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| Question | Answer |
| National Income | The monetary value of the flow of output of goods and services produced in an economy over time. |
| GDP | The total value of goods and services produced in an economy over time. It is calculated in quarters. There are three ways of calculating it; National Income, Nationa Expenditure and National output. |
| Trade deficit | When the value of an economys imports excceeds that of its exports. |
| Balance of payments | exports-imports. (deficit is when imports exceed exports- negative value) |
| Economic growth | the increase in the amount of goods and services per capita. |
| Inflations | A rise in the price of goods ad services we buy compared to the same month a year earlier. |
| Index numbers and formula. | Index numbers are useful when comparing data with large numbers. 1) assign a base year a total of 100. 2) work out the rest n accordance with this using the formula: (New value/ original value) x 100. |
| The circular flow of income | A diagram to show the flow of income in an economy. It is made up of households, firms and injections/leakages. injections add money into the CF, and leakages remove it. Injections: Government spending, Exports, Investment. Leakages: Tax, Savings, Imports. |
| The actual circular flow | Firms use FOP to procude output, which they sell to households. The households receive back this money as factor payments, and so a cycle is established. |
| If injections are bigger than withdrawals. | Expenditure will exceed planned amount, firms will supply more, national income will increase, and demand will increase even more. |
| If leakages exceed injections | Output will exceed the expenditure, so firms will decrease output, and expenditure and national income will decreasse. |
| Macroeconomic equilibrium | When injections = withdrawals. |
| Macroeconomic disequilibrium. | When injections do not equal withdrawals. It is when the plans of households and firms differ. |
| Limitations of using GDP to measure standard of living | It doesn't take into account DRIVE Development and innovation Regional Variations Inequality Value of unpaid work Evolving/changes in working conditions. |
| Other ways of measuring standard of living (apart from GDP) | Happy life index Human development index (adult literacy, life expectancy, GDP per capita) Better life index. |
| There are three ways of measuring GDP | National output- measure the output of all sectors of production (primary sector, secondary sector etc) National expenditure- measure of AD, so C + I + G + (X-M) National Income- add the incomes of all FOP (rent, salary, profits from businesses) |
| Nominal GDP | GDP with inflation not considered |
| Real GDP | GDP that is adjusted for inflation. |
| GNP | Gross national product- GDP plus net incomes from overseas investments and remittances. |
| Net | once everything has been taken off |
| Net income | Income received once tax etc has been taken off. |
| Remittances | payments |
| PPP Purchasing Power Parity | How many units of one country's currency are needed to buy the same basket of goods and services with a set amount of another country's currency. |
| Features of PPP | - It adjusts to reflect differences in costs of living - It compares across countries - However often there are inaccuracies as the real national income per capita is understated. - It doesn't account for the shadow economy, or the value of unpaid work. |
| Productive efficiency | All factors of production are employe and used efficiently |
| Allocative Efficiency | When it is not possible to make someonw better off without making someone else worse off by allocating resources |
| Inside the PPF | Resources are not fully employed and/or land is not employed efficiently, so production can increase without increasing the number of resources. |
| Points outside the PPF | This is not yet attainable without an increase in the number of resources. |
| PPF | It shows the opportunity cost of making decisionns to produce more of one good- The Principle of Diminishing returns- not all factor inputs are equally suited to producing different goods and services (so as mmore resources are allocated to Good Y, the extra output gets smaller. |
| AD | How much is spent by all consumers, businesses, governments and firms from overseas. |
| The real balace effect | consumers can buy less of what they need or want as the price increases. |
| Aggregate supply | The total volume of goods and services that producers are willing to supply with the available factors of production at given price levels. |
| Short Run | The period of time when at least one factor of production is fixed. |
| SRAS | the amount that will be supplied when FOP are fixed |
| Long run | The period of time when factors of production are variable |
| LRAS | The amount that will be supplied when facctors of production are variable. |
| SRAS | how much the economy can produce in the short term at each price level. Shifts in SRAS are caused by changes in the cost of production, and supply shocks. |
| Keynesian economic | This is the curved LRAS curve, when there is spare capacity, AD can increase without inflation because of unemployment and LRAS will be relatively elastic. |
| Fuundemental determinants of LRAS | FAT PEE Factor mobility Attitudes Technology Productivity Economic incentives Entreprise |
| MPC | Marginal propensity to consume is the change in consumer spending arising from a change in disposable income. |
| MPS | Marginal propensity to save is the changes in saving resulting from a change in disposable income. |
| MPC/MPS | The percentage of extra disposable income you choose to spend or save. |
| The multiplier effect | A change in consumer spending resulting from a change in another component. It depends of the size of withdrawals and leakages from the circular flow of income. |
| The accelerator effect | If any componnent of AD changes, the accelerator efffect shows the change in investment. (change in I as a result of a change in another component such as demand for consumer goods) |
| Economic cycle | Regular ups and downs in the growth of output, jobs, income and spending. |
| BOOM | a stage of the economic cycle where output is rising faster than the trend. It leads to an increae in consumption, output, employment, wages, investment and inflation. |
| Slowdown | The rate of growth is slowing, but National Output is still rising. |
| RECESSION | a stage in the economic cycle where there has been two or more consequetive quarters of negative growth. It causes overlending by banks, a decrease in confidence, (the credit-crunch) and slumps in the housing market, decrease in spending and investment, and an increase in employment. |
| Slump | A prolonged and deep recession whcih leads to a significant drop in ouput and average living standards. |
| RECOVERY | The point in the economic cycle where real national ouput picks up from the trough reached at the lowest point n the recession. |
| Output gaps | The difference between actual output and trend |
| Negative output gap | Output is below trend, the GDP is below the economy's productive potential. |
| Positive output gap | Output is above trend. actual GDP is above the productive potential of the economy. |
| The multiplier effect will be high when... (4 things) | - MPC is high -Marginal rate of Income tax is low -Businesses have capacity to expand production to meet increased demand. -Consumer confidence is high. -Propensity to import is low. |
| Time Lag | When something takes time to come into effect. (I.e. the multiplier effect) |
| The multiplier effect will be lower when... | -Consumer and business confidence is low. -Marginal income tax is high -MPS is high -The economy is operating close to capacity limits. -Rising demans causes high inflation. -Higher inflation causes an increase in interest rates. |
| Unemployment | Those of a working age who are actively seeking a job (willing, able and available) but do not have one. |
| Economically active | People of a working age who are employed or unemployed. |
| Econmically inactive | People of a working age who are out of work, and haven't been actively seekin work for 4 weeks, and are unlikely to start within 2. |
| There are two ways to measure unemployment | 1) Claimant count- count how many people are claiming jobseeers allowance. 2) Labour force survey- Choose a sample of 600,000 households, and count those who are out of work, haven't been actively seeking it for at least 4 weeks, and are unlikely to start within 2. |
| Why is unemployment bad? | Deskiling Waste of resources Reduced Expenditure GS diverts from elsewhere Worsen deficit Poverty, stress, health issues |
| What is supply side unemployment? | Fictional, Structural, Real Wage |
| What is demand side unemployment | Demand-deficient, seasonal |
| Frictional unemployment | Unemployment due to a job turnnover. (in-between jobs) |
| Structural Unemployment | Unemployment due to: - a mismatch of skills of the nemployed to job vacancies. - occurs due to shut down of traditional industries. -Geographcal Immobility -Occupational Immonbility |
| Deman deficient unemployment | When AD decreases, firms supply less, so they don't meet the productive potential. To reduce costs, they get rid of certain emmployees. They are unlikely to want to employ more due to low business confidence. Negative output gap. Business cycle (cycliccal) Labour is derived demand If there is a + output gap, DD unemployment is low If there is a - output gap, DD unemployment is high. |
| Seasonal unemployment | Lack of demand for workers at certain points in the year. |
| Real wage unemployment | -When workers choose not to work at the market price. -Wages are forced up -Creates disequilibrium, people are fired because firms can't use so many workers at this wage. |
| Social Cost of unemployment | Increase in poverty and welfare dependancy Higher demand on NHS Social Problems |
| Youth unemployment | Affect lifetime ernings due to decrease retirement rates, skills gaps, reluctant employers. |
| Labour scarring effect of unemployment | Loss of work experience, decrease in human capital, more CV gaps, decrease in current and fture incomes, vulnerable to borrow at high interest rates, decrease in health, unlikely to find work again, chaging economy patterns. |
| Advantages of unemployment | Decrese in inflation, which could kick-start the economy. Large pool of labour available for growing businesses Rise in self-employment. |
| How to reduce DD unemployment | (Increase AD) Decrease interest rates, reduce tax, increase government spending, depriciate the pound. |
| Policies to reduce seasonal unemployment | Retraining, and increase labour mobility |
| Policies to reduce real wage unemployment | Aim to make the workforce more flexible |
| Policies to reduce structural unemployment. | Regional policiy (give grants to businesses in areas of high unemployment), invest in worker trainig, improve geographical mobiility, leave it to the market. |
| Policies to reduce frictional unemployment | Reduce the JSA, direct tax cuts, improve job information. |
| Barriers to lowering unemployment | -High levels of structural unemployment takes time to change -Difficult to overcome the disincentives, such as a complex tax and welfare system, low paid jobs, and unaffordable housing. -Pockets of Unemployment mean there is less motivation to get a job. -Variations in educational performance opportunities. -Weak demand in domestic and overseas markets. -Underemployment -Skills shortage |
| Which are the best policies? | A mixture of demand and supply side policies- there is a limiit to what the government can achieve. In the long run, improving incentives for competitiveness and encouraging emerging key industries is key. |
| Economic growth | The growth in real output of an economy over time. |
| Short term Economic Growth | The annual percentage change in real national output-level of AD/SRAS shifts. |
| Long term Economic Growth | An increase in the trend/potential GDP/productive capacity. (LRAS shifts) |
| Key drivers of Economic Growth | -Expanding capital stock investment) -Increasing active labour supply -Increase investment -Higher innovation/entreprise -Extraction/selling of natural resources -Improved technology -Improved factor productivity -Government spending/training -Exports |
| What happens when macroeconomic equilibrium in on LRAS? | When macroequilibrum is on LRAS, AS can't shift (full employment) so LRAS must shift, at this point, any increase in AD is purely inflationary. |
| Advantages of Economic Growth | Higher/better living standards Employment effeccts are increased Increased tax revenue, decreased GS on benefits Accelerator effect Increased productiviy (higher wages and lower costs) New goods and services (stimulates innovation) Improved health (investment in NHS, technology) |
| Costs of Economic Growth | Inflation (demand pull, cost push) Environmental effeccts (sustainability) Inequalities in inome and wealth (might just benefit the rich) |
| Limitations of Economic Growth | Deficientcies in human capital (bad education/brain drain) High inflation- less competitive Supply side weaknesses-don't have supply, workers etc available. Savings gaps (can only invest is have the money to invest) |
| Inflation | Asustained increase in the general price level over time. |
| How do we measure inflation (the % change in prices) | CPI-consumer price index Base year selected, family expenditure survey carried out. Represenative basket of goods used, weights attached to each item based on importance in peoples spending. Each month government officials collect 120,000 price quotations in 141 locations of about 600 products. Weights multiplies by price changes- totalled to calculate inflation rate. |
| Limitations of CPI | Not fully representative (inaccuracies for non-typical households) Spending patterns differ (i.e.single/family) Housing costs vary greatly hanging quality of goods and services Slow to respond to emerging new products. |
| What is RPI? | It is basically the same as CPI Covers more housing costs Doesn't cover as many people Uses different formula to calculate. |
| Causes of Inflation | Demand Pull inflation Cost Push inflation |
| What is demand pull inflation? | Excess AD AD curve shifts to the right The economy is close to full capacity and there is a positive output gap As AD increases, prices increase so inflation increases. |
| What is Cost push inflation? | When firms prices rise to maintain or protect the profit margin after a rise in costs (i.e. labour costs, input costs, indirect tax and import prices) AS curve shifts left, which increases the price level. |
| Effects of inflation | Inequality Inefficient resource allocation Reduced UK competitiveness Redduced real value of savings Consumers/firms on fixed incomes lose out Wage Price SpiralHihger iinterest rates = reduced investment and growth or employment Creates uncertainty, so disrupts business planning Lower profit growth (cost inflation) Higher menu costs. |
| Inflation and Unemployment | Inflation targets can clash with Unemployment targets A decrease in U will increase wages (labour shortage- attract better workers) Raising interest rates will create U Policies to encourage growth and reduce U can cause inflation (demand pull) |
| What is deflation? | A persistant fall in general price level |
| What causes deflation? | A deep fall in AD (persistent recession) Negative output gap (spare capacity) Improved productivity Technologicaal advances Significant fall in wages High exchange rate |
| Consequences of deflation | People postpone their spending (expect further drop) Debts increase as the value of debts increase (drag on consumer confidence) Real cost of borrowing increases Lower profit margins, so higher U Confidence/savings- wealth decreases as it hits confidence Income distribution from debtors (owes) to creditors (you owe) |
| Poolicies to tackle inflation and deflation | Fiscal policy- Government spending and tax (inflation= increase tax, decrease spending) (deflation= increase government spending, decrease tax) Monetary policy- interest rates and moneys supply (Inflation= increase interest rates, reverse quantatitive easing) (Deflation= decrease interest rates,, expand credit supply/quantative easing) Supply side policies- inflation = increase productivity, competition and innovation. Direct controls Inflation= public sector pay controls, cap regulated prices Deflation= lower exchange rate value, increase savings tax. |
| What is the balance of payments? | It records all financial payments between consumers, firms and government of one country with other nations. |
| What are inflows | They are positive (Exports) |
| What are outflows | They are negative (imports) |
| What makes up the balance of payments? | It is made up of the capital account and the current account. |
| What is the current account? | The current account measures the Balance of Trade in : Goods (visible) Services (invisible) Transfers (ie foreign aid) Net Investment income |
| What does the capital account measure? | The capital account measures the flow of money between the UK and abroad, not the actual movement of goods and services. |
| The current account | It is the value of exports minus the value of imports |
| What is a current account deficit and surplus? | A current account deficit is when the value of imports is greater than the value of exports. A current account surplus is when the value of exports is greater than the value of imports. |
| What causes a current account deficit? | Poor Competition (stronger pound means higher inflation than partners, so a lack of productivity) Economic cycle (such as recession- boom can worsen the deficit because consumer confidence is higher, so people are more likely to import as YED increases) Strong exchange rate (SPICED) Recession in a main trading partner Volatile world prices |
| The UK deficit | Supply side weaknesses- (ability to supply, such as haven't invested in production) High YED for imports Hard to finance increased exports Majority of the exports go to slow moving economies. |
| Does a deficit matter? | It depends on whether it is a: structural deficit- long term, persists reagardless of the stage of the economic cycle. In the short term, if the imports are used for growth, it isn't a bad thing. Living standards can be improved. In the long term- can signal a weak economy, and falling competitiveness. Bad for LRAS, impacts growth, employment, currency weaknesses. |
| Policies to reduce the deficit | DEMAND SIDE expenditure reducing policies (stop people buying imports- increase IR and IT) expenditure switching policies- encourage switch in spending away from imports to domestic spending-taxes, tariffs, trade barriers. Exchange rate- devalue or depreciate the currency through QE, more money available. SUPPLY SIDE improve UK productvity Reduce structural deficit (more long term) Increase investment, to shift LRAS and PPF to the right. |
| What are macroeconomic policies? | Policies the government uses to help it achieve maccroeeconomic objectives. |
| What are demand side policies? | They impact AD and aim to: influence spending patterns redistribute income and wealth Even out the business cycle |
| What are the two main macroeconomic policies? | Fiscal Policy and Monetarist policy |
| What is the fiscal policy? | The use of government spending, tax and borrowing to influence output, growth and jobs. |
| What is the monetarist policy? | Use the money supply and interest rates to control investment and demand. |
| What are supply side policies? | Policies that aaim to improve the productive capacity of the economy, and shift LRAS/PPF to the right (i.e. invest in education) |
| What are the balance of payments? | It records all financial transactions made beween consumers, businesses and governments in 1 country with other nations. |
| What are inflows? | They are positive, and refer to the inflow of money into our economy from selling our exports. |
| What are outflows? | They are negative and refer to the money which flows out of the economy, when we buy imports. |
| What is the current account? | It measures the balance of payments (trade) in: Goods Services Transfers (i.e. foreign aid, migrants) Net investments income It measures the flow of money, not the actual flow of goods and services. |
| What is a current account deficit? | When the value of imports is much larger than the value of exports. |
| What causes a current account deficit? | PRICE Prices (volatile world prices) Recession in a key trading partner Inflation and poor competition Cycle (Economic cycle- boom can actually worsen the deficit) Exchange rate is strong. |
| What do we, as an economy need to do with services? | We have a surplus of services, so we need to increase this, otherwise it cancels out the benefits. |
| What are the problems of the UK deficit? | It is hard to finance an increase in exports (i.e. transport) Supply side weaknesses (no investment in production) High YED for imports Exports go to slow-moving economies. |
| Does a deficit matter (BOP)? | It depends on whether it is a cyclical deficit (part of EC) or a structural deficit (long term deficit, which will persist) |
| Short term effects of a BOP deficit | In the short term, if the imports are used for growth, it is not a bad thing as livving standards can be improved. |
| Long term effects of a BOP deficit | It can signal a weak economy, and falling competitiveness which is bad for LRAS, impacts growth, employment, and currency weaknesses. |
| Demand Side Policies to reduce a BOP deficit | Demand side: Expenditure reducing policies- increase income tax and interest rates to stop buying Expenditure switching policies- encourage a switch in spending to domestic goods and services, with import tariffs, trade barriers, tax. Exhange rate- depreciate the value of the pound, use QE to increase money supply and increase exports. |
| Supply Side Policies to reduce deficit | Improve UK Productivity Reduce structural deficit, by increasing investmet and shifting PPF and LRAS right. |
| What are the key roles of the fiscal policy? | Financing government spending (tax) Providing a welfare statee Evening out the business cycle Redistributing income/wealth from rich to poor Improving competitiveness Reducing market failure |
| Why is tax a good thing? | It is revenue to pay for government spending It helps to redistribute income Helps to manage AD for macroeconomic stability. |
| Direct Tax | It is levied on income, welath and profit Examples: Income tax Corporation Tax Inheritance tax Capital Gains Tax |
| Indirect Tax | Tax on spending Examples: VAT (20%atm) Excise duties |
| Progressive tax | Marginal tax rate increases as income increases |
| Proportional tax | Marginal tax rate in constant |
| Regressive Tax | Tax rate decreases as income increases, so the poor are affected more |
| What is an expansionary policy | Aiming to increase aggregate demand: Cut indirect tax- prices decrease, real incomes increase Cut corp. tax- hgiher prices, higher capital spending Cut tax on interest for saving- boost DI. |
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