Economic performance

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Short run growth
% increase in real GDP - measured annually - caused by increases in AD
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Long run growth
Productive capacity of the economy is increasing - trend rate of growth of real national output - caused by increases in AS
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Potential output
What the economy could produce if resources were fully employed
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Positive and negative output gap on a diagram
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Output gap
Difference between actual level of output and the potential level of output - measured as a percentage of national output
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Negative output gap
Actual level of output < Potential level of output, downward pressure on inflation, unemployment of resources, not full productive potential - lots of spare capacity
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Positive output gap
Actual level of output > Potential level of output, resources being used beyond the normal capacity, productivity is growing - output gap becomes positive - upwards pressure on inflation
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Positive and negative output gap on a classical diagram
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What do classical economists believe in relation to output gaps?
Markets clear in the long run - full employment - output gaps are in the short run
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The business cycle is the..........
......stage of economic growth that the economy is in
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Business cycle diagram
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Recovery stage
Real output is increasing as there is economic growth below the trend rate of growth
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Boom
Economic growth is fast above the trend rate of growth - inflationary or unsustainable - gov spends less
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Recession
Real output falls below trend rate of growth - negative economic growth - gov might increase spending to stimulate demand
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Characteristics of a boom
High rates of economic growth, Near full capacity or positive output gaps, Near full employment, Demand-pull inflation, Confidence - high rates of investment, Gov budget improves
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Characteristics of a recession
Negative economic growth over two consecutive quarters, Lots of spare capacity and negative output gaps, Demand-deficient unemployment, Low inflation rates, Gov budget worsens, Less confidence - less spending and investment
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Costs of economic growth on consumers
Inequality could increase, higher demand-pull inflation, shoe leather costs - more time and effort finding the best deal while prices are rising, benefits of more consumption might not last - law of diminishing returns
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Benefits of economic growth on consumers
Avg consumer income increases - more employed - wages increase, Confident - increase consumption - higher living standards
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Costs of economic growth on firms
Higher inflation - Menu costs - Changing their prices to meet inflation
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Benefits of economic growth on firms
More profits - Confidence - Increase investments - New technologies - Improve productivity - Lower LRAC, Economies of Scale, More competition - more productive and efficient - more sales opportunities
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Costs of economic growth on the government
Increase their spending on healthcare if the consumption of demerit goods increases
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Benefits of economic growth on the government
Fewer ppl require welfare payments and more ppl will be paying tax - Gov budget might improve
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Costs of economic growth on current and future standards of living
Increase in negative externalities - damage to the environment
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Benefits of economic growth on current and future standards of living
More concern about the environment as incomes increase, development of technology to produce more eco-friendly, enjoy more goods of a higher quality, increase in life expectancy and education levels
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Causes of cyclical instability
Sustainability of economic growth, Excessive growth in credit and levels of debt, Asset price bubbles, Destabilising speculation and animal spirits, Herding
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The sustainability of economic growth
Sustainable when can be maintained in the LR, Fast growth - natural resources deplete - environmental problems for future, unsustainable growth occurs during booms and busts (deviations from trend rate), inflation, excessive credit, savings rate low
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Excessive growth in credit and levels of debt
Growth finances by public debt not sustainable - difficult to pay back in future - does not contribute to improvements in productivity, more productive - more sustainable growth - increases productive capacity
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Asset price bubbles
Price of an asset predicted to rise significantly - traded more - demand exceeds supply - bubble 'bursts' when price steeply and suddenly falls to ordinary level - panic - investors sell assets - loss of confidence
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Destabilising speculation
Destabilising speculation leads to changes in the price level - Speculators purchase assets when they believe price is likely to appreciate, Assets are sold when price believed to depreciate - affects the actual price of assets
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Animal spirits
Keynes used this to describe instincts and emotions of human behaviour - drives the level of confidence, if firms expect a high rate of return they will invest more, expectations about society and politics could affect investment
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Herding
Reacting to the behaviour of other economic agents rather than the market - investors think other economic agents are better informed - can cause instability in the market
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Measures of unemployment
The Claimant Count, Labour force survey
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The Claimant Count
Number of people claiming unemployment related benefits (JSA) - prove they are actively looking for work, Not every unemployed person is eligible - method generally underestimates the level of unemployment
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Labour Force Survey
Taken on by the International Labour Organisation, Criteria: 4 weeks out of work, able and willing to start working within 2 weeks, workers should be available for 1 hour per week, part time unemployment included - higher unemployment figure than CC
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Voluntary unemployment
Someone chooses not to work at the current wage rate - welfare payments generous relative to real wages, high income tax rate will discourage people
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Involuntary unemployment
Willing and able to work at the current wage rate, but they cannot find work - usually cyclical - fall in AD - excess supply of labour - 'sticky wages' unable to correct - not operating at full employment
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Significance of changes in the rates of employment and unemployment on consumers
Consumers unemployed - less disposable income - standard of living may fall, psychological consequences of losing a job - mental health of workers
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Significance of changes in the rates of employment and unemployment on firms
Higher rate of unemployment - larger supply of labour to employ from - wages fall - helps reduces costs, Less disposable income - consumer spending falls - lose profits, inferior goods rise in sales, cost firms to retrain workers
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Significance of changes in the rates of employment and unemployment on workers
Unemployment - waste of worker's resources - lose their existing skills if they are not fully utilised
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Significance of changes in the rates of employment and unemployment on the government
Unemployment rate increases - Spend more on JSA - opportunity cost, receive less revenue from income tax and indirect taxes on expenditure - unemployed have less disposable income to spend
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Significance of changes in the rates of employment and unemployment on society
Opportunity cost to society - workers could have produced goods and services, negative externalities - crime and vandalism if unemployment increases
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Significance of changes in the rates of employment and unemployment on inactivity
Economically inactive are those who are not actively looking for jobs, discouraged from the labour market - out of work so long - stopped looking, economically inactive ^ size of the labour force may decrease - productive potential of economy falls
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Causes of unemployment
Structural, Frictional, Seasonal, Cyclical, Real wage
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Structural unemployment
Long term decline in demand for the goods and services in an industry - car manufacturing - labour replaced by capital (technological unemployment), decline of coal and ship building, Worsened by the geographical and occupational immobility of labour
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Frictional unemployment
Time between leaving a job and looking for another job - always will be some frictional unemployment - not particularly damaging since it is only temporary
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Seasonal unemployment
Certain points in the year - summer - more people will be employed in the tourist industry - demand increases
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Cyclical unemployment
Lack of demand - periods of economic decline - negative output gap - firms are either forced to close or make workers redundant - profits falling - decrease in spending - reduce costs - output falls, increases in productivity - fewer workers needed
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Real wage unemployment
Wages above the market equilibrium may cause unemployment - supply of labour exceeds demand, demand shifts to left - more unemployment as wages are unable to adjust
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How globalisation affects employment and unemployment in the UK
Globalisation - Structural unemployment - production manufacturing sectors moves abroad to countries with lower labour costs - domestic unemployment
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How migration affects employment and unemployment in the UK
Supply of labour at all wage rates tends to increase with more migration - ^competition to get job - rise in the size of the working population - migrants bring high quality skills - increase productivity - increase international competitiveness
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Affect of unemployment on consumers
Less disposable income - standard of living may fall, psychological consequences of losing a job - mental health of workers
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Affect of unemployment on firms
Higher rate of unemployment - firms have a larger supply of labour to employ - wages fall - helps firms reduce costs, consumers have less disposable income so profits may fall, cost to retrain workers, inferior goods ^sales
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Affect of unemployment on workers
Unemployment - waste of worker's resources - lose their existing skills
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Affect of unemployment on government
Receive less rev from income tax and from indirect taxes on expenditure - unemployed have less disposable income, spend more on JSA - Opportunity cost
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Affect of unemployment on current and future standards of living
Opportunity cost to society - workers could have produced goods if they were employed, Negative externalities - crime and vandalism
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The natural rate of unemployment
Unemployment rate when labour market at equilibrium - caused by supply side factors, NAIRU - non-accelerating inflation rate of unemployment - inflation not have a tendency to increase at this unemployment rate - no demand-deficient unemployment
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Inflation
The sustained rise in the general price level over time - cost of living increases and purchasing power of money decreases
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Deflation
Avg price level in the economy falls - negative inflation rate
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Disinflation
Falling rate of inflation - avg price level is still rising but to a slower extent - relatively cheaper now than a year ago and the purchasing power of money has increased
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Demand pull inflation
Demand side of the economy - AD is growing unsustainably - pressure on resources - producers increase their prices to earn more profits - usually occurs when resources are fully employed
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Main triggers for demand pull inflation
Depreciation in the ER - M more expensive X cheaper, Fiscal stimulus - lower taxes high gov spend - more disposable income - spending increases, Lower IR - savings less attractive borrowing more - spending increases, High growth in UK export markets
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Cost push inflation
Supply side of the economy and occurs when firms face rising costs
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Examples of when cost push inflation occurs
Changes in world commodity prices (raw materials more expensive), labour more expensive (trade unions), Expectations of inflation (expect prices to rise ask for higher wages causes more inflation), Indirect taxes, Depreciation in ER, Monopolies
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Effects of inflation on consumers
Low and fixed incomes are hit hardest by inflation - cost of necessities more expensive, loans - value of the repayment will be lower - amount owed does not increase with inflation - real value of debt decreases
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Effects of inflation on firms
Less investment - high inflation leads to higher IR and reduction in confidence, Costs increase - workers demand higher wages, Less competitive on a global scale
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Effects of inflation on the government
Will have to increase the value of the state pension and welfare payments because the cost of living is increasing
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Effects of inflation on workers
Less disposable income - real incomes fall with inflation, More redundancies - firms face higher costs so they cut it by cutting labour
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The effects of deflation
Real value of money increases - discourages spending - cheaper in the future - economic decline and increasing rates of unemployment, real value of debt higher - larger proportion of income used, less disposable income -worsens recession, wages fall
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Quantity theory of money
There i inflation if the money supply increases at a faster rate than national income
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Fisher's equation of exchange
M (Money supply) * V (Velocity of circulation) = P (Price level) * Q (Real GDP), the value of expenditure on goods = the value of total output
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What does Fisher's equation of exchange assume?
Velocity is constant - frequency that workers are paid does not change often, Q is independent of the supply of money (only supply side factors affect Q)
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What does Fisher's equation of exchange argue?
Increasing the money supply causes inflation - consumers have more to spend - AD shifts rightwards - Firms increase supply in SR - Inflationary positive output gap - More workers employed - Costs increase - real value of money falls-contractiondemand
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Economic growth vs Inflation
Growing economy - inflationary pressures, negative output gap - downward pressure on inflation, positive output gap - upwards pressure on inflation - AD increases faster than AS
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Economic growth vs The current account
Economic growth - high levels of spending - high marginal propensity to import in UK - ^spending on imports - worsening current account deficit, Export led growth - surplus and growth
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Economic growth vs The government budget deficit
Reducing a budget deficit - less expenditure and more tax revenue - Fall in AD - less Economic growth
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Economic growth vs the environment
High rates of economic growth - high levels of negative externalities - pollution and non-renewable resources - more manufacturing - higher levels of carbon dioxide emissions
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Unemployment vs Inflation
SR - trade off between unemployment and inflation - illustrated on the Phillips curve, Growth increases - unemployment falls - increase in inflation
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Short run Phillips curve diagram
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How can the extent of the trade off between inflation and unemployment be limited?
Use of supply side policies to reduce structural unemployment - which will not increase average wages
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Short run Phillips curve
Trade-off between unemployment and inflation, roughly L-shaped, unemployment increases - inflation decreases
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Long run Phillips curve
Vertical, L-shaped, at natural rate of unemployment - no-trade off between unemployment and inflation, two variables are unrelated
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Long run Phillips curve diagram
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The implications of the SR Phillips curve for economic policy
Gov tries to lower unemployment in SR - inflationary pressure - economy suffers from demand-deficient unemployment - encourages the use of demand-side policies to tackle unemployment
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The implications of the LR Phillips curve for economic policy
LR - changes in unemployment do not affect inflation - policies can be more flexible - no demand-deficient unemployment in LR - supply-side policies are more likely to be used
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Other cards in this set

Card 2

Front

Productive capacity of the economy is increasing - trend rate of growth of real national output - caused by increases in AS

Back

Long run growth

Card 3

Front

What the economy could produce if resources were fully employed

Back

Preview of the back of card 3

Card 4

Front

.

Back

Preview of the back of card 4

Card 5

Front

Difference between actual level of output and the potential level of output - measured as a percentage of national output

Back

Preview of the back of card 5
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