topics 11-14: econ. growth, UN, price stability, BOT Flashcards Preview

A-level H2 Economics > topics 11-14: econ. growth, UN, price stability, BOT > Flashcards

Flashcards in topics 11-14: econ. growth, UN, price stability, BOT Deck (20)
Loading flashcards...

econ. growth benefits

  1. higher SOL
    - econ. growth results in increase in RNY per capita, higher disposable income, higher PP to consumer greater qty and quality of G&S
    - non-material SOL: collect higher tax revenue comprising income tax, gst -> spend on infrastructure to improve healthcare needs, env conservation
  2. reduction of DD-deficient UN
    - increase in AD, firms employ more labour
    - social crimes due to loss of income mitigated
  3. redistribution of income (greater equity)
    - collect more taxes to better redistribute income. increase targeted expenditure on lower income groups , welfare payments& merit goods such as education and healthcare subsidies

econ. growth costs

  1. -ve env. impacts and resource depletion (unsustainable growth)
    - env. provide FOP that generate econ. growth, depletion of resources (minerals and deforestation) means less resources for future generations to utilise, causes climate change which is irreversible, lowering SOL of citizens today and on future gens
  2. income inequality and inequity
    - widens income gap btn rich and poor
    - already wealthy indivs capture majority share of growth
    - unfair distribution of econ. welfare as low-income consumers unable to afford basic necessities, leading to inquity
  3. structural UN
    - rapid econ. growth achieved thru increase in spending on capital goods and advances in tech.
    - firms sub labour with capital, leading to more capital-intensive production methods, making current jobs obsolete
    - retrenched workers of declining industries lack required knowledge and skills to join sunrise industries, mismatch of skills
  4. inflation
    - when AD increase, GPL will increase if economy is operating with limited or full capacity
    - increase in cost of living + COP -> transfer higher costs in the form of higher prices
  5. worsening BOT
    - national income increase, consumers have PP to purchase g&S from international mkt, net exports increase (esp when dd is income elastic), (X-M) fall

issues relating to econ. growth

  1. econ. growth due to excessive increase in AD
    - productive capacity unable to accommodate rise in AD, all available resources nearing full utilisation. further increase in AD leads to increase in GPL. households face fall in PP if nominal household incomes do not rise as quickly as GPL, fall in material SOL.
  2. recession - occurs when economy suffers from fall in RNY for 2 consecutive quarters
    -> dd-def. UN, fall in income, govt budget deficit, fall in profit and investment
  3. slow growth
    - marginal increase in RNY
    developing country: limited increase in C(wages), limited increase in I(poor expectations), limited increase in G(small tax base), limited increase in net exports (focus on primary products)
    developed country: country nearing full capacity

econ. growth consequences

1. higher SOL
2. increased equity
3. reduction of DD-deficient UN
1. worsen BOT position
2. income inequity - non-inclusive growth
3. structural UN
4. inflation
5. -ve env. impacts and resource depletion - unsustainable growth

DD-deficient UN


fall in AD -> unplanned accumulation of stocks -> firms decrease production hence there is a fall in derived demand for labour -> less national income earned
initial fall in income will lead to further fall in income-induced consumption due to reverse multiplier effect

  • using labour mkt diagram: resistance to wage cut. surplus of LdLs workers represent DD-deficient UN
    greater extent of DD-deficient UN when there is lots of spare capacity in the economy and production activities are labour-intensive

structural UN


structural changes in economy. mismatch of skills btn unemployed and existing job vacancies, hence ppl made redundant in one sector of economy cannot immediately take up jobs elsewhere [occupational immobility of labour]

  1. tech
    - change in production techniques: workers less proficient in handling more advanced equipment becoming unemployed. automation used to sub labour
  2. changes in econ structure
    - permanent fall in DD for product of a good. due to
    a. change in consumer taste&pref
    b. comp. from other countries - shift production bases to countries where production costs lower
    c. outsourcing - contracting tasks to another company which can provide same service at cheaper cost
  3. changes across geographical regions

frictional UN

  • result of mkt imperfections such a imperfect info of existing mkt conditions
  • workers ignorant of available job opt, employers not fully informed of what labour is available

consequences of unemployment


1. lower SOL
- fall in RNY -> fall in PP
- stress, crime rates
2. lower actual and potential growth
- higher crime rate -> loss of household and investment confidence, reducing C and I. C leads to fall in AG, I leads to fall in both AG and PG
- prolonged UN leads to loss of skills and knowledge from possibly unemployed and eventually leaving labour force, leads to lower quality and qty of labour
fall in productive capacity, adversely affecting PG
unable to achieve sustained growth
[conversely: increase in AD signify increase in DD for G&S, induce firm to invest and also attracts FDI)
3. worsened equity
- structural UN causes income inequality btn workers in sunset and sunrise industries
- low-income workers unable to afford goods and services
- govt spend more on UN benefits, collecting less tax revenue from gst, corporate/income tax
- strain on govt budget (assume increase deficit), posing constraint on govt ability to conduct expansionary fiscal policy/SS-side policies to promote sustained growth
- if govt borrow to finance spending, fiscal debt accumulates, i/r repayments results in opt. cost such as societal benefits foregone from less spending on public and merit goods which could improve equity
4. reduced efficiency
- UN means that labour resources idle and not fully utilised to produce G&S (economy producing inside PPC)
- inefficient allocation of labour resources. PE and AE not achieved.


consequences of high UN (list)

  1. lower SOL
  2. lower actual and potential growth
  3. worsened inequity
  4. reduced efficiency

demand-pull inflation


sustained increase in GPL arising from continous/large increase in AD w/o corresponding increase in productive capacity
- economy is near full employment. when AD increase, there in unplanned running down of stocks, firms increase production to meet increase in DD and hire more FOP, thereby competing with other producers for same resources. this leads to higher COP, which firms pass on to consumers in from of higher prices, hence GPL increases


cost-push inflation


sustained increase in GPL caused by increase in unit COP independent of increase in AD -> firms pass on in the form on higher prices
1. increase in price of imported raw materials and intermediate goods
key commodities like crude oil and metals determined in global mkts, lead to increase in COP and fall in SRAS
SG: esp susceptible to imported inflation
2. increase in trade union power leading to higher wages
3. implementation of min wage
4. depreciation -> higher price of imported raw materials


wage-price spiral


increase in AD, fall in SRAS

  • in response to increase in cost of living
  • to maintain prior SOL, workers will demand for higher wages. higher COP -> higher prices

benefits of low inflation

  1. lower UN, higher econ. growth
    - low and stable inflation signals that economy is growing, providing certainty to investors when they make predictions on cost and revenue of their investment -> increase I -> increase in PG(capital goods) and AG
    - consumers make accurate predictions about PP of their income -> increase C -> increase in AG
    - increase in AG ->national income increase by multiplier effect (AG and lower dd-def UN)
  2. improvement in SOL
    - household can manage finances and make projections on future prices of big-ticket items -> acquire more goods and services -> increase material SOL
    - households consume healthcare and education, leisure goods like holidays -> reduced stress -> higher non-material SOL
    low inflation allows households to set aside for future consumption -> increase future SOL
  3. improved equity
    - low and stable inflation rate prevent drastic erosion of savings which affects poor sectors of economy most.
    real i/r=nominal i/r-inflation rate
    interests are returns on savings, interests accured enhances household savings and future PP
    - inflation complicates household ability to project how much to set aside for future consumption
    - increase prices of G&s erode PP despite interests accured, esp when economy exp -ve real interest rates
  4. improved BOT position (X-M)
    - country has relatively low inflation rate, compared to trading partners, price of exports relatively lower and are more price competitive. results in increase in export revenue due to increase in qty dd esp if dd for exports are price elastic (close subs)

costs of high inflation

  1. lower AG and PG
    - lower certainty -> lower C and I
  2. worsened SOL
    - higher cost of living
  3. worsened BOT position
    - fall in X, increase in M (foreign goods relatively cheaper)
    - fall in FDI and hot money due to uncertainty -> instability in exchange rate
  4. effects on income distribution (equity)
    i. creditors vs debtors
    - debtors gain from high inflation as value on money fall, debts worth less. lenders lose out as real value of loan repayments eroded
    ii. fixed vs variable income earners
    - income fixed in monetary terms, exp fall in real incomes and PP due to high inflation
    - variable income earners (vary with inflation) will not exp fall in real income
    iii. consumers vs firms
    - consumer lose out as PP eroded. sol worsen if nominal wages do not rise as fast
    - shoe leather cost
    gain if DD-pull inflation as exp increase in profits
    lose out if cost-push inflation: menu costs



sustained decrease in GPL due to fall in AD or rise in SRAS (fall in prices of major inputs)


consequences of deflation



  1. lower econ. growth
    - consumers expect prices to fall further -> postpone current spending
    - fall in real value of assets for asset owners, fall in wealth, decrease C
    - credit crunch -> banks do not loan as they are concerned borrowers unable to repay -> cannot access loan -> firms w overstocked inventories and leads to further deflation as they reduce price -> economic recession
  2. higher UN and lower SOL
    - firms earn lower profits due to fall in DD -> lay off workers to reduce COP -> UN (loss in income + stress)
  3. -ve effects on income distribution
    - deflation will lead to redistribution of income from borrowers to lenders
    - increase in real value of debt while real value of loan repayments increase.
  4. worsen of foreign debt position
    - increase govt debt in real terms -> increase burden to pay debt, hinders ability to spend on economy
    - worsen outlook on economy

benefits: if deflation due to SRAS
a. higher econ. growth
if due to increased productivity and better tech, SRAS increase, AG increase
b. improved BOT position
- fall in COP, exports more price competitive


consequences inflation

benefits of low inflation:
1. lower UN, higher AG and PG
2. increased SOL
3. improved equity
4. improved BOT position
costs of high inflation
1. lower AG, PG
2. worsened SOL
3. worsened BOT
4. income distribution (equity)

causes of BOT deficit


reasons for BOT deficit
1, demand factors
a. fall in national income of trading partner country
b. fall in inflation rate of trading partner country
c. appreciation of exchange rate
2. structural factors
a. change in CA affecting international trade (fall in opt cost)
b. stages of econ. developing (developing country import capital goods)


consequences of BOT deficit

  1. depreciation of currency leading to cost-push inflation
    persistent BOT deficit lead to fall in DD for country’s currency -> imported inflation
  2. worsen econ. growth, higher UN, worsen material SOL
    - contractionary effect on economy, fall in AD, fall in household PP
    - hire less workers since less output is produced
    - exporting firms will reduce investment due to poor econ. outlook
  3. impact on external debt
    - persistent BOT deficit means country living beyond means and in continual debt position. if bot deficit contribute to overall BOP deficit position.
    - international debt has to be made up for by drawing on foreign currency reserves/borrowing from foreign country/ IMF
    - when deficit financed by foreign borrowing, country’s foreign long-term debt increases, money has to be repaid some time in the future with interest, fall in SOL for future generations
    greater extent if deficit due to fall in export competitiveness due to lack of skilled labour. not a concern if it is due to import of capital goods

consequences of BOT surplus

  1. actual growth, full employment, dd-pull inflation
    - rising BOT surplus contribute to increase in net exports and hence AD (assuming spare capacity)
  2. appreciation of domestic country currency, resulting in fall in AG, rise in UN, fall in GPL
    - persistent BOT surplus lead to appreciation due to increase in DD for country’s currency
  3. improvement in external debt position
    - rise in foreign exchange reserves, ease pressure on country’s external debt situation
    - if country experiences overall BOP surplus, it will be able to repay previous foreign borrowing, reduce interest payments and free itself from restrictive conditions imposed previously
  4. possibility of retaliation of trading partners
    - fall in export R