Theme 2: The UK economy - performance and policies Flashcards Preview

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Flashcards in Theme 2: The UK economy - performance and policies Deck (39):

Gross national product

GDP plus net income from abroad



The total value of output in an economy (and is used to measure change in economic activity)



Same as GDP but it adds what a country earns from overseas investments and subtracts what foreigners earn in the country and send back home.


Limitations of GDP (5)

1. Does not account for a shift in production to higher quality goods that may improve the standard of living of consumers.
2. Does not account for how hard workers are working to produce this output / how much leisure time they have.
3. Does not account for the underground economy
4. Does not account for negative externalities
5. Does not account for non market production e.g. subsistence farming in LICs.


Problems with using market exchange rates to compare GDPs (2)

ERs are very volatile due to speculation - unlikely to be reflective of actual changes in living standards at least in the short term.
ERs are more relevant to products that are traded between countries rather than non-traded products.


Big Mac index/basket of goods and purchasing power parity

The Big Mac index looks at the implied PPP exchange rates between countries and the actual exchange rates to judge whether a currency is under or over-valued against the US dollar.



Reduction in the rate of inflation



Sustained increase in the cost of living or the general price level leading to a fall in purchasing power



CPI is a weighted price index. Changes in weights reflect shifts in the spending patterns of households - changes in price of all important types of goods are measured and thus weighted.



CPI but includes for example, taxes and mortgage repayments.


Limitations of CPI (4)

1. CPI is not fully representative e.g. 14% of the CPI index is dedicated to motoring costs even though some people don't even own a car
2. Spending patterns vary between households
3. Does not account for changes of quality in the goods potentially associated with changes in prices.
4. Slow to respond to the change of consumption patterns.



Those able, available and willing to work at the going wage but cannot find a job despite an active search for work



Those workers that are highly skilled, but working in low paying jobs or low skill jobs, as well as those working part-time that would prefer to be working full time.


Claimant count

Includes people who are claiming the Job Seeker's Allowance


Labour Force Survey/ILO

Surveys 44,000 households every month and asks them about economic activity, income etc. as well as unemployment.


Types of unemployment (5)

1. Classical unemployment/real wage inflexibility: as a result of government intervention e.g. NMW raising the wage above the market equilibrium.
2. Cyclical/demand deficient unemployment
3. Frictional unemployment: in between jobs
4. Seasonal unemployment: workers without a job due to the time of year
5. Structural unemployment: caused by a lack of skills for the jobs available.


What does the balance of payments contain (5)

1. Current account: balance of trade in goods and services, net primary and net secondary incomes
2. Capital account: sale/transfer of patents and other transferable contracts, transfers of ownerships of fixed assets.
3. Financial account: net balance of FDI, net balance of portfolio (debt and equity) flows, balance of banking flows
4. Balancing item
5. Changes to the values of gold and FOREX reserves.


Current account deficit/surplus

Where the value of the goods and services which it imports exceeds/is less than the value of the goods and services which it exports


Influences on investment (6)

1. Rate of economic growth - if the economy is expanding, firms will need to increase their investment to have the capital equipment to produce more goods and services.
2. Business expectations and confidence/animal spirits - affects whether firms believe that their profits will rise or not.
3. Demand for exports
4. Interest rates
5. Access to credit - as lots of investment is financed by borrowing
6. The influence of government and regulations - through tax levels or guaranteeing loans, the government can affect how much firms are willing to invest.


Influences on net trade balance

1. Real income - rising real incomes will suck in more imports
2. Exchange rates - rise in the value of the pound means that it costs foreigners more to buy pounds with their local currency.
3. State of the world economy - if the UK's trading partners are doing well, this is likely to increase the volume of exports.
4. Degree of protectionism - the greater the degree of protectionism internationally, the more difficult it will be for UK firms to export.
5. Non-price factors - the design and quality of goods that are exported and imported can affect the extent to which they are traded.


Circular flow of income, what is it, what does it include

The circular flow of income and spending shows connection between different sectors of an economy.
Leakages/withdrawals: savings, taxation, imports
Injections: investment, government spending, exports.



Refers to the stock of assets held by an individual or household at a single point in time



Refers to the money received by an individual or business in exchange for the provision of a good or service or through investing capital.


Multiplier effect

An initial change in AD can have a much greater impact on the level of equilibrium national income - injections of new demand into the circular flow of income can stimulate further rounds of spending





Actual growth

Growth in the quantity of goods and services produces is measured by the percentage change in GDP.


Potential growth

The change in the productive potential of the economy over time. It is shown on a diagram by the shift to the right in the LRAS curve or the PPF


The output gap

The difference between the actual level of real GDP and its estimated long term value at a point in time is known as the output gap


Hysterisis (may occur following a deep recession)

Economices do not bounce back to their previous trend level of growth.


MEPOs (7)

Economic growth, low unemployment, low and stable rate of inflation, B of P equilibrium on current account, balance government budget, protection of the environment, greater income equality


Consequences of inflation (7)

1. Redistribution of income - if staple/basic necessities experience particular inflation e.g. gas
2. Falling real incomes
3. Negative real interest rates
4. Higher costs of borrowing
5. Risks of wage inflation
6. Business competitiveness - if one country has a much higher rate of inflation that others for a considerable period of time, this will make its exports less price competitive in world markets
7. Business uncertainty


Consequences of deflation (8)

1. Consumers hold back on spending
2. Real debts increase
3. Real cost of borrowing increases
4. Lower profit margins
5. Lower confidence
6. Income distribution - redistribution of income from debtors to creditors, but debtors may default
(7. Can make exports more competitive in the long term)
8. Higher unemployment


Strengths of demand side policies (3)

1. Quick response according to Keynesian economics (not according to Classical economic theory)
2. Can be used further to lower interest rates; which can only be lowered to a certain extent
3. Boosts economy using multiplier (Keynesian)


Weaknesses of demand side policies

1. May conflict with MEPOs
2. Increase national debt
(3. May have a time lag)
4. Difficult to target right areas
5. Inflation


Market-based supply side policy

Involve policies to increase competitiveness and competition e.g. deregulation, privatisation


Interventionist supply side policy

Involve government intervention e.g. government spending


Phillips curve

Shows that inflation and unemployment have a steady inverse relationships - proven wrong following '70s stagflation.


Strengths of supply side policies

1. Sustainable economic growth
2. Reduces unemployment - however, also requires a large increase in AD, particularly if operating at the horizontal part of the LRAS curve.
3. Can improve the current account balance if the supply-side policies can be directed at increasing exports.


Weaknesses of supply side policies

1. Can create downward deflationary pressure, or inflationary pressure if AD exceeds the increase in LRAS.
2. May increase distribution of income through policies like abolishing the NMW.