UK Economic Activity - unit 1 Flashcards
(23 cards)
Economic Objectives
Low unemployment/full employment.
Low inflation => target 2%
Sustained/steady economic growth, measure by GDP
stable balance of trade exp and imp
What are monetary policies
Policies that make changes to the base interest rate and money supply.
An interest rate can be defined as the cost of borrowing and the reward for saving money.
Interest rate is set by the monetary policy committee (bank of England) all other interest rates, loans, mortgages and credit cards are based from this
Fiscal policy
Polices that make changes to rates of taxation and government spending in order to achieve the economic objectives.
Supply side policies
Policies which aim to achieve the economic objectives by improving the productivity and skills of the people and businesses of an economy
What is the claimant count
Published each month and counts the number of people claiming unemployment benefits such as job seekers allowance (JSA)
What is the labour force survey (LFS)
Samples around 90,000 people each month and counts as unemployed:
We’re available to start work in the next two weeks.
Had actively sought work in last four weeks.
Had found a job and were waiting to start.
LFS is usaully more accurate and higher. Working age is 16-64
Effects of unemployment on the individual
-Reduced income
-reduced standard of living
-reduced efficiency as the unemployed worker loses skills, fitness and motivation.
-reduced status, could lead to social exclusion
-Increased health problems both physical and mental
For business and firms, unemployment effects
Negative
-fall in demand for products, less sales and profits.
-knock on effect on suppliers as they lose business.
Positive
-bigger pool of labour available
-less pressure to pay higher wages
-less risk of industrial action as employees are worried about losing their job
Effects for the government unemployment
-there is reduced spending in the economy
-reduced taxation revenue for the government
-increased burden on taxpayers
-increased crime
-increased burden on health system
Business/trade cycle
1.) Boom - at this stage GDP is increasing Income, employment and tax revenues are high and inflation may start to increase.
2.) Recession- at this stage GDP has fallen for 2 consecutive quarters.
-income, employment and tax revenue falls
- benefit payments increase
- inflation likely to fall
3.) Slump - at this stage GDP falls for longer than 2 consecutive quarters.
- issues similar to a recession but even more severe unemployment, lower demand, less tax revenues.
4.) recovery - follows either a recession or slump and GDP begins to increase.
-incomes, employment and tax revenues rise.
-benefit payments become lower
Types/causes of unemployment cyclical
Cyclical - cyclical unemployment is associated with a recession in the economy.
Aggregate demand has fallen for many products and so firms pay off staff and there are not enough jobs for those seeking them.
Types of unemployment (structural)
Structural unemployment is caused by a mismatch between the skills that workers in the economy can offer and the skills demanded of workers by employers.
-known as the skills gap
-linked to the closure of industries.
Types of unemployment (frictional)
Frictional unemployment occurs when people are switching between jobs, either because they have been made redundant or are looking for new employment.
Can also be linked to a lack of knowledge about job vacancies
Types of unemployment (seasonal)
Seasonal unemployment occurs in industries such as agriculture, tourism and building where the number of people employed changes depending on the time of year
Monetary policy to reduce unemployment.
-reduce interest rates
-when interest rates are lowered this makes it cheaper to borrow money, which is encourages spending by consumers. This increases demand for products, creates growth and jobs and therefore reduces unemployment.
Fiscal policy to reduce unemployment
Reduce taxes-
- when taxes on consumers are reduced this should increase disposable income, which increases demand for products, helping growth and leading to more workers being employed
Fiscal policy to reduce unemployment
- increasing government spending.
- when government spending is increased this should create jobs in the public sector e.g. and give existing government workers more income
Consumer price index (CPI)
-Since 2004 this has been the government’s official measure for inflation with a target of 2%
-the prices of a basket of goods (around 700 items in basket) are gathered each month.
-items are updated annually to reflect current trends.
-items are given a weight based on importance.
-does not include mortgage payments or other housing costs such as repairs, insurance and council tax.
-cpi is closer to the method used in the EU
2 Retail price index (RPI)
-until 2004 RPI was the main measure of inflation with a target of 2.5% for the Bank of England to maintain.
-similar to cpi just a slightly different range of items including housing costs.
—although no longer the main measure it is still calculated and used as the figure when deciding how much increases in pensions or train fares should be.
Nominal and real rates of inflation
-nominal - the monetary value before the rate of inflation has been considered.
-real - the money value after the rate of inflation has been considered.
-the real value is more important and when and when viewing information you need to know if figures are given in ‘nominal’ terms or ‘real’ terms.
Deflation
-deflation is a fall in the general level of prices
-falling prices occur because of less demand which makes it difficult for businesses to make profit and leads to unemployment.
-people put off spending as deflation means products will be cheaper in the future.
Effects/consequences of inflation
-reduces the ‘real’ income of people- if individuals do not receive a pay rise at the same or above the rate of inflation they cannot purchase the same amount of products and in ‘real’ terms are worse off.
-makes savers worse off if inflation is above the interest rate as it reduces the value of savings.
-high inflation makes British goods more expensive abroad leading to a fall in exports
Cost push
- this occurs when the costs of making a product increase at a fast rate
-costs include wages, raw materials, VAT, energy
-if specifically linked to increases in staff costs it is known as wage push inflation
-in order to maintain profits businesses need to increase prices to cover costs
