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Flashcards in Unit 5 Deck (85):

How can a planned or command economy control different %s of their economy ?

Big G intervention
will decide all g/s produced, how much, price paid, availability e.g. North Korea, China Cuba


How can a free market economy control different %s of their economy ?

Small G intervention
G/s are provided mainly by he private sector and few g/s are available e.g. Mexico


How can a mixed economy control different %s of their economy ?

Means G provide essential g/s and some merit goods as well as regulating the private sector e.g. UK


What are the role of the G?

1. - G provides essentials g/s e.g. Health services
- paid for out of income tax
2. - Merit goods are g/s society needs provided for by the G, e.g. Health services - UK NHS, US health insurance
3. - public goods are goods which everybody benefits from, however not everyone benefits would want to pay for them, e.g. traffic lights and road repairs
4. - controls natural monopolies which are essentials such as water and electricity
- if controlled by private sector they might charge higher prices than people can afford


what type of people do the G employ?

doctors, teachers, civil servants


why would people want to work for the G?

job security


full employment?

most people are in work


what did introducing the N min. wage?

we increase dissatisfaction amongst workers who can't get a job
productivity increases, employed workers will not ask for wage increase
inflation is then controlled


the G want to strive for what?

full employment to collect tax and pay less transfer payments


what is the rate of unemployment?

no. of unemployed / labour force X 100


who is part of the labour force?

- 18-65
- cannot be in prison
- cannot be in full time education
- cannot be in full time military service


how can you prevent temporary unemployment?

publicise job vacancies


how can you prevent seasonal unemployment?

not a big issue if they have a second job


how can you prevent technological unemployment?

provide educational training opportunities focusing on new technical skills


how can you prevent frictional unemployment?

training where shortages of supply, providing more info. through G and priv. labour recruitment agencies


how can you prevent structural unemployment?

encourage people and businesses to move to growth areas of the economy


how can you prevent cyclical unemployment?

G increase in its own spending in time of recession which lower business taxes, reducing costs


why does G want full employment?

- measure of good G
- not wasting resources
- less benefits
- decrease social unrest


what is derived demand?

we don't demand the actual workers, we demand the service provided


what is inflation?

an increase in general price levels overtime


what is the G aim of inflation?

2% or +-1%


what is the danger of inflation?

money looses its buying power


who are the losers of inflation?

- poor consumers, the unemployed and those on low wages cause they are pushed into poverty as P increase
- pensioners and those on fixed Y or benefits suffer the most cause they have no way of earning more income
- savers lose out because money devalues


who are the winners of inflation?

- more well off people who have assets with houses, land or art will be able to cope with inflation better as there assets keep pace with inflation
- firms that sell inelastic g/s e.g. tobacco
- highly skilled workers that negotiate higher wages
- business owners that can increase fees


how do you measure inflation?

CPI consumer price index


what is the CPI?

- contains normal g/s most people buy
- items are reviewed yearly because peoples tastes change
- some items are weighed depending on the importance of them
- in order to make CPI, 2 surveys are carried out:
1. looks at the buying pattern of consumers
2. looks at the P changes of products
- CPI is designed to be a shortcut to see the rate of inflation compared to a base of 100


4 major problems caused by CPI

1. businesses become reluctant to supply goods on credit
2. if prices start rising faster. prices are unpredictable making the economy unstable
3. when P of domestic products rise they become less competitive when compared with imports
4. inflation will reduce value of taxes received


what is fiscal policy?

another term for budget
involves changing total level of taxation or government spending in an economy to influence the level of demand for goods and services


what is expansionary fiscal policy?

may be used in times of a recession
decreases tax levels so people go out and spend more, increasing economic growth, however some people may buy goods imported which doesn't benefit the country


what is contractionary fiscal policy?

may be used to reduce price inflation
involves reducing demand in an economy through tax by increasing so people won't buy as much


what is monetary policy?

uses the interest rate of the central bank to influence demand


what is expansionary monetary policy?

used to boost demand and employment by cutting interest rates so people borrow more


what is contractionary monetary policy?

increasing interest rates will encourage people to save more in bank deposit accounts so they can reduce their own borrowing from the central bank


what is GDP per Capita?

- take total GDP and divide by the population of the country we will get an average Y per person
- this is also the av. output per person
- in this way countries can be compared to each other and we can decide who has the best standard of living


what doesn't GDP tell us?

how the National income is distributed


why is GDP not accurate?

GDP doesn't take into account many transactions so the total must be much lower


what are the 3 methods for measuring GDP?

- by adding every persons income from LLCE, this shows = GDP -> called the income method
- all spending in the economy is spent on g/s, therefore if we add together all the spending in the economy should = GDP -> expenditure method
- the value added or production method adds how a product is improved at each stage of production


what do all 3 methods =

same total


what does real mean?

It means the effects of inflation have been removed


what is relative poverty?

they are people with fewer goods and services than others


what is absolute poverty?

some people don't receive enough to even meet basic needs


what is the poverty line?

anyone living on less than $2 a day but the pov. line can change in each country


what is the poverty line for the UK?

below half of the median income in the UK


what is economic growth?

involves an increase in real GDP or the total output of goods and services


what happens if there is a rise in real GDP?

economic growth occurs


how can a rise in real GDP be achieved?

- discovery of more natural resources
- investment in new capital goods and infrastructure, such as new ports, roads and research facilities
- technical progress including new products and production processes that can increase the productivity
- an increase in the size and skills of the workforce e.g. through better education and training
- relocating scarce resources to their most efficient uses


how can growth be encouraged?

- making it easier for business to conduct business e.g. lowering taxes
- providing incentives for businesses to set up in growing industries e.g. wind power energy
- employing people in productive activities in the public sector
- encouraging investment by both private and public sectors


what is meant by trade off?

the G has to balance its various policy aims e.g. it may have to TRADE OFF or accept a little more unemployment for a little less inflation


what are the governments aims?

economic growth
environmental concerns
price stability
full employment
reducing the gap between rich and poor


what is budget deficit?

this where public expenditure is greater than the revenue received


what is budget surplus?

this is where the public expenditure is less than the revenue received


what is a balanced budget?

this is where the public expenditure is equal to the revenue received


what are the four main reasons for taxing?

- to raise revenue (helps to cover a range of G expenditures)
- to discourage certain activities (smoking is heavily taxed)
- to redistribute income between the rich and the poor
- to discourage the import of goods (we import more than export which is not good for the economy)


what are direct taxes?

taxes which are taken directly from incomes and profits


what are indirect taxes?

paid by consumers when they buy goods and services
they raise the cost of production and can be used to discourage the consumption of harmful products


what is progressive tax?

where richer people pay more tax than the poor an did considered more fair in most economies


what is regressive tax?

flat rate tax e.g. VAT
higher % or disposable income is paid by the poor than the rich
however is the most efficient way collecting tax


what is proportional tax?

not used very often
it is a set % of your earning paid by everyone


what type of tax is a tax on incomes?

often a progressive tax
higher-income earners pay larger % of income tax - direct tax


what type of tax is a tax on purchasing?

example is value added tax
producers and sellers pf goods pay the tax to the G as a % of the value they add in the production of an item


what type of tax is a tax on profits?

direct tax - the G can make it progressive by increasing the rate as profits increase


what are regulations?

there G rules backed up by penalties


give an example of regulation on methods of production

management of waste and pollution: rules protecting the health and safety of production workers


give an example of regulation on setting up a new business

paperwork to be filled in to register the business, rules protecting shareholders


give an example of regulation on rules about prices

prices that can be charged for supplying certain products


give an example of regulation on product standards

quality of food products, labelling the contents of food products


give an example of regulation on disclosure of information

info that companies must produce in reports to shareholders, info about how certain products can be used


give an example of regulation on providing goods on credit

info that must be given about the cost of the credit to the borrower, rules setting out the possibility of the borrower pulling out of a credit agreement


give an example of regulation on providers of certain products and services

who can supply certain products, such as repairs to gas pipes ; building construction


give an example of regulation on supply of harmful products

health warning on cigarettes


benefits of regulations

- to improve efficiency
- regulations are also used to redistribute income
- monopolists may restrict output or artificially raise prices
- some industries involve a high level of regulation e.g. banking sector


disadvantages of regulations

- usually raise business costs and can involve a lot of time
- some business people complain that they are 'over regulated' meaning sometimes they cannot concentrate on running their business'
- countries with a greater number and complexity of regulations lose competitiveness


what are permits?

are given as exceptions to regulations e.g. disability parking permits


what are license?

where the G allows a firm to import of supply a specific product to guarantee quality


what are the four main uses of subsidies?

- to encourage the production of goods of national importance e.g. the G may provide subsidies to farmers to produce essential food supply
- to encourage the development of new products and industries (the G may provide subsidies to encourage the development of new forms of energy such as wind and solar)
- to provide support for industries that are in decline and that are major employers of labour (closing industries may have neg. externalities such as unemployment)
- to protect domestic industries against foreign competition


BOP current account (equation) =

export receipts - import payments


what are the four balances in the current account?

balance of goods, services, transfer and International investment income


what is the international investment income?

the difference between what British companies earn abroad - profits of foreign companies that take their money home


what is the BOP?

the BOP of a country records all international financial transactions between the country and all others


what are visible exports?

physical products sold oversea


what are invisible exports?

sales of services overseas


what are the three accounts of the BOP?

current, capital and financial


what is the current account?

records payment for visible and invisible imports and exports, plus net income flows and transfers


what is the capital account?

recorded payments involving the sale for capital goods or fixed assets such as buildings and machinery


what is the financial account?

records the investment flows including loans and loan repayments, and the sale of shares