Paper 2 Economics Flashcards
(134 cards)
1
Q
Outline GDP.
A
The total value of all goods and services produced within an economy over a given time period usually a year.
2
Q
DADV of GDP
A
Ignores Income Distribution.
3
Q
Outline gross national income.
A
measures income generated by the country’s citizens regardless of their geographical location.
4
Q
Outline gross national product.
A
market value of all the goods and services produced in one year by labour and property supplied by the citizens of a country.
5
Q
Outline GDP per capita.
A
GDP divided by the country’s population.
6
Q
What increases an economies happiness?
A
Paid sick leave.
Free education.
Availability and quality of healthcare.
Universal basic income - high income inequality is said to be one of the highest unsatisfactory things.
7
Q
Factors impacting consumption.
A
Wealth effects (increase in assets price - feeling wealthier)
Cuts in income tax. - increases disposable income.
Increased availability of credit.
Fall in interest rates.
Consumer confidence.
Expectation of future prices - if expected to rise may by now.
8
Q
Outline MPC.
A
How much on average individuals spend of an extra unit i.e how much of an extra pound they spend.
9
Q
Outline MPM
A
How much additional income a consumer spends on imports - tariffs etc can fix this.
10
Q
Outline investment.
A
Expenditure on capital goods (usually by businesses).
11
Q
Factors affecting investment.
A
Interest rates.
Inflation.
Gov intervention - regulations which can increase costs of production i.e health and safety regulations.
Animal spirits (Animal spirits refers to the confidence and the ‘gut instincts’ of businessmen on their future business prospects).
Availability of credit.
Consumption.
Business confidence.
Demand for exports.
12
Q
What are the largest expenditures of the government?
A
Pensions and healthcare - an increase/decrease in these can have large effects.
13
Q
What are the smallest expenditures of the government?
A
JSA.
14
Q
Factors determine government spending.
A
Increase spending if there’s a reccesion.
Levels of national debt.
15
Q
How does the uk government finance debt?
A
Bonds/gilts.
16
Q
Factors influencing LRAS.
A
Technological advances.
Education.
Gov regulations.
Migration.
Investment in infrastructure.
17
Q
Outline LRAS.
A
Represent the productive capacity/potential GDP of the economy. Any attempt to shift this is a supply side policy.
18
Q
Outline AD.
A
total quantity of goods and services that all sectors of an economy (households, businesses, government, and foreign buyers) are willing and able to purchase at various price levels during a given period, typically measured in a year or a quarter.
19
Q
How to calculate multiplier effect.
A
(1/Marginal propensity to withdraw)
MPW - is MPS+MPT+MPM.
or
(1/1-MPC).
20
Q
Evaluate multiplier effect.
A
High MPM - leakage/withdrawl.
Low MPC - less effect.
Hard to measure.
21
Q
Why is economic growth important.
A
More jobs.
Business confidence.
Greater choice and lower prices - more RnD due to better confidence.
Improved living standards.
22
Q
Outline the accelerator effect (Analysis of AS/AD).
A
When an increase in national income results in a larger rise in investment.
If consumption increase firms will extend along the supply curve however In the long run they may feel they dont have enough spare capacity so may spend on machinery etc shifting LRAS and productive capacity.
23
Q
Drawback of economic growth.
A
Inequality.
Environmental effects.
24
Q
Outline what the balance of payments is.
A
a record of a country’s flows of money with the rest of the world, it is made up of three accounts - current account, capital account and financial account.
25
What is the current account made up off?
Trade in goods and services. (exports - imports).
Profits and income payments. (inflow of profits from British companies as well as outflows of foraging companies in Britain)
Transfer payments - donations and girts between countries i.e foreign aid.
26
Consequences of a current account deficit.
AD falls - large amounts of imports.
Domestic demand falls.
27
Outline cost push inflation.
Price rises due to an increase in the cost of production.
28
Outline demand pull inflation.
When AD increases more than supply causing prices to rise.
29
Deflation.
General price level falling.
30
Disinflation.
Decrease in the rate of inflation.
31
CPI (Measure of inflation)
Measures inflation on a basket of popular goods and services. Goods are weighted differently to represent the impact they have upon average prices.
32
RPI (Measure of inflation).
Measures inflation on a basket of popular goods and services but also included housing costs.
33
Limitations of CPI.
Spending patterns may vary between households.
Consumers usually switch to cheap goods however CPI assumes consumers are buying the same amount of these increasingly expensive goods.
34
2 ways to measure unemployment.
Claimant account - JSA.
The international Labour organisation.
35
Outline the claimant account.
JSA - contribution based benefits through NI. People claiming have to be actively looking for work. This accounts to less than 1% of the UKs spending.
Savings over 16000 - not allowed t claim.
36
DADV of claimant account.
Those eligible choose not to claim due to the stigma attached to claiming benefits or the information gap about what they are eligible to claim.
Some claimants may purposely do bad in interviews with the intention of not being employed.
37
Outline the ILO.
A person without a job who's wants a job and is actively sorting for work in the last month and are avaliable to start work in the next two weeks.
OR
Have found a job and waiting to start in the next to weeks.
38
Outline the macroeconomic objectives.
Unemployment - as low as possible.
Economic growth - high and sustainable.
Low inflation - 2% +/-1
Balance of payment stability - 5% deficit is seen as okay in a developed economy.
Low government borrowing. Public sector/national debt less than 60% of GDP and budget deficit less than 3%
Avoid inequality.
Envrionmental factors.
39
Explain the Phillips curve (relationship between inflation and unemployment).
When unemployment is low, inflation will tend to be higher. Alternatively when unemployment is high wages tend to be lower, as there is greater supply of labour - wages fall and cost of production falls lowering inflation.
40
Stagflation.
High inflation and high unemployment.
41
Types of unemployment.
Frictional Unemployment:
Short-term unemployment when people are between jobs or entering the labour market.
Structural Unemployment:
Caused by a mismatch between workers’ skills and available jobs due to long-term industry changes.
Seasonal Unemployment:
Occurs in industries with seasonal demand, like tourism or agriculture.
Voluntary Unemployment:
When individuals choose not to work at the current wage rate.
Demand-Deficient Unemployment:
Caused by a lack of demand for goods and services in the economy (same as cyclical unemployment).
Cyclical Unemployment:
Unemployment that rises during economic downturns due to falling demand (same as demand-deficient).
Real-Wage Inflexibility:
Happens when wages are kept above the market-clearing level, reducing demand for labour.
42
Costs of unemployment.
Gov tax revenue - workers employed will pay tax and NI increasing revenues - unemployed takes JSA.
Productive capacity - not all resources are being fully utilised so the economy would be operating below its PPFA curve.
Aggregate demand - more jobs - higher incomes - Increased consumption.
43
Economic growth and protection of the environment.
As countries such as china industrialise CO2 emmisons rise due to the need of energy etc. However as they switch to a tertiary sector this will balance out.
44
What affect can inflation have on the current account balance?
Can increase export prices and make uk less internationally competitive - lead to a current account deficit. - However abroad countries may also be experiencing inflation.
45
Economic growth in the current account balance.
Economic growth - higher wages - can increase demand for imports - deficit - however growth may be export lead.
46
What is fiscal policy?
Used to influence AD within an economy through the uses of government spending and taxation.
47
Contractionary fiscal policy (austerity).
Reducing GS and increasing taxation.
48
Expansionary fiscal policy.
Increasing GS and reducing taxation.
49
Evaluation of fiscal policy.
Government spending - greta national debt - increase debt repayments which dont Increase AD - 2019 35bn on interest repayments - lowering spending and austerity in the future.
Crowding out - when a budget deficit leads to the government needing finance - issue bonds/gilts.
Banks/financial institutions have a choice between risk free bonds and household/private firms - less likely to lend to private sector.
Banks money being tied up and them unable to lend to private firms/indiviudals crowing them out.
50
Monetary policy.
aims to stimulate aggregate demand by using interest rates and money supply (QE). - MPC responsible. (meet 8 times a year).
51
Outline quantitative easing (monetary policy).
stimulate economy expiring low growth and high unemployment. - Makes banks look elsewhere for investments.
1)BofE deposit digital money into their own bank.
2)They use this to buy second hand gov bonds from banks - 375bn in 2009.
3)By selling these binds banks become more liquid so need to seek alternative investment for their cash.
4)Banks are led away from purchasing more bonds as the increased demand by BofE pushes up prices.
5)This leads banks to more riskier investements lending to households and businesses.
6)This increased supply of loans decreases the high street interest rate as banks compete.
7)Higher availability of loans accompanied by lower interest rates resulting in increased consumption and investment - increasing AD.
52
Evaluate QE.
QE increases the money supply by the central bank purchasing financial assets (like government bonds), which can lead to demand-pull inflation. If the economy is already near full capacity, extra money can cause overheating and price instability.
QE tends to benefit those who own assets as it inflates asset prices.
This can widen income and wealth inequality, as lower-income households typically don’t benefit as much.
53
Evaluate monetary policy.
Base rate may not be passed on by banks to consumers.
Time. lags of interest rates to make an impact.
Flows of hot money - higher interest rates rise the demand for the GBP making exports more expensive and balance of payment effects.
54
What shifts SRAS.
Changes in cost of production and productivity.
55
Outline what a supply side policy is.
Government polices which aim to increase the amount of supply that is capable of being produced over the long term (productive capacity).
56
Comparative advantage.
When a country can produce a good or service at a lower opportunity cost than other countries. - Meaning world output would increase.
(Saudi Arabia with oil).
57
What are the assumptions of comparative advantage from Ricardo.
Fixed endowment or resources - no growth or technological change.
No transportation costs.
58
Outline absolute advantage.
When a country, individual, firm or region an produce a good or service at a lower cost per unit than any other entity.
59
Evaluate trade liberalisation/free trade.
+ Allow firms to become more efficient (increased competition) - increased output - benefit from EoS - produce at a lower AC.
- The infant industry argument - dont have EoS to compete - won't be able to survive - job loses - inequality.
60
What caused globalisation?
Development in ICT (phones/email/teams video meetings) - communication (fuels integration) - avoids DEoS.
Transport/infrastrucute - containerisation - lowering the costs to transport items - carry more.
Reduction in protectionism - WTO - exploit comparative advantage.
MNC's - (FDI) - global supply chains.
Deregulation of financial markets - removal of capital controls - easier to operate globally.
61
Define globalisation.
The reduction in trade barriers and an increase in the inter-connectiveness of nations.
62
Impact of globalisation on producers + consumers.
+ Firms can export worldwide - increasing revenue - access to SNP + EoS - greater consumer choice.
- Exploitation and ethics (cheap labour + working conditions).
63
Impact of globalisation on the environment.
+ Firms may utilise EoS and SNP to invest and innovate into green technology - Tesla (also allows them to share the knowledge and sell more green products).
- Pollution - air miles.
64
Impact of globalisation on individual countries.
+ FDI form MNC's - economic growth - creates jobs - tax revenue - boosts production/exports - help balance of payments.
- Dependence on MNC's - economy may suffer if they leave to relocate to cheaper countries.
65
Impact of globalisation on governments.
+ Increased corporation + income tax from MNC's - invest in public services (supply side policies).
- Can lead to inequality - move away from perfect equality - gina coeffiecnt - can lead to protectionist measures.
66
Trade bloc.
A group of nations that seek to make trade easier amongst themselves.
67
Common external tarrif. (Custom unions and above).
Countries in a trade bloc like the eu have a legal obligation to charge tariffs on goods imported that are not from the eu.
They cannot negotiate individual bilateral agreements with non eu members.
68
Types of trade blocs.
Free Trade Areas Where all (or most) tariffs and quotas are removed between member countries. However, each member country is able to impose its own tariffs and quotas on goods it imports from outside the trading bloc.
Customs Union - This is where the members not only agree to free trade with each other, but they also adopt a common external tariff (CET) on imports from non-members outside of the bloc.
Common Market - This is when member states agree free trade and adopt a CET. Additionally they now allow free movement of capital and labour, as well as product standards and regulations are common between member countries (regulatory alignment).
Economic Union - economies within a bloc are fully integrated, in the same way that different regions are within a country. Additionally, it implies that there is some degree of fiscal union and/or monetary union.
Economic and Monetary Union (EMU) - At this point, all of the characteristics apply but additionally all member states use the same currency and operate under the same monetary policy, with a central bank dictating interest rates/quantitative easing for all e.g. ECB and Euro. ( + Can give price transparency however eurozone debt crisis and the cost to switch to the euro).
Fiscal union - Decisions about the collection and expenditure of taxes are taken by a central institution for all member states. Individual countries cannot dictate their own taxation/spending. This is considered the highest level of trade bloc integration.
69
Adv of trade blocs.
Tariff removal leads to trade creation (greater demand for goods from the cheapest producer within the trade bloc) - lower price for consumers or SNP - greater opportunity/ more competitive exports. This increased output can increase specialisation and quality as well as allowing foe EoS.
Trade blocs can attract FDI as they look for freer trade - economic growth - increased exports - job creation.
70
DADV of trade blocs.
May lead to trade diversion CET makes goods from lower cost countries more expensive - firms have to go to more expensive firms within the trade bloc - loss of business for other countries - higher AC - less productively efficient and a loss of international competitivness.
Increased competiton for domestic firms.
71
WTO principles.
Most Favoured Nation (MFN) Principle - cannot discriminate between trading partners - a reduction in a tariff for on country must extend for all.
National Treatment Principle- once goods or services have entered a member country, they must be treated no less favorably than domestically-produced goods or services.
Freer Trade Gradually Through Negotiation - the WTO encourages trade liberalisation through gradual, negotiated reductions in trade barriers (such as tariffs and quotas) over time.
Predictability - trade must be predictable, with clear rules and regulations. This helps businesses plan and invest with more certainty about the future.
Promoting Fair Competition - the WTO aims to create conditions for fair competition among member countries by reducing trade-distorting practices, such as subsidies and unfair trade restrictions.
Encouraging Development and Economic Reform - the WTO recognises the need to support the economic development of poorer and developing countries by providing special treatment, flexibility, and technical assistance.
72
Criticisms of the WTO.
Free trade benefits developed countries more than developing countries (infant industry argument).
Environmental considerations.
73
Benefits of the WTO.
Allows comparative advantage to be utilised.
As countries specialise and increase output they can benefit from EoS.
74
Outline what protectionism is and the types.
The use of economic policies to purposely regulate and reduce imports/trade from other countries.
Tariffs
Quotas
Subsidies - either to exporting firms to be more competitive or domestic to compete with imports.
Regulation - raise costs to importers - may have to increased standard of goods. (Non - tariff barrier).
Dumping
Countervailing duty - offset foreign subsidies.
75
Arguments against protectionism.
Reduced consumer surplus (tariff diagram) - Ev - may be offset by the increase in tax revenues from tariffs.
Protectionism can encourage inefficient firms to stay in business and there is less scope for specialisation and economies of scale.
Trade wars - retaliation.
76
Arguments for protectionism.
Protection of infant industries.
Reduce current account deficit - reduced imports.
77
What are 2 measures of international competitiveness?
Relative unit labour costs.
Relative export prices.
78
Factors influencing international competitiveness.
Exchange rates - SPICED - Can be combated by hedging (fixed contract for the exchange rate with suppliers).
Productivity.
Infrastructure (increase productivity) - increases geographical mobility.
Wage and non wage costs - pensions contributions - National insurance.
Regulation - increased COP.
Quality.
RnD.
Taxation.
79
Benefits of being internationally competitive.
Can attract FDI - employment - knowledge - multiplier effect of new knowledge and processes.
More likely to have a current account surplus - increased exports.
Economic growth (can also increased domestic peoples incomes). - greater demand for exports shifts AD - so firms invest increasing LRAS.
80
Problems being internationally competitive.
A current account surplus could lead to a rise in the exchange rate, making exports more expensive (rises as the demand for the currency increases) eroding international competitiveness.
81
Policies to improve international competitiveness.
Education and training - increased skills and occupational mobility - productivity - lower unit costs. (Training can be costly - won't be felt in the SR - can increase budget deficit and lead to austerity - crowding out).
Corporation tax reductions - aims retain more profit to innovate this can also attract FDI.
Cuts in unemployment benefits - encourages people to find work - increased labour supply - reducing wage equilibrium rate. (Can lead to inequality).
Government investment in infrastructure.
Privatisation - selling of nationalised firms.
Polices to encourage growth of small firms.
Lower the power of trade unions.
Exchange rate polices.
Low inflation.
82
Direct controls.
A gov measure that is imposed on the price or quantity of a single product or factor of production. i.e through maximum and minimum prices on goods.
83
ADV of direct controls.
Introduced and changed quickly.
84
DADV of direct controls.
Can distrust the free market and reduce the incentive to innovate.
85
Outline the capital account of the balance of payments.
Contains physical capital transfers. I,e FDI.
86
Outline the financial account of the balance of payments.
All flows of financial capital into and out of the UK. i.e FDI or transactions in financial assets i.e gold.
87
Causes of a current account deficit.
Excessive growth - domestic AS may not be able to cope with AD so imports increase to replace inadequate domestic output.
High export prices (may be due to inflation).
Non price factors - poorly designed products.
Poor productivity.
Low levels of investment in human capital - lack of education and training - lower value exports.
Primary product dependent (PPD) - can be volatile in price.
88
Why may a current deficit not be a problem?
Type of imports - raw materials or machinery - can lead to a more competitive economy.
Size of the deficit - is it less than 5%.
Inflation - increased demand for imports can dampen the effects.
Exchange rate - deficit leads to a fall in the value of the currency.
89
Why may countries have a current account surplus?
Low valued exchange rate - china has been accused.
Competitiveness.
High domestic saving ratio - increased saving means less demand for imports.
Protectionism.
FDI.
90
Methods to reduce a current account deficit/policies.
Expenditure reducing policies - aim to reduce the real spending of consumers - spend less on imports - will reduce domestic spending also.
Expenditure switching policies - encourage consumers to switch their spending away from imports and towards domestic firms.
Allow exchange rate manipulation - depreciate it. Ev - Marshall learner condition.
Government measures to stimulate domestic consumption + saving i.e tax cuts. EV this tax cut may be spent on imports.
Protectionist measures.
91
Outline the marshal learner condition.
1A currency depreciation will improve a country's trade balance only if the combined price elasticity of demand for exports and imports is greater than one.
92
Devaluation.
Intentional weakening of a currency in a fixed exchange rate system.
93
Depreciation.
Decrease in the value of a currency relative to other currencies, caused by market forces in a floating exchange rate system.
94
Appreciation.
Increase in the value of a currency relative to other currencies, due to market forces in a floating exchange rate system.
95
Revaluation.
Intentional increase in the value of a country's currency relative to other currencies, done by the government or central bank in a fixed or managed exchange rate system.
96
Floating exchange rate.
Value of a currency is determined by market forces—specifically supply and demand in the foreign exchange market—without direct government or central bank intervention.
+ Reduced need for currency reserves.
+ Less opportunity for currency speculation.
97
Fixed exchange rate.
A fixed exchange rate (also called a pegged exchange rate) is a currency system where a country maintains its currency's value at a set rate relative to another currency or commodity. I.e the gold standard.
+ Can promote trade and investment as fluctuations are less likely.
+ Firms spend less on hedging.
98
Managed exchange rate.
Currency value is mostly determined by market forces, but the central bank occasionally intervenes to stabilise or steer the exchange rate when needed. i.e buying and selling the currency.
99
How can governments intervene in currency markets (exchange rates)?
Foreign currency transactions - buying and selling of currency. If the central bank wants to raise the value of the currency, it will buy its own currency in exchange for foreign currencies.
Changing interest rate - raise in these can attract investment increase demand for currency.
100
Outline the 3 mains roles of the central bank.
Acting as bank to the government - manages the government's accounts, conducts its payments and receipts
Acting as a banker to other banks (lender of last resort) - the central bank provides emergency liquidity to commercial banks facing short-term liquidity issues to prevent the collapse of the banking system.
Also allow banks to deposit funds and earn interest.
Regulator of the financial system - FPC in Bank of England takes on this responsibility - help banks manage risk and monitor activities.
Systematic risk - the danger that the failure of one bank/a small part of the financial system will lead to the collapse of the whole system as banks lend to banks.
101
Outline what is meant by terms of trade.
Measures a country's export prices in relation to its import prices, and is expressed as a figure and calculated by - index of export prices/index of import prices x100
i.e if exports index number rise by 10% and the index of import prices rises by 5% the terms of trade is 110/105x100.
Above 100 or 1 it is said to be improving (very unit of exports sold it can buy more units of imported goods). below 100 or 1 terms of trade is said to be worsening (needs to export more).
102
Factors influencing the terms of trade.
Exchange rate.
Demand for imports/exports.
Productivity.
Inflation.
Changing incomes.
Primary product dependent - Saudi Arabia and oil if prices rise there terms of trade will improve.
Depending on the PED of the good depends on the change.
103
Outline absolute poverty.
When individuals are not able to consume sufficient necessities to maintain a basic standard to live.
UN states it is people living off less than $1.25 a day.
104
Relative poverty.
Number or proportion of households on less than 60% of median household incomes.
105
Causes of changes in poverty.
Free market economic system - rationing function excludes some consumers through higher prices - especially damaging when it is healthcare, education or food. (capitalism can increase inequality due to the rationing function).
Employment - without a job incomes are low and welfare is not available.
Education and training - Those that are higher skilled, are more likely to have a job and more likely to have higher income - purchase these necessities.
Healthcare - people who are sick and cannot work cannot earn.
Inheritance - people who are born in rich families are less likely to be poor.
Infrastructure.
Taxation - regressive.
106
Income inequality.
When regular payments are different between the richest members of an economy and the poorest members of an economy. (Paid employment, dividends, rental income).
107
Wealth inequality.
Difference in the value of assets owned. (Property, jewellery).
108
Gini co-efficient values.
0.0 - perfect equality.
1.0 - one person has all the income/wealth within an economy.
109
Causes of inequality.
Education.
Healthcare.
Corruption - gov officials can generate revenue through tax or sale of commodities but not distribute this income/wealth amongst the population.
Inheritance and wealth accumulation.
Subsistence trap - an economy which can only produce the basic necessities to live and no more- can't produce a surplus to trade.
110
How can the government reduce inequality?
Break subsistence trap.
Government expenditure - education, infrastructure and healthcare.
Welfare system.
Trickle down economics.
Taxation system - regressive/proggresive.
Minimum and maximum wages (cap on bankers bonuses that was recently removed).
Price controls.
111
HDI 3 measures.
Health - life expectancy at birth.
Education - mean years of schooling received by adults aged 25 and over and the expected number of years of schooling that current five year olds can expect to receive during their life.
Income - GNI.
Score between 0-1 the higher the score the better economic development.
Switzerland highest Somalia lowest.
112
Limitations of HDI.
Over simplified into a few categories.
Doesn't look at the spread of income.
113
Factors influencing economic development.
Primary product dependant - volitailty of commodity prices - hard to predict long term revenues - discouraging investment due to a lack of confidence.
High dependancy ratio - a significant portion of the population is dependent on those who work. - Japan.
Debt.
Access to credit and banking.
Infrastructure.
Education and skills.
Absence of property rights.
114
Non economic factors affecting economic growth.
War - damaged LRAS and high opportunity costs.
Dictatorships.
Pandemenics - absceeentism - can't secure and income.
Geographical location - landlocked - slower to export goods - no coastline.
115
2 policies for strategies of development.
Market orientated polices - designed to remove barriers and allow free market (market to operate efficiently on its own).
Interventionist policies - correct market failure - governments intervene in free markets to change the outcome.
116
Identify some market orientated strategies for development.
Microfinance schemes - small loans for those in absolute poverty.
Trade liberalisation - comparative advantage.
Promote FDI.
Removal of government subsidies.
Floating exchange rates - frees up the use of interest rates.
Privatisation.
117
Identify some interventionist strategies for development.
Promoting JV with global companies - all profits thereof won't go back to the home country.
Buffer stock schemes - stabilise commodity prices. If price falls below the minimum price then the government buys the commodity if it goes above the maximum price then the commodity is sold. EV - large amount of capital needed to sell and buy as well as hold stock. - Perishable.
Development of human capital - training.
Protectionism.
Managed exchange rates.
Infrastructure development.
118
Outline the Harrod Domar model for economic growth.
Higher savings allows for more investment as banks can offer loans this investment can increase productive capacity due to investment in capital goods.
119
Outline the role of the world bank.
Provide low interest loans to to its poorest members to help-increase education, health and infrastructure.
Ev - The countries with the highest votes i.e US, UK Japan and France hold most of the decision making which impacts the fortunes of developing country's.
120
Outline the role of the IMF.
Promote international monetary co - operation exchange rate stability, faster economic growth and financial assistantance.
121
Outline the role of NGO's (non - governmental organisations).
Separate from the government and are not commercial not profit making firms. - Support charities and provide direct assistance in the form of project work and also act as pressure groups and lobby governments to adopt what they perceive.
122
Outline public expenditure.
Flow of income from the government. It is an injection into the circular flow in the form of G. It is spending by central, regional and local authorities.
123
Outline capital expenditure.
Spending on capital goods, such as schools, hospitals roads and other durable goods.
124
Outline current expenditure.
Recurring expenditure to run the public services and use of capital expenditure.
125
Outline transfer payments (public expenditure).
Mainly welfare payments made to individuals, such as the state pension and child benefit. These do not increased the component G of AD also included are debt interest repayments.
126
Outline automatic stabilisers.
The process by which government spending and revenue varies with the business cycle, thereby helping to stabilise the economy automatically without any conscious intervention from the government. If this causes a deficit this would be known as a cyclical deficit.
127
Outline discretionary fiscal expenditure.
Spending not associated with economic performance. If this leads to a deficit it is known as structural deficit.
128
Outline fiscal deficit.
Also known as a budget deficit and is when the governments spending is greater than tax revenue in a year.Ou
129
Outline national debt.
Accumulation of fiscal debts.
130
Factors affecting the significance of fiscal and national debts.
Inter - generational.
Credit rating of a country and future borrowing "default risk". (UK is AA).
Austerity measures.
Debt to GDP ratio.
131
Proportional tax.
Where the proportion paid in tax remains the same while the income of the taxpayer changes.
132
Outline what a financial market is.
A set of arrangements where buyers and sellers can buy or trade a range of services or assets that are fundamentally monetary in nature.
133
Outline the roles of financial markets.
To facilitate saving.
To lend to businesses and individuals - banks connect those who want to save with those who want to borrow.
To facilitate the exchange of goods and services - payments systems.
To provide forward markets in currencies and commodities. - parties initially agree to buy and sell and asset for a price agreed upon today and payment occurring at some point in the future.
To provide a market for equities (stocks and shares)
134
Market failure in the financial sector.
Asymmetric information - financial institutions have more knowledge than their customers.
Moral hazard - when an economic agent makes decisions based on their best interest knowing that there are potential adverse risks.
Speculation and market bubbles - investors become more convinced that they too must buy (tinker bell effect) market bubble is when the price of a particular asset is driven to an excessive high and then collapses.
Market rigging - where a group collude to fix prices or exchange information that will lead to gains for themselves at the expense of other participants in the market. I.e fixing the price of a commodity, currency or interest rate.
Externalities - negative externalities and spill over effects.
