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section 3 Flashcards

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1
Q

how do we measure size of the economy

A

through national income (gdp)

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2
Q

what is uks gdp

A

£2 trillion

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3
Q

what is gdp

A

the total value of good and services produced within the boundaries of an economy in a given time (usually one year)

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4
Q

three ways to measure gdp

A

output measure
expenditure measure
income measure

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5
Q

output measure

A

this is the total value of the goods and services produced by all sectors of the economy: agriculture, manufacturing, energy, construction, the service sector and government

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6
Q

expenditure measure

A

the value of the goods and services bought by households and by government, investment and the value of exports minus imports

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7
Q

income measure

A

the value of income generated mostly in terms of profits and wages

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8
Q

how to measure economic growth

A

measured by % change in real gdp over a period of time (usually 3 month / quarter or a year)

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9
Q

formula to convert nominal gdp to real gdp

A

nominal gdp % change - inflation %

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10
Q

recession

A

two consecutive quarters of negative real gdp

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11
Q

real gdp per capita and formula

A

real gdp per person indicating living standards

real gdp / population

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12
Q

change in real gdp per capita formula

A

nominal gdp % - rate of inflation % - change in population %

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13
Q

short run economic growth

A

increase in real output mainly caused by increases in ad

the impact upon output and the price level will depend upon how close the economy is to full capacity

the closer to full capacity the steeper the sras curve

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14
Q

things that impact sras

A

cost of production
aggregate demand

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15
Q

long run economic growth

A

an increase in productive capacity of an economy (outward shift of lras)

improving the supply side of the economy is essential for long run economic growth

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16
Q

difference between ppf and lras curve

A

both shifting outwards represent an increase in productive capacity of an economy

lras- normal (sustainable) capacity
ppf- maximum productive capacity

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17
Q

what causes short run economic growth versus long run economic growth

A

sras - aggregate demand
lras - aggregate supply

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18
Q

the economic cycle

A

short run fluctuations in economic activity and long run trend rate of growth - changes in actual gdp

these fluctuations represent changes in short run economic growth - mainly caused by changes in ad (but sometimes by as)

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19
Q

different stages of the economic cycle

A

recession; 2 consecutives quarters of negative real gdp

peak; top of the cycle

trough; the bottom of the cycle

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20
Q

demand side factors that cause a change in the economic cycle

A

consumer business confidence
changes in wealth factors (house prices or stock market)
government policy / change in fiscal policy
central bank policy / changes in monetary policy (interest rates)
globalisation
exchange rate shocks
demand side shocks
the accelerator and the multiplier
excessive growth in debt and credit

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21
Q

supply side factors that cause a change in the economic cycle

A

changes in costs of production
supply side shocks (increases in the price of oil / energy)

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22
Q

output gap

A

the difference between the actual output and potential output

positive; real gdp > trend gdp
negative; real gdp < trend gdp

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23
Q

macroeconomic disequilibrium

A

ad > as
as > ad

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24
Q

main macro objectives during boom

A

gdp up
unemployment down
inflation up
balance of trade down

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25
main macro objectives during bust
gdp down unemployment up inflation down balance of trade up
26
benefits of economic growth
higher living standards / fall in poverty, fiscal dividend, long run growth helps control inflation, higher investment
27
downsides of economic growth
trade off between short term growth and inflation new growth not shared equally environmental impacts
28
policies to promote economic growth
monetary policies (short run) fiscal policy (short run and long run) supply side policies (long run)
29
monetary policies
bank rate exchange rates money supply and credit
30
fiscal policies
taxation government spending borrowing
31
supply side policies
industrial policy measures financial and capital market measure labour market measures
32
low interest rates impact on cyclical instability
low interest rates increase borrowing borrowing up means investment up means ad up but at some point borrowing has to be paid so consumption down so ad down some may borrow too much and default on repayments leading to cyclical instability ( or crisis like gfc 2008)
33
asset price bubble
occurs when asset prices rise very quickly, exceeding prices justified by fundamentals, making a sudden collapse likely (at which point the bubble 'bursts') typically seen in property markets
34
how do assets price bubbles contribute to cyclical instability
when house prices rise people feel wealthier, confidence increases and spending increases, increasing ad opposite happens when house prices fall
35
other causes of cyclical instability
interest rates too low asset price bubbles destabilising speculation animal spirits herding
36
difference between economically active and economically inactive
economically active; those aged 16 and over who are either in employment or unemployed economically inactive; those people not actively seeking work (looking after family, sick, discouraged workers, students, retired)
37
unemployment
those without a job, have been actively seeking work in the past four weeks and are available to start work in the next two weeks; or out of work, have found a job and are waiting to start in the next two weeks both are economically active
38
how to measure unemployment
the labour force survey
39
the employment rate formula
(number employed / the working population) x 100
40
the unemployment rate formula
(number unemployed / economically active) x 100
41
economic inactivity formula
(economically inactive / the working population) x 100
42
issues with unemployment data
doesnt show geographic inequality doesnt show age inequality doesnt show underemployment
43
full employment
4.5% unemployment
44
cyclical / demand deficient unemployment
unemployment when people are out of work as a result of a lack of ad - labour is derived demand so as ad falls output falls so unemployment rises
45
frictional unemployment
where people are out of work because they are switching between jobs people are searching for another job - it is called search or transitional unemployment (shorter term unemployment) caused by supply side factors, people not supplying labour quickly enough
46
factors leading to frictional unemployment
lack of incentives to find work taxes too high welfare benefits too high insufficient information on job availability
47
structural unemployment
occurs when there is a mismatch of skills between unemployed and available jobs which leaves some unemployed workers unable to find work in new industries with different skill requirements, unaffected by strength of economy and long term unemployment caused by supply side factors (e.g. de-industrialisation / closing of mines)
48
factors leading to structural unemployment
de-industrialisation globalisation technology changes in pattern of demand (not fall in ad) geographic immobility occupational immobility
49
impact of supply side unemployment on a diagram
causes a shift to the left of lras
50
other types of unemployment
casual unemployment seasonal unemployment
51
costs of unemployment
lower economic growth lower standards of living lower investment negative impact on gov finances higher inequality loss of skills hysteresis
52
benefits of unemployment
helps to control inflation
53
why is it important to identify the type of unemployment
whether unemployment is demand side or supply side effects how it can be fixed (monetary policy or supply side policy + always fiscal policy)
54
fixes to structural unemployment
improve occupational immobility improve geographic immobility improve labour market flexibility investment
55
fixes to frictional unemployment
improve info on jobs incentivise people to find work quicker (fiscal policies)
56
real wage unemployment
if real wages are too high (above equilibrium) there will be excess supply of labour (unemployment)
57
causes of real wage unemployment
trade unions national minimum wage welfare benefits
58
inflation
sustained increase in the general price level in an economy (cpi is positive)
59
how is inflation measured
consumer price index (cpi_
60
impact of inflation on real value of money
reduces the value of nominal values
61
deflation
a sustained fall in the general price level
62
impact of deflation on real value of money
increases the value of nominal values
63
disinflation
when the rate of inflation is falling but still positive, prices rising but at slower rate; cpi still positive
64
hyper inflation
excessively high rates of inflation (over 50%)
65
inflation targetting
a target is set for inflation and action is taken to achieve the target (the bank of englands monetary policy committee is responsible for achieving the target)
66
price stability meaning
when inflation remains broadly constant over time
67
demand pull inflation
an increase in the average price level caused by an increase in ad impact depends on where the economy is in the economic cycle inflationary pressure occurs in a positive output gap - little spare capacity means limited supply so an increase in ad puts upwards pressure on the price level
68
causes of demand pull inflation
credit boom (too much lending, consumption up) increase in property prices / wealth effect increased consumer and business confidence increased government spending economic performance in trading partners economies (impact demand for exports) weaker exchange rate
69
cost push inflation
increase in the average price level caused by sustained increase in firms cost of production higher costs mean lower profit margins so firm supply less higher costs are passed onto consumers in the firm of higher prices can lead to wage - price spiral
70
causes of cost push inflation
higher wages / labour costs rise in vat increase in commodity prices war (ukraine) weaker exchange rate
70
demand pull on a diagram
ad shifts to the right
71
cost push on a diagram
sras shifts to the left
72
costs of inflation
real value of wages down standards of living down real value of saving down lenders may reduce lending consumption down ad down reduces international competitiveness distorts consumer behaviour increases inequality menu costs shoe leather costs breakdown in the functions of money
73
benefits of inflation
lubricates the wheels of the economy buffer to stop us slipping into deflation the real value of debt falls
74
malevolent (bad) deflation
caused by a fall in ad this causes output to fall which impacts upon growth and unemployment japan has suffered from this type of deflation for decades
75
what is benign (good) deflation
caused by a fall in costs of production consider how improvements in technology and higher productivity can lead to lower costs and so lower prices the impact is higher output and lower unemployment you could also draw a lras shifting right
76
negative consequences of deflation
deflationary spiral; consumption is delayed due to falling prices - ad falls, prices fall, output falls, unemployment increases, incomes fall, ad falls, price level falls further the real value of debt increases
77
positive consequences of deflation
increase in international competitiveness increase in the real value of savings an increase in real incomes
78
policies can be used to control inflation
demand pull; tighter monetary policies / interest rates + tighter fiscal policy / direct tax up gov spending down cost push; fiscal policy / cut vat + supply side policies / increase productivity or lower costs of production
79
policies for malevolent deflation
expansionary / looser fiscal policy (direct tax down, gov spending up, borrowing up) expansionary / looser monetary policy (interest rates down or quantitative easing)
80
quantitative easing
a form of printing money which increases the money supply and so increases ad; also pushes down long term interest rates

macroeconomics (6 decks)

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