Theme 2 - The UK Economy Flashcards
1
Q
What is economic growth
A
- rate of change of output
- increase in the long term productive potential of the country => increase in amount of goods and services a country produces
2
Q
How is economic growth measured and shown
A
- measured by percentage change in real GDP per annum
- shown through shift of PPF
3
Q
What is gross domestic product
A
- GDP
- standard measure of output
- allows us to compare countries
- total value of goods and services produced in a country within a year
- indicator for standard of living in a country
4
Q
What is the difference between total GDP and GDP per capita
A
- total GDP represents overall GDP for the country
- GDP per capita is total GDP divided by number of people in a country
- GDP per capita grows if national output grows faster than population over a given time period, so there are more goods and services to enjoy per person
5
Q
What is the difference between real GDP and nominal GDP
A
- real GDP strips effects of inflation
- nominal GDP is inclusive of inflation
- real values can be described as volume of national income whilst nominal represent value
- value is equal to volume times current price
- value of NI is its monetary value at prices of the day while volume is NI adjusted for inflation and expressed as index
6
Q
How can national income be measured
A
- gross domestic product
- gross national income
- gross national product
7
Q
What is gross national income (GNI) and how does it measure national income
A
- value of goods and services produced by a country over a period of time plus net overseas interest payments and dividends
- means it adds what a country earns from overseas investments and subtracts what foreigners earn in a cost run and send back home from GDP
- affected by profits from businesses owned overseas and remittances sent home by migrant workers
- increasingly used due to growing sizes of remittances
8
Q
What is gross national product (GNP) and how does it measure national income
A
- value of goods and services produced over a period of time through labour or property supplied by citizens of a country both domestically and overseas
- means it is value of all goods produced by citizens of a country, whether they live in that country or not
9
Q
How can comparisons about growth be made overtime
A
- changing NI shows whether economy grew or shrunk
- data is compared to other countries to put figures into context
- figures can also make judgements about economic welfare as growth in NI means rise in living standards
- important to use real, per capita figures
- rise in growth may cause rise in GDP but not living standards, providing inaccurate comparisons
10
Q
How can comparisons about growth be made between countries
A
- when countries have a difference in population, difference in total GDP doesn’t necessarily mean difference in living standards
- to make comparison, we work out real GDP per capita
11
Q
What is purchasing power parities (PPP)
A
- exchange rate of one currency for another
- compares how much a typical basket of goods in the country costs compared to one in another
- better alternative than exchange rates for GDP comparison
- Big Mac Index
12
Q
How is using a purchasing power parity comparison useful
A
- useful when comparing countries as it takes into account cost of living
=> better comparison of living standards
13
Q
What are problems with using GDP to compare the standard of living
A
- inaccuracy of data
- inequalities
- quality of goods and services
- comparing currencies
- spending
14
Q
How is inaccuracy of data a problem of using GDP to compare standard of living
A
- some countries are inefficient at collecting or calculating data
- black market not taken into account
- does not include home produced services
- errors in calculating inflation rate
- methods used to calculate GDP change so can be difficult to compare if different methods used
- important to take away transfer payments
15
Q
How are inequalities a problem of using GDP to compare standard of living
A
- increase in GDP may be due to growth in income of just one group of people
- therefore growth in NI may not increase living standards everywhere
- income distribution changes overtime and varies between countries making comparison difficult
16
Q
How is quality of goods and services a problem of using GDP to compare standard of living
A
- quality is higher than those 50 years ago but does not reflect real price
- therefore living standards may have increased more than GDP would suggest
- improved technology may allow prices to fall, suggesting falling living standards when this is not the case
17
Q
How is comparing different currencies a problem of using GDP to compare standard of living
A
- issues over which unit should be used
- usually converted into US due to size of American economy
- some argue PPP should be used to take into account impact of differences in cost of living
18
Q
How is spending of data a problem of using GDP to compare standard of living
A
- some expenditure does not increase living standards but increases GDP
- e.g. defence, GDP of UK was higher in WW2 than 1930s as a lot was spent on defence increasing GDP
19
Q
What is national happiness
A
- GDP only measures income but other factors affect welfare
- UN happiness report found seven key factors
20
Q
What are the key factors found by the UN happiness report on national happiness
A
- real GDP per capita
- health
- life expectancy
- having someone to count on
- perceived freedom to make life choices
- freedom from corruption
- generosity
21
Q
What was the measuring national wellbeing report
A
- report by UK PM in 2010 (David Cameron) measuring how lives are improving
- found that self reported health, relationship status and employment status most affected personal well being
- asked 4 questions about life satisfaction, anxiety, happiness and worthwhileness
- report updated on quarterly basis
22
Q
What is the relationship between real incomes and subjective happiness
A
- Easterlin Paradox
- happiness and income are positively related at low incomes
- higher levels of income aren’t associated with increases in happiness
- increasing in consumption of material goods will increase happiness if basic needs aren’t met
- once basic needs are met, increased consumption won’t increase long term happiness
23
Q
What does income and happiness depend on
A
- depends on people around us
- e.g. richest out of everyone you associate yourself with, you then will be happier than someone with same income but is poorest in group
- income is linked to social status and higher status makes us happier
24
Q
What is inflation
A
- sustained increase in the general level of prices over time, eroding the purchasing power of money
- low inflation is generally considered better than high
25
Q
What is deflation
A
- fall of prices indicating a slowdown in the rate of growth of output in the economy
26
Q
What is disinflation
A
- reduction in the rate of inflation
- prices are still rising but they are not rising by as much
27
Q
What are indices
A
- nominal figures must be changed into real figures to make comparisons
- done by choosing one year for base year and adjusting all other figures into equivalent figures
28
Q
How do you calculate indices
A
(new figure / base figure) x 100
29
Q
What are the different indices used
A
- retail price index (RPI)
- consumer price index (CPI)
30
Q
What is the consumer price index and how is it used to calculate inflation
A
- Office for National Statistics collects prices on a general basket of goods and prices are updated with goods/services being added/removed
- prices combined with information on average household spending pattern to produce overall index
- takes into account how much is spent on each item so are weighted
31
Q
What are the limitations of the CPI
A
- not completely representative => does not account for all goods purchased and different households purchase different items
- does not include price of housing
- difficult to make comparisons with historical data
- inflation indices overestimate inflation as they do not account for goods and services improving
32
Q
What are the differences between RPI and CPI
A
- includes housing costs such as mortgage and interest payments which CPI does not
- CPI accounts for people switching to cheaper products when prices rise which RPI does not
- RPI excludes top 4% earners and low income pensioners as they are not ‘average’ households
33
Q
What are the causes of inflation
A
- demand pull
- cost push
- growth of money supply
34
Q
What is demand pull inflation
A
- prices in a market are determined by demand and supply
- shift in either causes prices to change
- inflation can be caused by increase in AD
- if any factor increasing AD was to increase, then inflation would increase
35
Q
What is cost push inflation
A
- decrease in supply can also push prices up
- when businesses find their costs have risen, they will put up prices to maintain profit margin
=> caused by any factor decreasing AS
36
Q
How can growth of money supply influence inflation
A
- too much money can cause inflation
- if people have access to money then they will want to spend it
- if there is no increase in amount of goods/services supplied then prices rise
- idea grew from fisher equation
- government can also increase amount of money they print and decisions to increase government borrowing can increase money supply
- can be increased by bank multiplier
37
Q
What is the fisher equation and what does it do
A
- grew out of the idea of growth of the money supply increasing inflation
- MV=PT
- M is money supply
- V is speed of money circulating in economy
- P is price level
- T is number of transactions
- increase in money supply will lead to increase in price level, Ceteris paribus
38
Q
What is the bank multiplier
A
- linked to idea of inflation from growth of money supply
- banks make money by taking deposits and lending money at interest rates
- keep a certain percentage and people who borrow do it in order to spend it
- person who receives money will most likely input it back into system, which is a new deposit
- this way banks can increase money supply
39
Q
What are the effects of inflation on consumers
A
- if peoples incomes do not rise with inflation then they have less to spend => fall in living standards
- those in debts will be able to pay off at cheaper value
- those who saved will lose out as money is worth less
- psychological effects, people may feel less well off and cause decrease in spending
40
Q
What are the effects of inflation on firms
A
- less competitive => difficult to export => negative BoP
- encourages people to postpone purchases, as they wait for prices to fall further => further fall in AD and revenue
- difficult to predict => cannot plan for future
41
Q
What are the effects of inflation on governments
A
- if government fails to change excise taxes in line with inflation then real government revenue falls
- if they fail to change personal income tax allowances, then real government income will increase and taxpayers will have less money
42
Q
What are the effects of inflation on workers
A
- can be worse off and living standard decrease if they do not receive yearly pay rises
- can cause unemployment as a result of falling demand
43
Q
How can costs of inflation be reduced
A
- indexation
- wages or taxes are increased in line with inflation
- e.g. workers negotiating with employers for wage rises in line with predicted CPI/RPI
- however indexation may cause further inflation as wage increases will reflect past increases
44
Q
What is unemployment
A
- represents a waste of resources
- employment linked to economic growth as fast economic growth leads to more jobs being created
45
Q
How can unemployment be measured
A
- claimant count
- international labour organisation (ILO) and UK labour force survey (LFS)
46
Q
How does the claimant count measure unemployment
A
- is the number of people receiving benefits for being unemployed
- provides number of claimants on particular day each month and numbers joining and leaving the count each month
47
Q
How does the ILO and LFS measure unemployment
A
- ILO classes people as employed, unemployed or economically inactive
- LFS is sample of people living in households and is legal requirement for all countries in EU
- asks questions about personal circumstances and activity in labour market to class people as employed, unemployed or inactive by ILO definitions
48
Q
How does the ILO define employed
A
- those who do more than 1 hour of paid work a week or are temporarily away from work, are on a government supported training scheme or do minimum 15 hours of unpaid work for their family business
49
Q
How does the ILO define unemployed
A
- those of working age without work, able to work and seeking to work and have actively sought work in the last 4 weeks and are available to start work in the next 2 weeks
50
Q
How does the ILO define economically inactive
A
- neither employed nor unemployed
- people of working age not seeking employment as well as those seeking employment but not able to start work
- e.g. those in education, looking after family, health related issues, discouraged workers, retirement
51
Q
What are comparisons between the claimant count and LFS
A
- some people may not be in LFS but in claimant count as they are working in hidden economy or fraudulently claim benefits
- some people are illeligible for benefits but classed as unemployed so show on LFS but not claimant count => LFS tends to be higher
- claimant count and LFS rates can go in different directions as LFS is only a sample and there may be things in labour market not covered by claimant count
52
Q
Why is it argued that both the LFS and claimant count underestimate figures
A
- do not include these;
- working part time but would like to work full time
- on government training schemes who would prefer employment
- classed as sick or disabled
- aren’t actvely looking for jobs but would take a job if offered
- in education because they cannot get a job
53
Q
What are the different unemployment rates and their definitions
A
- economically active => employed and unemployed, engaged in labour market and people employers can look to recruit while workers are unemployed and inactive
- employment rate => percentage of population of working age who are employed
- unemployment rate => percentage of economically active who are unemployed
- activity/participation rate => percentage of population of working age who are economically active
- inactivity rate => percentage of population of working age who are inactive
54
Q
What is under employment
A
- those who are in part time or zero hour contracts when they would prefer full time
- self employed but would rather be employees
- those in jobs that do not reflect their skill level
- not included in unemployment statics
- increased during recessions
55
Q
What’s the significance of changes in employment activity
A
- increases in inactivity will decrease size of labour force causing fall in productive potential
- lower GDP and lower tax revenue as less people are working
- decreases in inactivity would result in more people being unemployed if there are no jobs available to them
56
Q
What are the different types of unemployment
A
- frictional
- structural
- seasonal
- cyclical
- real wage inflexibility
57
Q
What is frictional unemployment
A
- unemployment due to people moving between jobs
- due to new workers entering labour market or people leaving previous job
- may take a while to locate and gain a job they are willing to accept
- short term
58
Q
What is structural unemployment
A
- long term decline in demand in an industry leading to reduction in employment
- lack of geographical and occupational mobility means people remain unemployment
- different types
59
Q
What are the different types of structural unemployment
A
- regional => certain areas of country suffer
- sectoral => one sector suffers dramatic fall in employment
- technological => improvement in technology means jobs are replaced
60
Q
What is seasonal unemployment
A
- some employment is strongly seasonal in demand
- once that time of year passes then labour force is drastically reduced
- little can be done to prevent this from occurring in free market
61
Q
What is cyclical unemployment
A
- general lack of demand of goods and services within the economy
- Keynesian ‘demand deficient’ unemployment
- occurs during recession or severe economic slowdown
62
Q
What is real wage inflexibility unemployment
A
- real wages being above market clearing level leading to excess supply of labour
- some workers may be prepared to work for less than minimum so company can take on more but this is illegal
- some economists believe minimum wage risks creating unemployment in industries where international competition from low labour cost producers is severe
- little evidence minimum wage created rising unemployment on high scale
63
Q
How is migration linked to unemployment
A
- increase in net inward migration leads to increased jobs
- UK has seen mass immigration with people taking low skilled jobs
- due to circular flow of income, immigrants’ spending creates job and total employment increases => depends on size of remittances
- can lead to lower wages and supply of labour increases so price equilibrium of labour is reduced
- low skilled most affected
64
Q
How is skills linked to unemployment
A
- as economies progress, higher skills needed
- structural unemployment caused by lack of skills
- e.g. engineering companies struggling to recruit skilled workers even though there are unemployed workers in local area
- if firms will not train staff, government has to step in and correct market failure, costly => long term unemployed
- migrant workers tend to fill shortages if skills fit
65
Q
What is the impact of unemployment on workers
A
- loss of income => decline in living standards
- suffer from stigma of being unemployed
- long term unemployed find it difficult to get another job as they lose skills
- those in job suffer from lower job security and can see fall in wages
66
Q
What is the impact of unemployment on firms
A
- decrease in demand for goods (dependent on YED) => fall in profit
- long term unemployment can lead to loss of skills and reduce employability of workers so smaller pool of skilled people to employ
- can offer low wages => reduce costs
67
Q
What is the impact of unemployment on consumers
A
- local shopping centres tend to be run down => less choice and reduced quality
- unemployed consumers have less available to spend
- firms may lower prices and put sales on to increase demand
68
Q
What is the impact of unemployment on the government
A
- fall in tax revenue
- increase spending on welfare payments => opportunity cost => budget deficit
69
Q
What is the impact of unemployment on society
A
- rising unemployment linked to social deprivation => relationship between crime and social dislocation
- areas of high unemployment see fall in demand => fall in income/jobs for those in those areas
- loss of potential national output
- social costs of unemployment
70
Q
What is the balance of payments (BoP)
A
- record of all financial dealings over a period of time between economic agents of one country and all other countries
- imports and exports
71
Q
What are the components of the BoP
A
- current account which records payments for purchase and sale of goods/services
- capital and financial account which records flows of money associated with saving, investment, speculation and currency stabilisation
- money flow into country is positive, money flow out is negative
72
Q
What are the different parts of the current account
A
- trade in goods
- trade in services
- transfer payments
73
Q
What is trade in goods
A
- known as visible as they can be seen
- goods that are traded, whether raw materials or finished goods
- difference between visible exports and visible imports is balance of trade
74
Q
What is trade in services
A
- services traded in or out of the country known as invisibles
- e.g. holiday or insurance
75
Q
What are transfer payments
A
- wages, interest, profit or dividends can be repatriated into the country
- current transfers done by governments when they transfer money into/out of overseas organisations
- income and current transfers split into primary and second income
- primary is result of loans of FoPs abroad while secondary is range of mainly government transfers to overseas organisations
76
Q
What is the current account made of
A
balance of trade + balance of invisibles + net transfer payments
77
Q
What is a current account surplus
A
- exports higher than imports
- current balance is positive
78
Q
What is a current account deficit
A
- imports greater than exports
- current balance is negative
79
Q
What are the main macroeconomic objectives (basic)
A
- low unemployment
- low and stable inflation
- economic growth
- BoP equilibrium on the current account
80
Q
What are the extra macroeconomic objectives
A
- protection of the environment
- income equality
- balanced government budget
81
Q
How are economies interconnected
A
- proportion of output of an individual economy which is traded internationally is growing
- many more people own assets in other countries
- increasing migration between countries
- more technology being shared
82
Q
What does increased interconnectedness mean
A
- countries more interdependent
- change in economic condition of one country will affect another since quantity imports/exported changes
- in theory, all current balances should add to zero as what one country exports another imports
83
Q
What is aggregate demand (AD)
A
- total level of spending in the economy at any given price
84
Q
What are the components of AD
A
AD = C + I + G + (X-M)
- consumption
- investment
- government expenditure
- net exports
85
Q
Briefly explain the components of AD
A
- C; consumer spending on goods and services; makes up about 60%
- I; spending by businesses on capital goods, 15-20% of AD, mostly done by private sector
- G; spending by government on providing goods and services, changes yearly, 18-20%
- X-M; net imports, UK has large trade deficit but this is a minor figure and is about 5%
86
Q
What is the AD curve
A
- same as demand curve for individual market
- instead shows relationship between price level and real GDP
- downward sloping as rise in prices causes fall in real GDP
87
Q
What are the different influences on the AD curve
A
- income effect
- substitution effect
- real balance effect
- interest rate effect
88
Q
What is the income effect and how does this influence AD
A
- as a rise in prices is not matched straight away by a rise in incomes, people have lower real incomes so can afford to buy less, leading to a contraction in AD
89
Q
What is the substitution effect and how does this influence AD
A
- if prices in UK rise, less foreigners will want to buy British exports
- UK residents will also want to buy more imported foreign goods as they are cheaper
- rise in imports and fall in exports decreases net exports so AD contracts
90
Q
What is the real balance effect and how does this influence AD
A
- rise in prices will mean the amount people have saved will no longer be worth as much as so will offer less security
- as a result, they will want to save more and so reduce their spending => AD contraction
91
Q
What is the interest rate effect and how does this influence AD
A
- rising prices means firms have to pay their workers more and so there is higher demand for money
- if supply stays same, then price of money rises because of higher demand
- high interest rates means more people save less borrow
- also businesses invest less
92
Q
How are movements and changes on the AD curve
A
- like demand, there can be both movements and shifts
- movement is caused by changes in prices, inflation or deflation
- shift is caused by changes in other variables
93
Q
How do you distinguish between change on an AD curve
A
- important to distinguish between rates of change and absolute change
- fall in consumption will reduce AD but a fall in rate of rise of consumption means consumption is still rising so AD increases but not as much
94
Q
What is consumption
A
- spending on consumer goods and services over a period of time
95
Q
What is disposable income (Y)
A
- money consumers have left to spend, after taxes have been taken away and state benefits have been added
- means it is affected by government taxation as well as wages
96
Q
What is the significance of disposable income
A
- most important factor in determining level of consumption
- those with high income spend more than those on minimum wage
- however we are concerned with how increases in income affects consumption => marginal propensity to consume (MPC)
97
Q
How is MPC linked to dispoable income
A
- most have positive MPC but less than 1
- some have MPC of more than 1 as they use borrowing or savings to fulfil demand for goods which is higher than increases in income
- poorer people have higher MPC as they likely to spend more of increased income while richer people save
- average propensity to consume (APC) is average amount spend on consumption out of total income
- in industrialised countries, APC for economy is likely to be less than 1 as people save earnings
98
Q
How do you work out MPC and APC
A
MPC = change in consumption / change in income
APC = total consumption / total income
99
Q
What is the relationship between savings and consumption
A
- savings is what is not spent out of income
- increase in consumption decreases savings
- same factors affecting consumption also affect savings but in opposite way
- marginal propensity to save (MPS) is how much of an increase in income is saved
- average propensity to save (APS) is average amount saved out of income
100
Q
How do you work out MPS and APS
A
MPS = change in savings / change in income
APS = total savings / total income
101
Q
What factors can influence consumer spending
A
- interest rates
- consumer confidence
- wealth effect
- distribution of income
- tastes and attitudes
102
Q
How do interest rates influence consumer spending
A
- most major expenditures are bought on credit
- if interest rates high, price of good will effectively be higher since more interest needs to be paid back reducing consumption
- high interest rates also increase mortgage repayments and reduce consumption
- rise in interest rates decreases value of shares so people experience negative wealth effect
144
Q
What does the Keynesian LRAS curve suggest
A
- agreed with classical to a point
- curve does not stay vertical as wages/prices fall when unemployment exists, making it worthwhile for firms to employ people, returning economy to normal
- this is not the case as wages are sticky downwards
- high unemployment (A) and firm wants to recruit, they do not have to offer high wages as LRAS is perfectly elastic
- between A and B, employment rises, making labour scarce so firms offer high wages to attract best workers
- output becomes price inelastic until B where increase in price no longer affects output
152
Q
What is the circular flow of income model
A
153
Q
Explain the circular flow of income model
A
- two sector economy with households and sellers
- households own wealth and resources, providing firms with FoPs in return for ret, wages, interest and profits
- money is used to buy goods and services from firms
- money flows in one direction, FoPs in another
- national output = national expenditure = national income
161
Q
How do shifts in AD in the SR affect the equilibrium of national output
A
- initial equilibrium position is P1Y1
- outward shift in AD moves position to P2Y2
- increase in AD leads to higher prices and higher real GDP
- fall in AD leads to lower prices and lower real GDP
162
Q
How do shifts in AS in the SR affect the equilibrium of national output
A
- initial equilibrium level is P1Y1
- increase in SRAS moves equilibrium to P2Y2
- increased SRAS leads to lower prices and higher real GDP
- decreases SRAS leads to higher prices and lower real GDP
164
Q
Explain the classical LRAS curve with a shift in demand
A
- increase in AD leads to positive output gap
- economy is thus in disequilibrium as SRAS and AD do not intersect on LRAS curve
- short term equilibrium is P2Y2 => over-full employment and firms bid up wages of labour and other factor prices
- as a result, SRAS shifts inwards as production costs increased
- eventually, economy is producing same amount but at higher prices at P3Y1
166
Q
Explain the classical LRAS curve with a shift in LRAS
A
- initial equilibrium is P1Y1
- increase in LRAS causes lower prices and higher output
- although there is short term disequilibrium as SRAS does not intersect with AD and LRAS, this will be closed by a shift in SRAS
- rise in LRAS likely to lead to lower prices and higher output
- when compared to rise in AD which causes increased prices and no higher output, it is clear to see why classicist favour supply side polices over demand management
168
Q
Explain the Keynesian LRAS curve with a shift in AD
A
- shift from AD3 to AD4 is purely inflationary => FoPs being utilised highly, high employment => low supply of labour so high wages for highly skilled => increased prices but no change on output
- shift from AD1 to AD2 occurs in recession => FoPs not being fully utilised, high levels of spare capacity, high unemployment => increased output but not price
- shift to/from AD5 would lead to a change both in price and output
- impact of shift depends on elasticity and employment levels
169
Q
Explain the Keynesian LRAS curve with a shift in LRAS
A
- if economy is producing at or near full employment, rise in LRAS will increase output and decrease price level
- seen by change in equilibrium from P1Y1 to P2Y2
- however if economy is in recession at AD2, increase in LRAS has no effect on prices or output
- this is why Keynesians argue during recessions the government needs to work to increase AD rather than supply side policies
196
Q
Draw and explain and AD and AS diagram for output gaps
A
- equilibrium where AD=SRAS=LRAS
- negative output gap at AD3 because SRAS equilibrium is less than LRAS equilibrium
- means full capacity is not being met
- at AD2, positive output gap as SRAS is higher than LRAS
253
Q
What is the trade off between unemployment and inflation
A
- Phillips Curve => rate of change in wages increased as rate of unemployment fell
- later generalised into relationship between unemployment and inflation, arguing firms pass on increases in wages to customer in increased prices
- high unemployment => low wages, high employment => high wages
- initially Phillips curve showed relationship well, but during 1970s, we saw high levels of unemployment and low inflation => stagnation
