Unit 2 Flashcards
(82 cards)
1
Q
What is Aggregate Demand?
A
total demand for goods and services within an economy
2
Q
What is the formula for AD?
A
C + I + G + (X-M)
C = consumption I = investment G = government spending X = exports I = imports
3
Q
What is consumption?
A
Money spent by individuals and families on consumer goods
4
Q
What affects consumption?
A
- Disposable income - An increase in this will increase consumption as people are more willing an able to spend - depends on MPS and MPC
- Interest rates - If high people will save as the reward is higher. If lower the cost of borrowing is lower so more consumption
- Prices - Movement along AD curve
- Consumer confidence - future expectation of wealth, income and interest rates
- Wealth effect - if the value of assets rise people are more likely to consume more
5
Q
What is investment?
A
Business invest in new stores and new technology
6
Q
What affects investment?
A
- Interest rates - if high the profitability of project is lower so will not be as viable
- Business confidence - driven by the consumption of consumers, if high more profit is being made so firms will invest
- Spare capacity - an increase in demand will lead to more capacity being needed
- Corporation tax - high rates mean firms will make less profit and will be less able and willing to invest
- Advance in technology - businesses want the latest most efficient methods so a change in technology will lead to investment
7
Q
What affects government spending?
A
- Size of population - more people will require more public goods
- Shocks - natural disasters, healthcare, war, economic shocks etc will lead to increased spending
- Economic cycle - if recession then more JSA and benefits paid out, less tax revenue due to unemployment (opposite for boom)
- Politics - certain types of government (eg conservatives) will want to spend less money
- Market failure
8
Q
What affects imports and exports?
A
- Exchange rates - value of one currency in terms of another, SPICED
- Incomes within trade partners - affects exports as it depends on incomes of countries buying
- Incomes in home country - if high then more luxury products will be wanted from abroad, therefore increasing M
- Factor endowment - what a country has been born with, natural resources
- Skills of workforce - highly skilled leads to higher quality goods therefore increasing exports
- Protectionism - restricts trade between countries
9
Q
What is Aggregate Supply?
A
Combination of all the willingness and ability of businesses to supply in an economy
10
Q
Why is the AS curve curved?
A
Spare capacity
Lots of spare capacity = more able to supply more for a small increase in price
11
Q
What affects AS so firms will supply more?
A
- Increase in resources - will have more spare capacity
- Fall in costs - at a given price more profit will be made so a firm will be more willing to supply
- Subsidies/fall in tax - same as above
- Increase in productivity/Advance in technology - output increases for a given amount of input, items are more profitable so are more willing to supply
12
Q
What is the circular flow of income?
A
OUTPUT generates INCOME which is spent as EXPENDITURE which requires OUTPUT
13
Q
What is an injection?
A
An addition of money to the circular flow
14
Q
Examples of injections
A
Exports
Government spending
Dis-saving
Investment
15
Q
What are leakages?
A
Removal of money from circular flow
Withdrawal
16
Q
Examples of leakages
A
Tax
Savings
Imports
17
Q
What is the multiplier effect?
A
The final impact on the total value of the circular flow is greater than the initial injection
18
Q
How does the multiplier effect work?
A
- Injection of money
- Creates jobs and so wages are paid out
- Wages are spent in the local economy
- Creates more income for firms
- Goes around until leakages reduce it to nothing
19
Q
What are the macroeconomic objectives?
A
B - trade balance U - low unemployment D - sustainable government debt G - economic growth I - low and stable inflation E - fair distribution of income
20
Q
How is economic growth measured?
A
Expressed as a % change in real GDP
21
Q
Problems with measuring economic growth
A
- Shadow economy - some income/expenditure not included
- Double counting
- Voluntary work - still produces output
- GDP per capita is only an average
22
Q
Why do we want economic growth?
A
- More income leads to a higher quality of life
- increased government spending
- Attracts further investment
- Reduces reliance on other economies
23
Q
Drawbacks of economic growth
A
- Inflation
- Increase in pollution - more output and traffic
- Resource depletion - run out of factors of production
- People are busier - creates stress and may lead to to less family time
24
Q
Evaluation points of economic growth
A
- Inflation - depends on amount of spare capacity
- Pollution - new technology may mean less pollution is produced
- Unemployment - people may be made redundant due to firms acquiring new technology
- Higher SoL - depends on distribution of income, may not benefit all
25
What causes short term economic growth?
Change in AD curve creating a movement up the AS curve
26
What causes long run economic growth?
A change in Aggregate Supply as it takes time to increase capacity
Once it increases it is unlikely to decrease again
27
What is unemployment?
When people are out of work and actively seeking employment
28
What is unemployment rate?
The % of working age people out of work and actively seeing employment
29
What is the claimant count?
The number of people claiming JSA
30
What are the disadvantages of the claimant count?
* People may not claim due to embarrassment or not needing the money
* People can only claim when they have been out of work for over 4 weeks
31
What is the labour force survey?
A survey of a large number of people to see if they're working or not
32
Disadvantages of the labour force survey
Only an average so it is not accurate
33
What are the 3 types of unemployment?
Cyclical
Structural
Frictional
34
What is cyclical unemployment?
Demand led which follow the economic cycle. When there is a lot of growth demand for labour is high so unemployment is low
35
What is structural unemployment?
People who lack the skills to work in jobs with current vacancies (e.g. dock workers)
36
What is frictional unemployment?
People who are stuck between jobs as they are temporarily unemployed
37
What are the effects of unemployment of the individual?
* Low income - low SoL
* Low self esteem - depression
* Loose skills due to lack of practise - less employable in future (Hysteresis)
38
What are the effects of unemployment to society?
* Crime - due to lack of income
| * Negative multiplier - less consumption
39
What are the effects of unemployment on the economy?
* Less tax revenue - fewer people working, govt has less ability to correct market failure
* More spent on JSA - more pressure on govt
* Government deficit - less tax & more JSA
40
What is inflation?
General increase in the price level over a period of time
41
How is inflation calculated?
Weighted basket of goods - ONS purchases the basket and calculates the average price, it is then compared to the previous year and expressed as a %
42
What are the causes of inflation?
* Cost push - increase in the cost of factors of production increases so firms increase their prices to protect their profit margin
* Demand pull - when there is excess demand so firms can increase their prices and increase their profit margin
43
What are the impacts of inflation?
* Effects household income - Assuming wages stay the same, can now buy a lower volume of goods which would reduce SoL
* Menu costs - constantly changing prices, creates OC
* Shoe leather costs - the OC of shopping around for the best price
* Decrease in international competitiveness - assuming no change in exchange rate, it will take more foreign money to buy a product therefore decreasing exports
44
What is the difference between real and nominal GDP?
Nominal: does NOT take into account inflation
Real: DOES take into account inflation
45
What is the balance of payments?
Current account - trade balance, transfers balance, investment income balance
Capital account - short term capital flows, long term capital flows
46
What is X and M in the trade balance?
X is money coming into the UK via exports
M is money leaving the UK via imports
47
When is there a trade deficit or surplus?
Trade deficit - when X M
48
What are the causes of a trade deficit?
* low quality of UK goods - low demand of exports so X falls relative to M
* Cost push inflation - costs of firms increase so they're less willing to supply, decreasing exports
* Fall in labour costs in Eurozone - import costs are less so imports will increase
* Strong £ - imports will be cheaper and exports more expensive
* Increase in interest rates - foreigners will money into UK so it will increase the value of the £ (previous point)
* Low productivity in UK - high production costs means international competitiveness is lost so exports decrease
49
What are the impacts of a trade deficit?
Decrease in AD (X-M) is negative
50
What is government debt?
The accumulation of the previous years deficit and surplus
* Deficit - gov spending > tax revenue
* Surplus - gov spending
51
Why is adding to the government debt ok?
* If the country has the ability to pay it back
* If the size of the debt is shrinking as a % of GDP (growing at a slower rate)
* Inflation needs to be high as the value of the debt will be eroded away as it is worth less
52
What are the negatives of a government deficit?
It is very expensive as interest has to be paid on top of the money owed meaning it has a large OC
53
How can government debt be reduced?
* Borrow less by spending less - less growth, leads to lower QoL, AD will decrease and the multiplier effect will not happen due to less injections
* Increase revenue by increasing tax - less AD due to less consumption and investment, less of a multiplier effect
54
What is a fair distribution of income?
An economy where 10% of the people have 10% of the money, 50% of people have 50% of the money etc
55
Problems with inequality of income
* Poverty - absolute and relative poverty
* Tension in society - people who can't afford anything will be living with people who can afford anything they want
* Can make the problem worse - poorer children will not do as well at school which limits their employment prospects and leads to further income inequality
* Inheritance - Inequality of wealth (money built up over time)
* Crime - people who cant afford anything will resort to criminal acts so they can get what they desire
56
What are the three policies to achieve macro objectives?
Fiscal
Monetary
Supply side
57
What is fiscal policy?
Changing:
• tax
• government spending
58
What is monetary policy?
Changing:
• interest rates
• Money supply
• Exchange rates
59
What is supply side policy?
Anything that affects AS
60
How does a cut in income tax effect growth?
```
• More disposable income
• Increased consumption
• AD increases as C is a component
• Move up AS curve
• Increase in real GDP showing growth
- inflation
- businesses are closer to full capacity so unemployment falls
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61
How does an increase in government spending effect growth?
* Increase G
* Increase AD as G is a component
* Increase in real GDP as AD shifts right and moves along the AS curve
62
Evaluation of fiscal policy
* depends on MPS/MPC
* Assumes ceteris paribus
* Cannot estimate value of multiplier
* Depends how far up the AS curve you start - could be inflationary
* Assumes AS remains the same
63
How does a cut in the interest rate work?
* Reward for saving decreases - MPS decreases
* Repayments decrease (specifically mortgage) - people have more disposable income therefore consumption increases
* Cost of borrowing decreases - firms more likely to borrow and therefore invest
* C and I both components of AD therefore causing a shift to the right (and therefore economic growth)
64
Evaluation for a cut in interest rates
* Ceteris paribus
* Assumes no change in taxes
* Depends how far up AS curve you are
* Depends on MPS/MPC
65
How does a cut in interest rates affect exchange rate?
* Reward for saving decreases
* Investors remove money from your country
* Demand for £ decreases
* Value of the £ depreciates
* Exports appear cheaper therefore demand rises causing a rise in AD = growth
66
Evaluation for interest rate affecting exchange rate
* Investors may not remove money
* Value of £ may not fall depending on strength of other exchange rates
* Depends on price elasticity of good (linked to quality of goods)
* Protectionism may prevent exports from increasing
* People may substitute cash investments for physical investments (take money out of bank but buy property)
67
How is the money supply increased?
• Quantitative easing - Bank of England buys bonds from the government (new electric money)
68
What does a supply side policy do?
Increase the money supply therefore devaluing the currency and causing the interest rate to fall (price of money) to encourage consumption and investment
69
How do supply side policies work?
* Increase productivity - more can be produced with the same resources
* Increase investment - more capacity and more efficient technology
* Improve mobility of labour - making it easier for people to move to where there are vacancies
* Job incentives - persuade people to work which increases the labour force so wages fall/stop growing even further
* Stimulate invention/innovation - reduce costs so firms are more willing to supply
70
Examples of supply side policies
* Apprenticeships - increase skill of the workforce
* Start up loans for new businesses - incentives to start up therefore increasing capacity
* Wage subsidy - acts as a reduction of costs
* Benefit cuts - incentive to work
* Promote higher education
* Subsidise childcare
* Privatisation - profit motive to be more productive and efficient
71
Evaluation points of supply side policies
* Assumes ceteris paribus - benefit of policy may be cancelled out
* Brain drain
* Start up loans not effective
* People may not take up subsidies
* Time lags on policies
* People may not use new infrastructure
* Benefit cut will only work if there are job vacancies
* Needs to be demand for more spare capacity
72
Why do policy objectives conflict?
One single policy is unlikely to achieve all 6 objectives
A compromise is needed to achieve all 6 objectives so multiple policies will need to be used
73
What is absolute advantage?
When country A can produce at a lower unit cost than country B
74
What is comparative advantage?
When country A can produce at a lower opportunity cost than country B
75
What does absolute and comparative advantage assume?
That both countries have the same resources
76
Advantages of trade
* Allows a country to specialise so more units will be produced with the same resources
* More production reduces the price so it becomes more affordable
* Improved quality of life
* Better quality products
* Consumers get more choice
77
Why is protectionism used?
To help stop a country losing its international competitiveness
78
What is a tariff?
* Tax on imports
* % of the selling price added onto the price of the product
- Imports will fall as producers put up their prices
79
What is a quota?
• Physical restriction on the number of imports
- Competition is reduced
80
What are voluntary export restraints?
• When a country asks another to limit the number of exports
- Restricts competition
- Done to repay a favour
81
What are non tariff barriers?
• Rules/quality standards that increase the cost of importing by making trade difficult
82
Effects of protectionism
```
On home producers
• Firms put under less pressure
• Less unemployment
On foreign producers
• Products are made expensive so trade is lost
• Lower quality of life
• Can't grow their business
Consumers
• Increased costs
• Unsafe products
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