whats the difference between wealth and income?
Income is a flow - it is the amount of money earned during a period of time
wealth is a stock - it is thr accumulation on financial assets.
It is considerably harder to redistribute Wealth compared to income
38
What is macroeconomic equilibrium?
where ad = as
39
What is:
* Average propensity to Consume (APC)
* Average propensity to Save (APS)
* marginal propensity to consume (MPC)
* marginal propensity to save (MPS)
* marginal propensity to tax (MPT)
* marginal propensity to import (MPM)
* Marginal propensity to withdrawl (MPW)
* APC = the proportion of income that is spent on consumption (C/Y)
* APS = The amount proportion of income that is saved (S/Y)
* MPC = The proportion of additonal income which is used for consumption (∆C/∆Y)
* MPS = the proportion of additional income which is saved (∆S/∆Y)
* MPT= the proportion of additional income which is taxed (∆T/∆Y)
* MPM = the proportion of additional income which is spent on imports (∆M/∆Y)
* MPW = MPS + MPT + MPM
40
What is the mulitplier effect? What is the formula?
an initial injection into the circular flow causes a bigger final increase in real national income.
Mulitplier = 1/(1-MPC) or 1/MPW
41
How does the mulitplier work?
The multiplier effect occurs because one person’s spending becomes another person’s income, which in turn is spent again, creating a cycle of increased demand and production. So, the size of the mulitplier depends on the amount of the original injection which is withdrawn from the circular flow at each stage.
42
What is the impact of a multiplier effect on AD?
There will be a large initial shift of AD, representing the initial injection into the system, this is followed by further smaller shifts in AD as the successive rounds of expenditure work their way throught the system.
43
Why is national income measured?
* academics use them to hypotheses and amd builds models of the economy, which helps further our understanding of economics
* Governments and firms use these figures to forecast changes in the economy, which help to plan for future changes (link to accelorator affect and planned future demand as well as counter cyclular macroeconomic policy)
* Allow for comparisons over time and comparisons between countries
44
What is the difference between potential and actual economic growth?
* Actual economic growth (short run growth) - an increase in AD, where the economy is using up spare capacity to increase real GDP, closing the output gap and bring the economy closer to Yfe
* Potential economic growth (long run growth) - an increase in LRAS, where the porudctive capacity of the economy increases, caused by an increase in Q2 CELL.
45
What causes actual and potential economic growth
* actual growth - changes in AD
* potential economic growth - changes in LRAS
46
Why do some countries and economists advocate for export led growth?
Export lead growth will lead to a short run increase in AD (X-M), overtime, an increase in exports incentivies firms to invest in labour and capital to maintain an comparitive advantage over other countries, so this will increase LRAS aswell. It encourages FDI from TNCs wishing to set up in the country due to productive efficency, therefore increasing both actual and potential economic growth. It also has the affect of creating a positive balance of payment.
47
What is an output gap?
where actual level of output is different to potential level of output
48
What is a negative output gap? How is it shown on a graph?
Where actual output is lower than potential output. On a AD-LRAS diagram, AD would cross LRAS at any point before the inelastic part. This means output would be lower than Yfe
49
What is positive output gap?
Where sras and ad is beyond LRAs, this is only possible in the short run, as firms unsustainably utilise their facotrs of production (as yfe by definition is long run sustaibable capacity).
50
why is it difficult to estimate?
Because economists and government officials do not know the precise position of LRAS, and thus do not know the positioin of Yfe
51
What is the trade (buisnesss cycyle)
Short term flucuations of Real GDP around a long term trend in real GDP.
52
What are the 4 phases of the trade cycle and what are their characteristics?
Booms - National income is high, and the economy is working past full employment, meaning it may start to overheat. Consumption, revenue expenditure and investment will all be high, the ecnonomy will be sucking in imports. There will be inflationary pressures
Downturn - When economic inndicators outlined above begin to fall, leading to a decrease in inflationary pressures
Recessions/slumps - economic activity is very low compared to trend growth. Unemployment is high, consumption and investment is low
Recovery - where the economy begins to expand again
53
What are the benefits of economic growth?
* Higher disposable income and employment - labour is a derived demand. An increase in the demand for goods and services in an economy will increase firms demand for labour, which will increase demand for labour and therefore increase wages. This in turn will increase living standards for those in poverty. Increased as a result leading to a mulitplier effect
* Higher profit for firms - firms will experience increassed demand for their goods and services. firms will have an increase in their animal spirits as they have a positive outlook on the future economic outlook, so will invest more in the due to the accelator affect to match future expectations in demand, further increasing both actual and potential economic growth.
* Fiscal dividend - An increase in consumption, income and profit in the economy will mean the governnment can generate higher tax revenues, so can invest in higher quality infustructure which can improve the quality of life for the population
54
What are the drawbacks of economic growth?
* Inflation - if actual economic growth increases without a corresponding increase in the productive capacity of the economy, demand pull inflation will increase as their is increase pressures on scarce factors of proudction. This will erode the purchasing power of consumers (affects lower socio-economic groups to a greater extent), aswell as create greater uncertanties in the economy
* income inequalities - if economic growth is focussed in one sector - eg Nigeria and oil, only firms and labour in that industry will experience the benefits, therefore increasing income and wealth inequality. There is no gurantee tthat firms will translate higher profits to higher wages, especially in developing countires where labour protection rules are less stringent
* Enviromental degration - kuznets curve - economic growth will often come at the expense of the deteration of natural capital according, meaning growth can be unsustainable, meaning living standards may deterioate in the long run.
* Baslance of payments - trade defecits may increase if incomes rise and suck in imports, which leads to withdrawls from the circular flow of income
55
1. What is inflation
2. What is disinflation
3. what is deflation
1. The general increase in the general price level in an economy, which errodes the purchasing power of the currency
2. Disinflation is a fall in the rate of inflation in an economy, but prices are still rising
3. Deflation is the fall of the general price level in an economy, ie negative inflation
56
How does the CPI measure inflation?
A basket of 700 goods and services is created, which the ONS measures the price of every month. All these prices are combined using information on the average household spending
pattern to produce an overall price index. Items are weighted, so that goods we spend a larger proportion of our income on makes a larger impact on the final result. A % change of previous CPIs are calculated to give a rate of inflation. The basket of goods and the weightings are updated yearly to account for changes in consumer preferences.
57
What are the limitations of the CPI
* Does not take into account changes in quality - a product may get mire expensive due to an increase in quality, which is not inflation
* 'Average family' - individual households whose consumption patterns differ from the norm experice inflation in different ways, so is not totally accurate
* Does not take into account housing - housing tends to rise higher than most goods or services, so the CPI may be lower than it should be
58
What is the RPI?
It uses an arithmetic mean and includes mortages - this mean it often overestimates the true inflation rate experienced by households in the economy.
59
What are the two forms of inflation?
Demand pull
Cost push
60
What is demand pull inflation? How does it cause an increase in prices?
demand pull inflation occures when there is a shift to the right in AD. This occures due to the increasing demand put on exisitng factors of production, which increases their scrcity, thus increasing prices in the economy.
61
What is cost-push inflation? How does it cause an increase in prices?
cost push inflation occures when there is a shift to the left in sras.
This occures when there is a nationwide increase in the cost of production for firms, such as an oil price increase or an increase in the minimum wage. This means cost of production for firms increases, which they then pass on to consumers.
62
Which one is considered better?
Demand pull inflation is generall considered better - as the inflation at least comes with the benefits of economic growth.
63
How does a growth in the monetary supply lead to inflation?
Persistent inflation can occure when the growth in the monetary supply exceeds growth in real national output. This leads to people having excess disposable income which they will naturallly spend, continously pushing ad to the right and increasing the national equilibrium price level.
64
What are the costs of inflation
* decreased purchasing power - inflation decreases the value of money, meaning income no longer goes as far (assuming that wages are not rising in line with inflation, which they usually do not in a market economy). This means that consumers are now worse off, and are less able to purchase necessities. This is particully bad for those on a fixed income such as pensioners who are unable to increase income
* inequality - As infation tends to be higher among necessities compared to luxouries, and lower socio-economic groups tend to spend a larger proportion of their income on necessities, the real cost of inflation will be higher for those in poverty.
* erosion of savings - the real value of interest rates will be negative, this discourages spending which will increase consumption and exacerbate the issue.
* Decreased international competitiveness - if the rate of inflation is higher in one country than an other , that countries exports will be less competitive, while imports will be more competitive. This has the effect of worsening the trade defecit.
* wage price spiral - The wage-price spiral is an economic phenomenon where inflation drives up the cost of goods and services, prompting workers to demand higher wages to maintain their purchasing power (especially if they are in a particularly strong trade union such as BMA) . As businesses face higher labor costs, they raise prices to compensate, further fueling inflation. This creates a self-reinforcing cycle
* menu - costs - firms have to spend resources changing the price of goods they are selling
* shoe leather costs - consumers spend time looking for the best deal, as they have asymetric information. This reduces productivity
* Fiscal drag - if incomes are increasing inline with inflation, this may drag some workers into higher tax brackets, meaning their real disposable income falls as they are taxed more even though real incomes have not risen
* inflationary noise - unanticipated inflation makes planning for the future impossibe, meaning firms may be less willing to invest as they are less certain of the future economic outlook, meaning that lras falls.
65
What are the problems of deflation?
A liquidity trap is a situation described by Keynes where, despite low interest rates, monetary policy becomes ineffective at stimulating the economy. This happens when people and businesses prefer holding onto cash rather than spending or investing, often because they expect further economic decline or deflation. In such a scenario, even though central banks may lower interest rates to encourage borrowing and investment, the interest rate will always stay positive due to the falling prices - it is logical to postpone spending to wait for a better deal. As a result, monetary policy loses its potency, leading to stagnation or prolonged economic downturns. This is particularly problematic during periods of deflation, as people anticipate that prices will continue to fall, further reducing the incentive to spend or invest.
66
Why is low and stable inflation considered diserable (benefits of controlled inflation)
* gives room for error/adjustment before experiencing the problems associated with high infllation/deflation
* real value of debt falls overtime, allowing for consumers to be able to finance higher spending projects with more confidence.
* Dosnt impact saving as people suffer from money illlusion (thinking their money is staying the same value).
67
What is the definition of unemployment?
Those of working age who are willing and able to work, actively seeking work and do not have a job
68
What are the three methods of measuring unemployment?
claimont count
UK labour force survey
International labour organisation
69
What is the Labour force survey?
This is compiled using the ILO criteria of unemployment -
Are people without a job, want a job, have actively sought work in the last four weeks, and are able to start work within the next two weeks; or
are out of work, have found a job and are waiting to start it in the next two weeks
The Labour Force survey asks 60,000 people whether they are unemployed and whether they are looking for a job.
70
What is the claimont count?
Simply a measure of everyone on the job seekers allowance.
71
What is the formula for the unemplyoment rae
Unemployment rate = unemployed/economically inactive x100
72
What are the main problems with the claimont count?
Not everyone who is unemployed can or willl claim JSA - if their partner is earning enough or you have a certain amount of savings. This means that the figure is likely too underrepresent the true level of unemploymet within an economy. it is also difficult to compare interntionally as criteria for unemployment benefits will vary significantly
73
What is the probkem with the Labour force survey?
The sample surveyed may not be representative of the true figures
Does not show underemployment or discouraged workers
74
forumla for inactivity rate
inactive people of a working age/ working age population x 100
75
Whats the difference between equilibrium and disequlibrium unemplyoment, and what causes belong to each one?
equilibium unemployment can occure even when a labour market is in equlibrium, and therefore contributes to the natural rate of unemplyment.
Disequilibrium - demand deficient and real wage
Equlibrium - frictional, structural and seasonal
76
What is demand defecient unemployment (cyclical)?
Demand deffecient unemployment is unemployment that occures when there is a lack of demand in the economy (a recession, a shift in in AD). This is because labour is a derived demand, so when AD falls, there is less demand for firms goods and services, meaning their revenue is falling, meaning the MRPL is falling, meaning firms will cut the size of the workforce to try maintain supernormal or normal profit
77
What is real wage unemployment?
Unemployment that occures when the minimum wage is set above the equilibrium wage rate in the labour market. This occures as a price floor in the labour market creates excess supply.
78
What is frictional unemployment?
Those who are inbetween jobs, and may turn down certain job opportunities because they are holding out for a better offer.
79
What is seasonal unemployment?
Unemployment due to temporal reasons. Closely linked to tourism, where there is a clear off season
80
What is the definition of structual unemployment?
The immobility of labour due to a long term change in the economy or industry
81
What is structural occupational immobility unemployment? WHat causes it?
When there is a skills mismatch in an economy - the skills certain workers possess are no longer needed. This is due to globalisation or technological advancements, which have reduced the Uk's comparative advantage, this replaces the need for physical labour.
82
What is geographic immobility of labour? What are its causes
Where workers are not willing or able to physically move to where job vacancies exist. OFten due to the cost and time that is required in commuting.
83
What is underemployment?
They want to work more hours than they currently work. They are working in a job that requires lower skills than they have, e.g. an architect working as a gym instructor. Thus, factors of employment are not being used to their full extent, meaning the economy is working within its PPF curve, and people are not earning as much as they could
84
What impact can migration have on unemployment?
If migrant workers have the same skill set as native workers, they compete for the same jobs, there will be an extension in labour supply, causing a deoression in wages and an extension in supply.
However, the affect will depend on the skill profiles of the migrants, and the actions of the government - if a minimum wage is in place, migration will cause an even bigger surplus of labour
85
what are the costs of unemplyoment?
* lost output - the economy is operating within its PPF curve, meaning factors of production are not being used to their full extent. This means the economy is not producing as much as it should, so growth is lower
* deterioation of government finances - a loss of income for lower socio economic groups will reduce tax revenues, such as vats, especially as they have a high MPC. At the same time, the government will be spending more on JSA. This means the government will have to cut spending in other areas, or the fisical defecit will rise.
* social unrest and an increase in criminal activity can increase uncertainy within the market
* Workers may experience hysterisis - workers, if unemployed for long periods of time, may begin to lose their skills. This hinders their ability to find new jobs in the future, as well as reducing the quality of labour availabl to firms
* Firms will experience a loss in revenue, due to the reduction in the spending of the unemployed, though the extent of this depends on the YED of the goor or service.
86
What are potential benefits of unemployment?
* Firms will have a greater pool of workers to choose from, so can pick highly productive workers without needing to offer increased wages as a means to pry workers away fro their existing jobs
* Less inflation - with high unemployment, workers do not have high wage bargaining power, this reduces the risk of a wage price spiral resulting from cost push inflation. The economy is in the elastic part of LRAS.
* Improvement in the current acount defecit as there is less spending on imports.
