Year 1 Macro Flashcards
(151 cards)
1
Q
Define GDP
A
GDP is gross domestic product and is the value of all goods/services produced in an economy in a one-year period.
2
Q
Explain nominal values
A
Nominal values are when there is no adjustment to the amount based on a change in rates of inflation
3
Q
Explain real values
A
Values which are adjusted for inflation
4
Q
Define GDP per capita
A
GDP per capita shows the mean wealth of each citizen in a country
5
Q
Define GNI
A
GNI measures the income earned by citizens operating outside of the country + GDP
6
Q
Define Gross National Product
A
Gross National Product is GDP + Income earned abroad - remittances
7
Q
One benefit of GNI per capita
A
GNI per capita provides a much more realistic view of a country’s wealth than GDP/Capita
8
Q
1 Benefit of using Real GDP
A
Real GDP is better as one country may have a high nominal GDP but also a high rate of inflation
9
Q
1 Benefit of using Real GDP Per capita
A
RGDP Per capita takes population differences into account
10
Q
1 Benefit of using real GNP per capita
A
RGNP Per capita shows the income that is within a country’s borders
11
Q
Define purchasing power parity
A
Purchasing power parity (PPP) calculates the relative purchasing power of different countries
12
Q
How does PPP (Purchasing power parity) work?
A
Purchasing Power Parity shows the units of a country’s currency needed to buy the same basket of goods in another country
13
Q
1 Benefit of PPP
A
PPP is a better standard of living comparison between countries where goods cost different amounts.
14
Q
3 Limitations of using GDP for comparisons
A
- Inequality - differences in standards of living within a country can be significant
- Some countries take less time to generate income, meaning higher standard of living
- Standard of living is higher in countries which produce few negative externalities of production on environment
15
Q
What is National Happiness?
A
National happiness is measured by the ONS.
Happiness focuses on things like health and relationships.
16
Q
Define Inflation
A
inflation is the sustained increase in the average price level of goods/services in an economy
17
Q
Define Deflation
A
Deflation occurs when there is a fall in average price levels of goods/services in an economy
18
Q
Define Disinflation
A
Disinflation occurs when average price levels rise at a slower rate than before
19
Q
What is the inflation rate?
A
The inflation rate is the change in average price levels in a given time period.
20
Q
Define the Consumer Price Index (CPI)
A
The Consumer Price Index is a basket of the most consumed 650 goods/services that an average household would purchase on an annual basis.
Goods in the basket are weighted based on the proportion of household spending.
21
Q
How do you calculate CPI
A
CPI = (Cost of basket in Year X / Cost of basket in base year) x 100
22
Q
3 Limitations of using CPI
A
- Many households differ from the ‘average household’
- CPI ignores regional differences in inflation
- The CPI is always behind changes in consumption of goods
23
Q
Define the RPI - Retail Price Index
A
The retail price index includes council tax, mortgage interest payments and house depreciation.
24
Q
4 Causes of inflation
A
- Demand-pull Inflation
- Cost-push inflation
- Changes to money supply
- Wage-price spiral
25
Explain Demand-pull inflation
Demand pull inflation is caused by excess demand in the economy
26
Explain Cost-push Inflation
Cost-push inflation is caused by increase in costs of production in an economy.
27
Explain how changes in money supply causes inflation
If the BOE lowers the base rate, there will likely be increased borrowing by firms and consumers
28
Explain the wage-price spiral
1. Demand-pull inflation
2. Workers wages have less purchasing power
3. Workers demand wage increases to compensate for higher prices
4. These wage-increases act as a form of cost-push inflation
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2 Impacts of inflation on Firms
1. Increased uncertainty delays investment
2. Menu Change costs
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3 Impacts of inflation on Consumers
1. Decrease in purchasing power
2. Decrease in real value of savings
3. Fall in real income
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Impact of inflation on Government
UK exports become less internationally competitive
32
Impact of inflation on workers
1. Demand higher wages
2. If wage increases don't equal inflation, motivation and productivity may fall
33
Define Unemployed
Someone is considered unemployed when they of working age, able and willing to work, actively seeking work but still cannot find a job.
34
Define Economically active
An Economically active person is part of the labour force and of working age
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Define Economically Inactive
An Economically Inactive person is someone who is not part of the labour force and not of working age.
36
Define the Labour force
The labour force consists of all workers actively working and the unemployed who are seeking work.
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Define the non-labour force
The non-labour force includes all those not seeking work
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2 ways to measure to unemployment
1. ILO Labour force survey
2. The Claimant Count
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Define ILO labour force survey
The ILO Labour force survey is an extensive survey which lets respondents determine if they are unemployed based on:
1. If they are ready to work within the next 2 weeks
2. If they have actively looked for work in the past month
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Benefit of ILO Labour force survey
The same survey is used internationally so is useful for international comparisons
41
Explain the Claimant count
The Claimant count records the number of people claiming job seekers allowance.
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Define Underemployment
Underemployment is when people want to work more hours than they currently work or they are overqualified for the job they currently work.
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Calculation for unemployment
Unemployment rate = (Amount Actively seeking work / Total labour force) x 100
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Calculation for employment
Employment rate = (Number in employment / Population of working age) x 100
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Calculation for inactivity rate
Inactivity rate = (Inactive people of working age / Working age of population) x 100
46
Explain Structural unemployment
Structural unemployment occurs when there is a mismatch between jobs and skills in the economy.
There are 2 types - occupational and geographical.
47
Explain Cyclical Unemployment (demand-deficient)
-Cyclical unemployment is caused by a fall in AD in an economy.
-The demand for labour is derived demand for goods/services
-As output falls in the economy, firms layoff workers
48
Explain Seasonal unemployment
Seasonal unemployment occurs as seasons come to an end labour is not required until the next season.
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Explain frictional unemployment
Frictional unemployment is short term and occurs when workers are between jobs
50
Explain Real-wage unemployment
Real-wage unemployment occurs when wages are above the free-market equilibrium, causing an excess supply of labour.
51
Define Net-migration
Net-migration is the difference between immigration and emigration
52
3 Impacts of immigration on employment
1. Immigrants fill vacancies which tend to be low-skill jobs
2. The increased supply of labour may lower wages in the economy.
3. Immigration results in an increased population, which increases consumption
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Impact of immigration on unemployment
Immigrants may displace local workers, increasing unemployment rates.
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3 Long-term effects of unemployment on the government
1. Increased spending on benefits
2. Less tax revenue
3. Increased spending on retraining
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2 Long-term effects of unemployment on Firms
1. Loss of sales revenue
2. Lower wage costs
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What other things can long term unemployment lead to in society?
Crime and suicide
57
Define Balance of Payments (BoP)
The Balance of Payments (BoP) for a country is a record of all the financial transactions that occur between it and the rest of the world.
58
What are the 2 main sections of the BoP?
1. The current account
2. The financial and capital account
59
What is the current account?
The Current Account is all transactions related to goods/services and the transfer of primary and secondary income.
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What is the financial and capital account?
The financial and capital account is all transactions related to savings, investment, and currency stabilisation
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Why is the BoP called the BoP? (3)
1. The current account should balance with the financial account and be equal to zero.
2. If the current account balance is positive, then the capital and financial balance is negative.
3. Money flowing into the country is recorded as a credit and money flowing out as a debit
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What does the current account record?
The Current account records the net income that an economy gains from international transactions.
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Explain Primary Income
Primary income on the current account consists of income transfers by citizens and corporations
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Explain Secondary income
Secondary income on the current account are payments at government level between countries
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How is the current account balance expressed?
The current account balance is expressed as a % of GDP
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When does a current account deficit occur?
A current account deficit occurs when the value of outflows is greater than the value of inflows.
This usually occurs when the debits from imports are greater than the credits from exports.
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When does a Current account surplus occur?
A current account surplus occurs when the value of inflows is greater than the value of the outflows.
This usually occurs when the debits from imports are less than the credits from exports
68
how long has the UK run a current account deficit?
Since 1985
69
How would the UK reduce the current account deficit?
By increasing exports, though this would take a long time as it is large
70
Define AD
AD is the total demand for all goods/services in an economy at any given average price level
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Define consumption
The total spending on goods/services by consumers
72
Define Investment
Investment is the total spending on capital goods by firms
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What does government spending NOT include:
Government spending does not include transfer payments`
74
Define Net Exports
Net exports are the difference between the revenue gained from selling goods/services abroad and the expenditure on goods/service from abroad
75
In the UK, what are the % splits in AD
Consumption - 60%
Investment - 15%
Government spending - 25%
Net exports - 1%
76
What does the household savings ratio calculate?
The households savings ratio calculates household savings as a proportion of household income.
77
What is the households savings ratio when the economy is booming and full of confidence?
Likely low
78
Explain the wealth effect
Rising asset prices give consumers confidence to borrow more money and spend.
79
What does investment do to an economy?
Investment increases the productive potential of an economy, increasing the potential long run economic growth.
80
Define depreciation
Depreciation is the decrease in value of an asset over time
81
Define Gross investment
Gross investment is the total amount of spending on capital goods
82
Define Net Investment
Net investment is gross investment - depreciation
83
What does net investment measure?
Net investment measures the addition of new capital goods to an economy.
84
What are animal spirits
Animal spirits are when firms have too much confidence in good times and make less rational investment decisions
85
Define the trade cycle
The trade cycle is the stages of economic growth that an economy moves through including boom, slowdown, recession and recovery
86
Define AS (aggregate supply)
Aggregate supply is the total supply of goods/services produced within an economy at a specific price level at a given time
87
What is LRAS curve influenced by?
Changes in the productive capacity of the economy
88
What is the classical view of the LRAS
In the long-run, an economy will always return to the full employment level of output.
There may be short-run output gaps in an economy
89
What is the Keynesian view of LRAS??
The Keynesian view believes there is a role for the government to increase its expenditure to shift AD and change the negative 'animal spirits' in the economy
90
Define the circular flow of income
The circular flow of income is an economic model that illustrates money flows in an economy
91
Circular flow of income diagram explanation
...
92
Define Injection
An injection adds money into the circular flow of income
93
What 3 forms can an injection come in?
1. Government spending (G)
2. Investment (I)
3. Exports (X)
94
Define Leakage
A leakage removes money from the circular flow of income
95
3 forms of a leakage
1. Savings (S)
2. Tax (T)
3. Imports (M)
96
Define Real national output equilibrium
Real national output equilibrium occurs where aggregate demand intersects with aggregate supply
97
Define the multiplier ratio
The multiplier ratio is the of change in real income in proportion to the injection that created the change.
98
What 2 ways can the multipler be calculated? ...
1. Multiplier = 1 / (1-MPC)
2. Multiplier = 1 / MPW
99
What is MPW
Marginal propensity to withdraw
(MPM + MPS + MPT)
100
Define output gap
An output gap is the difference between the actual level of output and the maximum potential of output
101
Define positive output gap
A positive output gap occurs when real GDP is greater than the potential real GDP.
102
Define negative output gap
A negative output gap occurs when real GDP is less than the potential real GDP
103
Trade / business cycle diagram ...
...
104
6 Characteristics of a recession
1. Two Consecutive quarters of negative economic growth
2. Increasing unemployment
3. Increasing negative output gap and spare capacity
4. Low confidence for firms and households
5. Low inflation
6. Increase in government spending leading to a greater budget deficit
105
6 Characteristics of an economic boom
1. Higher rates of economic growth
2. Decreasing unemployment
3. Reduction of negative output gap
4. High confidence and more risky decisions taken
5. Increasing rate of inflation
6. Increase in government budget as tax revenue rises.
106
7 Benefits of economic growth
1. Increased incomes lead to better standards of living
2. Decreased levels of absolute poverty
3. Greater profit for firms
4. Increased investment by firms
5. Reduced expenditure by governments on benefits
6. Higher government tax revenue
7. Reduced unemployment
107
4 Costs of economic growth
1. Demand-pull inflation
2. Environmental damage caused by negative externalities of production
3. Less internationally competitive exports, which could delay business investment
4. Greater consumption of demerit goods
108
Define demand-side policies
Demand side policies aim to shift aggregate demand (AD) in an economy
109
What are the two categories of demand-side policies?
1. Fiscal policy
2. Monetary policy
110
Define Fiscal policy
Fiscal policy is the use of government spending and taxation to influence AD.
111
Define Monetary policy
Monetary policy is adjusting interest rates and the money supply to in influence AD
112
2 Tools for applying Monetary policy
1. Adjustments to interest rates
2. Quantitative easing
113
Explain quantitative easing (8 steps)
1. The BoE commits to buy £60bn of gilts a month
2. Commercial banks receive cash for their gilts
3. Liquidity in the market increases
4. Commercial banks lower lending rates
5. Consumers and firms borrow more
6. Consumption and investment increases
7. AD increases
8. Inflation increases
114
Are transfer payments counted as government spending in AD?
NO
115
Define transfer payments
Transfer payments are payments in which no goods or services are being exchanged
116
In fiscal policy, what would happen if the government increased VAT from 20% to 22%?
1. Government increases VAT to 22%
2. Consumers pay more indirect tax and prices rise
3. Less disposable income available for other purchases
4. Consumption reduces
5. AD reduces
6. Inflation reduces
117
In fiscal policy, what would happen if the government reduced corporation tax?
1. Reduction in corporation tax
2. Firms profits increase
3. Investment by firms increase
4. Ad increases
5. Inflation increases
118
In fiscal policy, what would happen if the government freezes public sector pay?
1. Government freezes public sector pay
2. Consumer confidence falls
3. Consumption falls
4. AD falls
5. Inflation decreases
119
In fiscal policy, what would happen if the government increased the allowance in Universal credit (unemployment benefits)
1. Gov increases allowances of universal credit
2. Household income increases
3. Consumption increases
4. AD increases
5. Inflation increases
120
What is a budget deficit?
When government revenue is less than government expenditure
121
How is a budget deficit funded?
Through public sector borrowing, which gets added to the public debt
122
Define Direct tax
A direct tax is a tax imposed on an individual or firm's income or profits
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Define Indirect tax
Indirect taxes are imposed on spending on goods and services
124
Who sets monetary policy?
The Bank of England's Monetary policy committee (MPC)
125
What does the BoE's MPC (Monetary policy committee) do when setting monetary policy? (3)
1. They set the base rate and discuss if quantitative easing is required
2. Policy is decided by the majority vote
3. It can take up to 2 years for the effects of decisions to be seen in the economy
126
3 Strengths of monetary policy
1. Is able to consider the long-term outlook
2. Targets inflation and maintains stable prices
3. Depreciating the currency can increase exports
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2 weaknesses of monetary policy
1. Conflicting goals - economic growth puts upward pressure on inflation
2. Time lags
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4 strengths of fiscal policy
1. Spending can be targeted on specific industries
2. Short time lag compared to monetary policy
3. Reduces negative externalities through taxation
4. Redistributes income through taxation
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3 weaknesses of fiscal policy
1. Policies can fluctuate as governing parties change (Long term infrastructure projects may lack follow through)
2. Increased government spending can create budget deficits
3. Conflicts between objectives - cutting taxes to increase economic growth may cause inflation
130
Define supply side policies
Supply side policies aim to shift long-run aggregate supply (LRAS)
131
What are the 2 categories of supply-side policies?
1. Interventionist
2. Market based
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Define Interventionist supply-side policies
Interventionist supply side policies require direct government intervention to increase the full employment of output
133
What are interventionist supply-side policies mainly used for?
Interventionist supply-side policies are mainly used to correct market failure
134
Define market-based supply side policies
Market supply side policies aim to remove obstructions in the free market that are holding back improvements in long-run potential
135
What 3 things does market-based supply side policies include?
1. Setting up a regulator to prevent monopolies forming
2. Relaxing employment laws to increase labour force flexibility
3. Privatising government services through contracting
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You need to find supply side policies to list.
137
List 8 market-based supply side policies
1. Privatisation
2. Deregulation
3. Deregulating labour markets
4. Reducing the power of trade unions
5. Deregulate financial markets
6. Increase free-trade
7. Removing unnecessary red tape
8. Encourage immigration
138
List 4 Interventionist supply side policies
1. Increased education and training
2. Improving transport and infrastructure
3. Build more affordable homes
4. Improved healthcare
139
What is privatisation and why does it happen?
1. Privatisation involves selling state-owned assets to the private sector.
2. This is because the private sector is argued to be more efficient because they have a profit incentive to reduce costs and provide better services
140
What is deregulation
Deregulation involves reducing barriers to entry to allow new firms to enter the market, making the market more competitive.
Competition leads to lower prices and better quality of goods/services
141
What is a drawback of deregulation
Privatising natural monopolies is bad
142
What happens when income tax rates are decreased in terms of labour supply?
When income tax rates are decreased, it is argued that it increases the incentive for labour to work harder, leading to an increase in labour supply.
143
What happens when labour markets are deregulated?
1. Labour markets are deregulated
2. Such as allowing zero-hour contracts which allow firms to employ workers when demand is greater
144
What happens when the power of trade unions are reduced?
1. Power of trade unions are reduced
2. Through reducing the ability of trade unions to go on strike
3. Increases efficiency of firms
145
What happens when unemployment benefits are reduced?
1. Unemployment benefits reduced
2. Encourages people to find jobs
146
What is increasing free-trade?
Increasing free-trade includes lowering tariff barriers. This will increase trade and incentivise export firms to invest, while reducing business costs
147
What is removing unnecessary red tape
1. remove planning permissions and bureaucracy
2. Firms costs reduced and encourages investment
148
What does building more affordable homes do?
Building more affordable homes makes it easier to workers to move and find jobs, reducing geographical immobility.
149
5 strengths of supply-side policies
1. Increases the rate of growth in an economy
2. Reduces average price levels
3. Reduces unemployment
4. Increase the value of net exports
5. Improvements in infrastructure can raise the quality of life for all citizens
150
3 weaknesses of supply-side policies
1. Expensive to implement
2. Big time lags
3. Changes in governments often result in changes to budget and projects
151
