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Economics AS Level Macro > Spec point 2 > Flashcards

Spec point 2 Flashcards

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1
Q

Circular flow of income

A

Exchange of money between consumers and producers e(conomic agents)
In a closed economy it has no injections into the economy.
The open economy has injections, leakages and interactions between global economies

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2
Q

The UK’s Macroeconomic Objectives

A
  • Full employment
  • Low and stable inflation
  • Sustainable current account on the balance of payments
  • Sustainable economic growth
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3
Q

Injections into the Circular flow of Income

A

Government Spending
Investment
Exports

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4
Q

Three measures of GDP

A

Output, income and expenditure. The three measures allow a more accurate value to be calculated

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5
Q

GDP

A

total value of goods and services produced in a country

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6
Q

Real values and Nominal values

A

Real values refer to the value of a good, adjusted for inflation
Nominal values refer to the value of a good not adjusted for inflation
(55,000) new income after a pay rise (50,000) before
5,000 would be the nominal value for the increase
2,000 would be the real value, adjusted for inflation

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7
Q

GNI

A

A measure of economic growth
Gross National income is a measure of a countries economic activity that focuses on income generated by residents regardless of where it was made. Like income from abroad.

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8
Q

Purchasing Power Parities (Advantages and Disadvantages)

A

A measure of economic growth
PPP’s are exchange rates of currencies which compare the value of baskets of goods from different economies
Advantages -
+ Provides a more accurate comparison of living standard than nominal values. It reveals an economies true economic scale unlike nominal GDP values
Disadvantages -
- Depends on accurate price data. Consumers might pay different amounts for the same goods
- It doesn’t represent income inequalities
- Excludes black market incomes

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9
Q

Inflation

A

An increase in the general price level of goods and services in the economy over time

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10
Q

Deflation

A

A decrease in the general price level of goods and services in an economy over time

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11
Q

Disinflation

A

A slowdown in the rate of inflation. A fall in inflation relative to the previous record

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12
Q

CPI (Consumer Price Index)
Limitations
Calculation

A

Measure of Inflation
Average change in the basket of goods over time.
(Cost of basket in given year/Cost of basket in base year) *100
Limitations of CPI
- CPI does not include mortgage interest payments
- CPI is updated annually so doesn’t reflect short term changes in price
- Assumes that all consumers buy the same goods

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13
Q

RPI

A

Measure of Inflation
Retail price index is an alternative measure of inflation
- It gives a higher value
- Less favourable due to it having methodological flaws

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14
Q

Causes of Inflation

A
  • Demand-Pull Inflation occurs when aggregate demand exceeds aggregate supply
    Caused by Tax cuts, government spending and Exports. (An increase of components in AD)
  • Cost-Push Inflation. When there is a rise in production costs as a result of an increase in the price of raw materials or FoP
  • Growth of the money supply, Occurs when the central bank prints too much money and erodes the value of currency
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15
Q

Effect of Inflation on Consumers, Firms, Government and Workers

A

Consumers - Reduces purchasing power of their money. Goods and services cost more
Firms - Increased costs and fall in profits creates investment uncertainty
Government - Lower tax revenues. Increase in value of state pension
Workers - Erodes real income. May lose jobs as firms face higher costs

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16
Q

Measures of Unemployment
(Definition)
(Measures)

A

Unemployment is where individuals actively search for jobs but cannot find jobs

Claimant count of JSA was previously used but it ignored certain individuals who were not claiming benefits
ILO was then used, Labour force survey which includes people who are and aren’t claiming benefits giving a more accurate value

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17
Q

Underemployment

A

Where individuals are over qualified for the jobs that they do.

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18
Q

Frictional Unemployment

A
  • Temporary period of unemployment where people transition from one job to the other
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19
Q

Seasonal Unemployment

A

When people are out of jobs due to seasonality of their jobs. Examples could be tourism and agriculture

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20
Q

Unemployment effects on Consumers, Workers and Firms

A
  • Consumers would have less disposable income to spend
  • Workers would have to rely on benefits and would have no real income
  • Firms would have lower wages to pay so lower costs, but their productivity is negatively impacted
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21
Q

Current Account Surplus and Deficit

A

The Current Account measures a countries economic transactions over time
- A current account surplus would mean that the countries receipts are much greater than the countries payments
- A current account deficit would mean that the countries payments is much greater than its receipts

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22
Q

Aggregate Demand
(Shifts and Proportions)

A

Aggregate demand is the total level of spending in the economy at any given price level.

Aggregate demand is composed up of Consumption, Investment, Government Spending and Net Exports

Consumption makes up the most of AD
Net Exports makes up the least of AD

Shifts of the AD curve are caused by changes in the components of AD

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23
Q

Components of AD

A

Consumption - Amount that consumers spend on goods and services

Government Spending - Spending by the government on the public sector. Use fiscal policy (use of government spending and taxation to control the economy )

Investment - Spending by firms on capital goods

Net Exports - Exports-Imports

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24
Q

MPC

A

The amount of additional income spent on consumption.

People on lower incomes have a higher MPC because they are more likely to spend

MPC = Consumption/Change in income

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25
Consumer Spending
Spending on goods and services. The larger a consumers disposable income, the more able they are to spend.
26
Influences on Consumer Spending and AD
- Interest rates. Low interest rates, Low incentive to save, More spending High interest rates, high incentive to save and less spending - Consumer Confidence - Mortgage rates and loan repayment
27
Aggregate Supply (Shifts and Movements)
Level of output in the whole economy at any given price Shifts in Aggregate Supply is cause by changes in costs of production
28
What factors MAINLY cause shifts in SHORT RUN Aggregate Supply
- Changes in the cost of production - Changes in exchange rates. SPICED. A weak pound means imports more expensive. - Changes in tax rates. Tax causes cost of production to rise and shifts left All of these factors cause SUPPLY SIDE SHOCKS
29
SRAS
Short run aggregate supply is the total amount of goods and services that firms are willing to produce at a certain price level, assuming atleast one FoP is fixed
30
LRAS
Long run aggregate supply is the total amount of goods and services the **economy** can produce when all FoP are variable Output doesn’t change as the price level increases. Shifts in LRAS are caused by changes in economies efficiency. The capacity of the economy
31
What causes shifts in the LRAS curve
-Technological advancements - Productivity - Education - Migration
32
Classical Model of LRAS and Keynesian
Classical Model - Perfectly inelastic and the output doesn’t change as the price level increases - Assumes that the economy is always at full employment Keynesian - Three parts and the economies take time to reach equilibrium Part 1 is a recession where despite changes in price, output doesn’t increase. Unemployment of FoP Part 2 is upward sloping where there is more use of FoP and they become more scarce Part 3 is the vertical segment and increases in demand cause higher price levels. Perfectly Inelastic. All FoP are utilised
33
The Multiplier (Calculation) (Effect on Aggregate Demand)
When an injection into the circular flow of income (such as gov spending, exports or consumption) causes an increase in economic activity and RNI. The Multiplier = 1/1-MPC Because the multiplier is caused by an injection (which composes AD) and amplifies the effect of it
34
Factors that Cause Economic Growth
Increased Investment Technological advancements Increases in FoP Labour force growth Government Subsidies
35
Actual Growth and Potential Growth
Actual growth is the change in quantity of goods and services produced by an economy Potential growth is a change in productive capacity of the economy over time
36
Actual Growth Rates
Change in a countries GDP
37
Positive and Negative output Gaps (What it looks like on a graph)
Positive output gaps is when the actual growth is higher than the potential growth Negative output gaps is when the potential growth is lower than the actual growth The X axis is Real GDP. The Y axis is Price level. Negative output gaps have the SRAS and AD meet before LRAS The positive output gaps have the SRAS and AD meet after the LRAS, above the potential amount of output The LRAS represents potential output
38
The business cycle
A graph which shows the stages of economic growth that the economy is in - Boom - Recession - Slump - Recovery
39
Characteristic of a Boom
- High rates of economic growth - Positive output gaps where actual growth exceeds potential growth - Near full employment - Demand-pull inflation. There is more demand - Higher consumer confidence
40
Characteristics of a Recession
- Negative economic growth - Potential growth is higher than actual growth, negative output gap - Demand-deficient unemployment where - Low inflation and deflation may occur - Low consumer and producer confidence
41
Difference between Income and Wealth
Income is the flow of money received by an individual or household Wealth is the stock of assets owned by the person
42
Trade Cycle
Fluctuations in economic activity over time 1) Boom - When the country is working beyond full employment 2) Slowdown 3) Recession - When there is high unemployment and low economic activity, low consumption 4) Recovery
43
MPC Calculation
Change in Consumption/Change in income
44
Index numbers
Used to condense long numbers Allow for quick and easy data comparison Raw Number / Base year Raw Number = Index Number Difference/Original *100 New-Original = Difference
45
Withdrawals from the Circular Flow Of Income
Savings Taxes Imports
46
Too High of Economic growth causes
High inflation through demand pull inflation.
47
Underemployment
When workers are employed in jobs that are below their skill level or when they are working fewer hours than they would like to be
48
Structural Unemployment
Mismatch between a workers skills and their job
49
Demand Deficient (Cyclical) Unemployment
Results from reduced demand for goods and services in economic downturns where firms are forced to close or reduce costs through laying off workers.
50
Seasonal Unemployment
When demand for labour fluctuates throughout the year
51
Real wage inflexibility
When wages are too high causing unemployment
52
Causes of Unemployment
- Structural unemployment - Fricitonal unemployment - Seasonal unemployment - Demand Deficient unemployment - Real wage inflexibility
53
Migration effect on employment
- Reduces unemployment, migrants start working - Bring high quality skills to the workforce. Increase employability of the workforce and the productivity - Brings down the minimum wage. Usually migrants are happy to accept lower wages because it is still more than what they are paid in their old economy - More employable and skillful workforce would decrease structural unemployment
54
The multiplier effect
This effect is caused when there is new aggregate demand in the economy. This then leads to an injection into the circular flow of income
55
The multiplier ratio
The number of times a rise in national income is larger than the rise in the injection of AD
56
The multiplier process (steps)
New demand Injection into circular flow of income Leads to economic growth Leads to more jobs Higher incomes More consumption
57
Effects of marginal propensities
MPC - More marginal propensity to consume, larger the multiplier effect MPS - More saving lower multiplier MPT - More tax lower multiplier MPI - More imports, more spent on other economies and lower multiplier effect
58
Multiplier Calculation
1/1-MPC
59
Negative impacts of Economic Growth on - Consumers - Firms - Government - Living Standards
- Consumers. Creates income inequalities Demand Pull Inflation - Firms Prices need to change to meet inflation caused by economic growth - Government No real effect - Living Standards Can lead to environmental damage through the negative externality of consumption and production
60
What does ‘Export Lead Growth’ lead to?
Export-led growth leads to (X-M) increasing, causing AD to shift to the right. It also leads to job-creation and greater business profits, encouraging investment.
61
Fiscal Policy Advantages and Disadvantages
Fiscal policy 😄: multiplier effect, accelerator, can reduce inequality, supply-side fiscal policy. Fiscal policy 😦: opportunity cost, budget deficit, national debt.
62
63
What are the effects of an increase in aggregate demand
An increase in aggregate demand (AD) leads to several effects in the economy, primarily influencing inflation, output, and employment
64
Drawbacks of Economic Growth
environmental degradation, income inequality, and inflation
65
National Income
total spending on goods and services

Economics AS Level Macro (4 decks)

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