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Alevelllll > Economic Growth, Inflation, Unemployment > Flashcards

Economic Growth, Inflation, Unemployment Flashcards

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1
Q

What is GDP

A

Gross domestic product- standards measure of output- total value of goods and services produced in a country in a year

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2
Q

What is economic growth

A

Long run increase in a country’s productive potential
Increase in real value of G+S

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3
Q

How is economic growth measured

A

Annual percentage change in GDP

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4
Q

What is GDP per capita

A

Total GDP divided by number of people in the country

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5
Q

Difference between real GDP and nominal GDP

A

Real- adjusted for inflation- index number from base year- volume

Nominal- total value of G+S in an economy using current prices- value

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6
Q

What is GNI

A

Gross National Income- value of G+S produced by a country plus net overseas interest payments and dividends

+: investment

-: profits made by businesses overseas, remittances, aids

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7
Q

Why is GNI used more often

A

Growing size of remittances and aid

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8
Q

How is GDP used as comparisons of rates of growth between countries over time

A

Overall production performance- per capita- standards of living

Comparing changes over period of time- growth, stagnant, decline- could influence government policies

Shows contributions made by different sectors- suggests where support is needed

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9
Q

What are limitations of using GDP to compare standards of living between countries and over time

A

Don’t show inequality

Informal employment and self employment not reported

Spending on defence- included, but don’t improve standards of living

PPP not used, cost of living varies

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10
Q

What is Purchasing Power Parity

A

In long run, exchange rate should be adjusted so that identical goods costs the same across different countries when priced with same currency

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11
Q

Formula for PPP

A

Cost of one good in currency A / Cost of another good in currency B

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12
Q

What happens when there is higher living cost in a developed country

A

After adjusting for PPP, its GDP per capita may fall
As they can purchase a smaller amount compared to other countries- same amount of income can purchase a smaller amount of G+S

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13
Q

Stats for National Happiness

A

30.5% adults have high level of happiness

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14
Q

Explain Easterlin Paradox

A

Increase in income would increase happiness if basic needs are not met

Once these needs are met, no longer increase happiness

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15
Q

Define Inflation

A

Sustained increase in general price level

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16
Q

Define Disinflation

A

Falling inflation

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17
Q

Define Deflation

A

Sustained fall in general price level

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18
Q

What is the target inflation

A

2%

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19
Q

Explain CPI

A

Measuring rate of inflation by calculating the value of a basket of goods (700 items) representing the typical purchase of average household

Weighted index

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20
Q

Define weighted index

A

Relative importance of each item

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21
Q

Limitations of CPI

A

Not totally representative- as not all goods taken into account

Don’t include housing prices

Difficult to make comparisons- only used since 1996

Overestimate- as don’t take into account of increase quality of G+S

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22
Q

Causes of Inflation

A

Demand pull inflation and Cost push inflation

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23
Q

How is RPI different to CPI

A

Include housing prices

Don’t take into account that people switch to cheaper products when price rises- higher than CPI

Excludes top and bottom 4% of income earners

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24
Q

Causes of demand pull inflation

A

Depreciation of Exchange Rate (WIDEC)

Decrease T, increase G

Decrease interest rate

Fast growth in other countries- rising demand for our imports

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25
26
Diagram of demand pull inflation
AD shifts right
27
What is Cost push inflation
When businesses respond to higher production costs by raising prices to maintain their profit margins
28
Causes of cost push inflation
Increased imported raw material costs Increased labour costs Increased indirect taxes
29
Wage Spiral Effect
Increase in wages cause increase in prices, so people would want increase in wages to protect living standards
30
What is the Quantity Theory of Money
M x V = P x Y Assuming that V and Y are constants as they don’t change as much to influence P Increased Money Supply would cause an increase in price ‘More money chasing over same quantity of G+S’- inflation
31
Impacts of inflation on individuals
Workers are worse off in real terms Lower real income- lower disposable income- fiscal drag- they are paying same amount of tax when real income fell Lower value of money Lower interest rate, increase borrowing
32
Impacts of inflation on Firms
Decrease competitiveness Increase cost of production Decrease sales, decrease revenue and profit Increase uncertainty of future prices- decreases investment
33
Impacts of inflation on the Economy
Decrease trade balance- lower exports Rising unemployment as firms cut costs- causing more need on benefits Increasing inequality- poor is on fixed income and lower real income Could implement monetary policy- increase interest rate- loan repayments rises, people in debt is worse off
34
Define Unemployment
Someone who is not in work but has looked for work in the last 4 weeks, and is ready to start work in the next 2 weeks
35
Define economically inactive
Not in work Don’t want to be in work Stopped actively searching for work
36
What counts as being Employed
International Labour Organisation Worked for at least an hour per week
37
What is voluntary unemployment
Chose to not accept a job at a going wage rate
38
Reasons for voluntary unemployment
Generous unemployment benefits High income tax Hoping to find a better job Too tedious
39
What is involuntary unemployment
Workers willing to work at the market wage or just below, but are prevented by factors beyond their control
40
What are two measures of unemployment
Claimant Count Labour Force Survey
41
What is Labour Force Survey
Collecting data from 60,000 households asking if they are currently out of a job, actively seeking for a job, and is ready to work Includes people unemployed and not claiming benefits
42
Why are some people not claiming unemployment benefits
Not contributed enough to national insurance Partner still earning Have saving
43
What is Claimant Count
Measuring number of people claiming benefits because they are out of work Include Job Seekers Allowance and Universal Credit
44
What are limitations of the measures of unemployment
Don’t include part time job workers that want to work full time Don’t include people who are disabled
45
Limitation for Claimant Count
Don’t include people who ate not eligible for unemployment benefits
46
Limitation for Labour Force Survey
Only a sample, not as accurate
47
What is Underemployment
Number of people that is in a job but it may be unstable, low paid, present few opportunities, or doesn’t reflect their skill level
48
How do you calculate unemployment rate
Number of people unemployed divided by all economically active people
49
Characteristics of Underemployment
Low wage Part time job Zero hour contract Temporary contracts Working unstable hour Overqualified for the job they are taking In reference week, Looking for additional job Looking for new jobs with longer hours Wanting to work longer in their current job
50
Limitations of unemployment rate data
Excludes economically inactive Excludes underemployment
51
What is cyclical unemployment
Involuntary unemployment due ton lack of demand for G+S
52
Explain how cyclical unemployment happens in recession
Lower AD Contraction in output Firms cut costs and reduce unemployment- ‘down sizing’
53
What does an increase in economically inactivity do, however
Increase economic inactivity may lead to decrease size of labour force and lower productive potential Lower GDP and tax revenue However, lower inactivity may just result in higher unemployment rate
54
How might economic growth still cause cyclical unemployment
When economic growth is below trend rate- negative output gap AD is not high enough for everyone wanting a job to get a job
55
Diagram for cyclical unemployment
Decrease AD
56
What is structural unemployment
Long term decline in demand in an industry- Fewer jobs available- decline in employment in one sector
57
Example of Structural Unemployment
Production replaced by robots Globalisation resulting outsourcing manufacturing- as UK lost its cost advantage in manufacturing
58
Diagram for structural unemployment
Wage and quantity of workers SLF SActual DL Equilibrium at when DL = SActual But there is unemployment as connected to SLF
59
What is frictional unemployment
Transitional unemployment when people move between jobs -finding more suitable job -rejecting offers
60
What is Seasonal unemployment
Unemployment caused by changes in demand for workers during the season E.g tourism industry
61
Causes of Frictional Unemployment
Geographical Immobility - restrictions on ability to move locations for work-e.g transportation costs, laws on migration Occupational Immobility - restrictions on ability to switch jobs-e.g qualifications, retraining
62
What is real wage unemployment
Minimum wage set by government is above market level More people are willing to work than the employer willing to hire workers- excess supply of labour Pre-existing workers may lose their jobs as higher cost of production- firms ‘down-sizing’
63
Diagram for real wage unemployment
Wage and Quantity of labour SL, DL Minimum Wage above competitive wage level Excess supply
64
Causes of real wage unemployment
Wage stickiness- preventing wage from falling back to equilibrium level, due to: Trade Union pressure- threats of strikes, e.g Birmingham Bin Strikes Minimum Wage Fear of lower productivity from de-motivated workers
65
Consequences of unemployment
Lower income- lower standards of living- falling into debt from mortgage repayments Negative Multiplier effect- one person’s spending is another person’s income- decrease jobs- decrease AD- business closure Decrease output- high unemployment- under utilising FoP- operating within PPF Hysteresis Effect High fiscal cost- lower tax revenue- increase spending on benefits High social cost- increasing crime, health issues, lower life expectancy Lower revenue and profit
66
Explain Hysteresis Effect
Long term unemployment cause people to loose skills and less motivation to find a job Shifting SActual to the left, increase natural rate of unemployment (structural/ frictional/ seasonal)
67
unemployment consequences (evaluation)
Hysteresis Effect- long term unemployment- become structural issue Increase pool of labour force for businesses wanting to expand Lower unemployment- underemployment Just because people are in work- doesn’t mean they are productive
68
Effects of migration
Increase net inward migration, increase jobs, fill skill gaps Not Lump Labour Fallacy- migrants don’t steal jobs Due to multiplier effect- increase spending increases jobs However, lower wage rate as supply of labour increase

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