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Economics Edexcel > Theme 2 > Flashcards

Theme 2 Flashcards

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1
Q

Real vs nominal gdp

A

Real-Volume of gdp-takes into account prices
Nominal-Value of gdp-based on current prices

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2
Q

What is the standard economic growth measure used by the world bank

A

GNI(formerly gnp)

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3
Q

GNI vs GDP

A

Gross Domestic Product- the total value of goods and services produced within a country’s borders
Gross National Income-measures the total income earned by a country’s residents, even across borders

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4
Q

Actual vs potential economic growth

A

Actual-% rate of growth of gdp/gni in an economy in a certain time
Potential-What the rate of growth could be-isnt always actualised because the economy doesnt always operate at ful capacity.

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5
Q

Whatt are the 4 types of unemployment

A

Structural-Populace not equipped for jobs available-e.g. Liverpool dockworkers
Cyclical-Part of the business cycle-2008 unemployment increased
Frictional-People spend time between jobs
Seasonal-More employment during christmas, with more unnemployment between

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6
Q

Why is GNI important

A

It more accurately reflects the living standards of the population, especially for countries that heavily rely on remittannces e.g. Pakistan and the Philipinnes

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7
Q

What are the limitations of GDP/GNI

A

Doesnt account for inequality
Doesnt account for informal sectors/barter
PPP-hard+unreliable to calculate but gdp is meaningless without
official exchange rates may be reflective of govt policy, rather than actual value
GNI does not always correlate w living standards e.g. education and the environmennt

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8
Q

What is ISEW

A

Measure of economic welfare (MEW) relaunched as the Index of sustainable economic welfare, by James Tobin and William Nordhaus-GNI with adjustments of only including goods with a positive impact, and subtracting those with negative externalities, such as environmental damage.

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9
Q

What is the easterlin paradox

A

that while richer individuals within a society tend to be happier, overall national happiness doesn’t necessarily increase with economic growth over time-suggests its relative
e.g. rich people in the 1800s uk are as happy as rich people today, despite QOL improving massively

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10
Q

Why are the cpi and rpi rate different

A

Different representative baskets of goods-RPI excludes pensioners and the richest households whilst cpi doesnt
RPI typically includes a wider range of goods and services than CPI, including housing costs like mortgage interest payments and council tax
CPI uses a geometric mean, whilst Rpi uses an arithmetic mean

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11
Q

What is the issue with full employment

A

No new busineses can open or economic activity can take place, as all labour is occupied

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12
Q

What are the issues with the different measurements of unemployment

A

Claimant count-Not all unemployed people claim and receive it-e.g. thsoe returning after childbirth
ILO unemployment data-based on a crossection of society, may not be able to be extrapolated correctly-depends on sample size.
Neither take into account underemployment-nuclear technicians working as baristas

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13
Q

What is demand deficient unemployment

A

Unemploymet due to a lack of AD-e.g. during cyclical or seasonal unemployment

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14
Q

What are sticky wages

A

Workers will not accept pay decreases anywhere near as they will accept increases-hard for the labour market to be flexible and achieve equilibrium

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15
Q

Why might voluntary unemployment occur

A

Benefits too high-no incentive to work
Taxes too high
Wage too low

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16
Q

What are the costs of unemployment

A

Consumers-Less goods and services produced-lower standard of living
Firms-Lower demand=lower revenue, so lower profits-however, may be able to save on labour costs
Workers-Loss of income and livinng standards, involuntary unemployment is positively reinforcing-not got a job in ten years, more unlikely to get one in the future
Govt-less revenue, more benefits paid out-thatcher govt
Society-Homeless, despair, lack of confidence, animal spirits go down

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17
Q

What is the balance of payments

A

A set of accounts to identify transactions between the UK and the rest of the world

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18
Q

What are the three parts of the BOP

A

Current account-Transactions in goods and services, along with income payments and transfers
Financial account-Transactions in financial assets-bonds, gilts etc
Capital account-trade in fixed assets-v small

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19
Q

What is hot money

A

Money that circles the world looking for the best return on investment e.g. soverign wealth funds- raising interest rates attracts this

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20
Q

What is the nature of thhe uks balance of payments for the close past

A

Current account deficit
Financial account surplus

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21
Q

Why do capital and financial accounts have to balance

A

Foreign trade has to be in foreign currency, which can only be acquired from that country(We cant mint dollars) Therefore, money in has to equal money out and the exchange rate will change to reflect that

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22
Q

What are the components of aggregate demand

A

Consumption, investment, govt spending, Exports-Imports

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23
Q

What % of ad does consumption make up in the uk

A

66%

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24
Q

What is the formula for the multiplier effect

A

1/1-mpc or 1/mpw

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25
What is the wealth effect
When changes in household wealth induce changes in expenditure-e.g. house prices go up more spending despite income being unchanged
26
What is the permanent income hypothesis
Milton Friedman-Connsumers make decisions about consumption based on their permanent, or normal, expected levels of income over the future 5 or 10 year-will not change income for transitory changes
27
What is the most important influence on consumer expenditure
Income
28
Gross vs net investment
Gross-Total value of investment Net-value after subtracting depreciation of assets
29
What factors affect the rate of investment
Expectations about future demand-animal sprits Govt incentives-Tax breaks, regulations Interest rate-favourable-more likely to invest as it is cheaper. However,may not be a good sign for the economy as low IR sign of slow economy. IR is the opportunity cost of investing rather than saving
30
What are self stabilIsing economic policies
Unemployment benefit-demand deficient unemployment occurs, benefits are paid out causing AD to shift out, firms should rehire due to increased demand Exchhange rate-any imbalances in supply and demand will be resolved naturally through price changes
31
What influences short run AS
Cost of inputs-change in cost of raw inputs, labour, oil Exchange rate-imported inputs more expensive/cheaper Govt actions-tax, subsidies, regulatino
32
What are the two views on LRAS
Classical/Monetarist-Economy will always converge on the natural rate of output, and so is perfectly inelastic, as all factor inputs are limited-only so much oil no matter the price Keynsian-Economy not sufficiently flexible for long run employment-and in the long run we are all dead,-upward sloping AS as an economy output increases, the gpl increases as spare capacity is used up
33
What factors affect LRAS
Quantity of inputs-more factors of production mean more outpute.g. eu membership more labour increase lras Effectiveness of inputs-new technology increases productivity and results in a shift of lras-Similarly, unproductive labour shifts lras inwards Other costs faced-e.g. improved transport reduces cost, and therefore increases supply, but an increase in congestion will raise ccosts
34
What are the three elements of the circular flow of income
Households, firm and government
35
What are the withdrawals from the circular flow
Imports, taxes, saving
36
What aare the injections into the circular flow
Exports, govt spending, investment
37
Difference between income and wealth
Income-flow of money Wealth-total value
38
What is the multiplier effect
The idea that an injection into the circular flow will result in a net greater increase in GDP, providing certain conditions are met
39
What is the condition of macroeconomic equilibriium
Total injections=total withdrawals
40
What may the size of the withdrawals from the circular flow dependon
Domestic elasticity of supply-If supply is inflexible, money will flow to imports as domestic supply cant meet demand
41
What is autonomous spending
investment spending that's independent of income levels and is driven by factors like government policies or infrastructure development
42
Why can the govt not spend its way to max output
Diminishing marginal returns-as economy gets closer to full output gpl starts rising at a faster rate
43
What is economic growth
Expansion in the productive capacity of an economy
44
What is the output gap
Difference between real and potential gdp
45
Can the output gap be positive
Yes-factories can pay overtime and the economy can go over its max potential-unsustainable in the long run
46
What results in economic growth
An improvement in any of the factors of production e.g. Capital-investment is need(sacrificing consumption) Land-fixed(why a lvt is good) Labour-Better productivity via training/education or increasing quantity via immigration-human capital Entrepeneurs-not a real job Also international trade and specialisation-important to gain foreign money to spend on importing factor resources
47
What % of chinese gdp is investment
41.1 % of its Nominal GDP in Dec 2023 compared to approx 17% in the uk
48
What has been the most successful model of economic development in recent years
Export led growth-east asian tiger economies and china have been wildly successful
49
Why is stimulating AD during the business trough perhaps dangerous
Because the output gap might be near positive-any increase in AD will result in inflation rather than growth
50
What was the gdp growth rate for 2025 1st quarter
0.7%
51
What suggests domestic policy may not be the sole arbiter of economic growth
Countries follow similar patterns regardless of policy e.g. downturn in 70s cos of oil prices affected a lot of countries
52
What are the costs of economic growth
Pollution and degradation of the environment Inequality-kuznets curve Strcutural change-liverpool dockworkers Opportunity cost-S.K. growth for growths sake-miserable and no kids Investment without consumption lead to unemployment today Balance of payments problem
53
What is chinas average growth rate since opening of the economy
8%
54
What are they key macroeconomic objectives
Increase non-inflationary growth Reduce unemployment Control inflation BOP equilibirum Reduce inequality Balance the govt budget Environment protection?
55
What are the types of inflation
Cost push-rise in costs is passed onto the consumer Demand pull-Increase in demand increases prices due to rationing Net increases in the money supply-Businesses get more money-invest and save-ad shifts outwards-gpl rises
56
What are the costs of inflation
Menu-firms have to constantly amend prices Shoe leather-people will take frequent trips to the bank in order to not keep any cash, as it is losing value Unreliable price signals-reduces allocative efficiency Uncertainty and lack of confidence in the economy-especially if due to economy mismanagement
57
What happened to parking fines in argentina in the 80s
They had to be paid in gasoline because of ridiculously high inflation
58
What is the problem with a large financial account surplus(likely as a result of a current account deficit)
The UK is exporting assets, which may mean a leakage of investment income in the future.
59
What is an alternative to a financial account surplus to make up for a current account deficit
Foreign currency reserves can be sold to finance imports-this is because UK residents arew providing more pounds thann foerign owned currency-only workls in the short term as you run out
60
Why can a sustained current account deficit lead to a fall in investemnt from abroad
It requires a financial acount surplus-if this demand isnt met interest rates may have to rise until it is-this will both reduce demand
61
Why might the uk theoretically have a current account deficit
UK companies are uncompetitive High/overvalued exchange rate UK incomes have risen more rapidly then the rest of the world
62
What is the PSNCR
Public sector net cash requirements-differennce bettween public sector spending and revenue
63
What UK bank failed in 2008
Northern rock
64
Why is pollution as a symptom of growth hard to deal with
Can be international or intergenerational-hard to identify, define and internalise-e.g. Forest burning in malaysia leads to smog in singapore
65
Why is complete income inequality perhaps not desirable
can lead to a perverse incentive structure where providing as much value to society is discouraged becuase you are not rewarded
66
What is horizontal equity
The idea that two people who provide the same value to society should be rewarded/paid the same
67
What are the disadvantages of inequality
Less motivated workers Less likely to get educated-costs money-productive potential limited Reduces consumption as money will be tied up in less efficient parts of the economy then pure consumption High crime rates and social discontent
68
Fiscal vs Monetary vs supply side policy
Fiscal-govt-Tax, spend,borrow, Monetary-BoE-Interest rates anbd money supply-QE Supply side-Shift out AS-Subsidise, deregulate, increase competition-microeconomic in nature generally
69
What is the caveat to govt expenditure or investment in the uk to shift ad outwards
High MPI-multiplier effect is lost It will also exacerbate a current account deficit as more money will be made, ergo spent on imports
70
Direct vs Indirect taxes
Direct-paid directly to the govt, levied on income-Income tax,NI Indirect-Paid indirectly through a middleman, tend to be regressive taxes on consumption e.g. excise duty, vat
71
What does the BoE have to do if inflation reaches +-1% of 2%
Write a letter to the chancellor explaining why
72
What is the bank/base rate
The interest rate paid by the BoE on commercial bank reserves-used as their own base rate which they use to give out loans
73
What is QE
The central bank injects money into the economy by purchasing assets, such as government bonds, from financial institutions. This increases the money supply, lowering interest rates and encouraging investment and lending
74
Whatt are the demand side policies the govt can use to influence the economy
Fiscal and monetary policy
75
How did the UK respond to 2008
Fiscal stimulus-qe Taxation changes-temp. reduction in vat Huge cuts to interest rates
76
What are the two types of supply side policies
Market based-Ensuring freer markets to allow equilibrium and thus social optimum to be reached Interventionist-to correct market failure and increase supply
77
Name market based supply policies
Incentive-cutting taxes-trussonomics Privatisation and deregulation-improve AS via efficiency-over regulation of the financial industry e.g. 2007 lehman brothers-couldnt operate efficiently so collaped-getting rid of red tape would improve this Reforming labour market-improve flexibility-kill trade unions-deregulate health and safety or severance pay Reduce benefits
78
Name interventionist supply policies
Better provision of education or apprenticeships Infrastructure spending to reduce costs for firms Promote competition-fix information asymmetry
79
Name the strengths and weaknesses of supply side policies
Strength-targeted to specific problems more reliable/known quantity than demand side policies Weaknesses-Long time lags/complex transmission mechanism Requires careful thought-2nd order consequences and trade offs
80
What does the philips curve show
The trade off between low unemployment and low uninflation-mutually exclusive
81
What is the counterargument to the philips curve
Stagflation-high unemployment(stagnation) as well as high inflation
82
Why might there be conflict between fiscal and monetary policy
govt increasing expenditure, particularly on interventionist policies such as education or infrastructure is based on borrowing, leading to interest rates going up(crowding out), which is a key tool of monetary policy
83

Economics Edexcel (4 decks)

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