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Flashcards from Chapters 25-42 of the Pearson Edexcel IGCSE Economics textbook.
Budget Deficit
Amount by which government spending is greater than government revenue
Macroeconomics
Study of large economic systems such as those of a whole country or area of the world
What are the macroeconomic objectives?
Reducing unemployment, Protect the environment, Balance of payments (current account), Economic growth, Controlling inflation, Redistribution of income
Economic growth
Increase in the level of output by a nation
National income
Value of income, output or expenditure over a period of time
What does GDP stand for?
Gross Domestic Product
Gross Domestic Product (GDP)
Market value of all final goods and services produced in a period (usually yearly), an internationally recognised measure of national income
Why is GDP used to measure economic growth all over the world?
Using the standard definition means that meaningful comparisons can be made between the growth rates of different countries
What does GDP measure?
The value of all goods and services produced in a country for sale
What are limitations to GDP as a measure of growth?
Inflation, Population Changes, Statistical Errors, Value of Home Produced Goods, Hidden Economy, Living Standards, External Costs
Why can inflation limit the effectiveness of GDP?
Price increases make growth rates misleading
How can the problem of inflation and GDP be solved?
Using real GDP
Why can population changes limit the effectiveness of GDP?
Increases in population may offset growth in GDP
How can the problem of population changes and GDP be solved?
GDP per capita
Why can statistical errors limit the effectiveness of GDP?
The information has been entered inaccurately or left out by the government
Why can the value of home produced goods limit the effectiveness of GDP?
Some goods and services are not traded and therefore economic activity is not recorded
Why can the hidden economy limit the effectiveness of GDP?
Paid work and services can go unrecorded
Why can living standards limit the usefulness of GDP?
GDP rising does not directly constitute an increase in living standards
Why can external costs limit the effectiveness of GDP?
GDP does not take external costs like environmental costs into account
What are the four stages of the economic cycle?
Boom, Downturn, Recession, Recovery
Boom
Peak of the economic cycle where GDP is growing at its fastest
What are some characteristics of boom?
GDP is growing fast, existing firms will be expanding, new firms will be entering the market, demand will be rising, jobs created, rise in wages, profits rise, prices rise
How does economic growth affect productive potential?
Economic growth can increase the productive potential of a country
Overheat
If an economy overheats, demand rises too fast, causing prices and imports to rise, a situation that governments may try to correct by raising taxes and interest rates
Unsustainable growth
Economic growth that it is not possible to sustain without causing environmental problems
Why can economic growth lead to inflation?
If economic growth is too fast, the economy can overheat, which leads to inflation
What are the effects of economic growth on the environment?
Increased greenhouse gas emissions, global warming, pollution, using up finite resources quickly, unsustainable for future generations
Aggregate Demand
Total demand in the economy including consumption, investment, government expenditure and exports minus imports
Deflation
Period where the level of aggregate demand is falling
Inflation
Rate at which prices rise, a general and continuing rise in prices
What does CPI stand for?
Consumer Price Index
Consumer Price Index (CPI)
Measure of the general price level (excluding housing costs)
Retail Price Index (RPI)
Measure of the general price level which includes house prices and council tax
What does RPI stand for?
Retail Price Index
Demand
pull inflation
How can demand
pull inflation occur?
Cost
push inflation
How can cost
push inflation occur?
Interest rates
Price paid to lenders for borrowed money, the price of money
Monetarists
Economists who believe there is a strong link between growth in the money supply and inflation
What is the relationship between inflation and interest rates
Inflation is more likely to happen if interest rates are low because of the increases in borrowing
What is the impact of inflation on prices?
Prices rise, inflation reduces the purchasing power of money, fall in living standards for households
Purchasing power of money
Amount of goods and services that can be bought with a fixed sum of money
What is the impact of inflation on wages?
Workers need to increase their wages to compensate for the loss in purchasing power
Why can a wages/prices spiral develop during a period of inflation?
Firms need to raise prices in order to justify higher wage costs, which would demand higher wages and so on
What is the impact of inflation on exports?
If inflation is higher at home, demand for exports is likely to fall
What is the impact of inflation on unemployment
High levels of inflation usually mean that AD is rising, so firms will be keen to increase output since prices are increasing, which reduces unemployment
Menu costs
Costs to firms of having to make repeated price changes
Shoe leather costs
Costs to firms and consumers of searching for new suppliers when inflation is high
Hyperinflation
Very high levels of inflation, rising prices get out of control
What is the impact of inflation on menu costs?
Menu costs increase
What is the impact of inflation on shoe leather costs?
Shoe leather costs increase
What is the impact of inflation on uncertainty?
Higher uncertainty if inflation is high and varying
What is the impact of inflation on business and consumer confidence?
Decrease due to higher uncertainty
What is the impact of inflation on investment
Inflation results in a decline in business investment
Unemployment
When those actively seeking work are unable to find a job
How is unemployment measured?
The Labour Force Survey (in the EU)
What are the definitions of unemployment from the ILO?
People without a job, want a job, have actively sought work in the last 4 weeks and are available to start work in the next 2 weeks, or out of work, have found a job and are waiting to start it in the next 2 weeks
What are the types of unemployment?
Cyclical unemployment, Structural unemployment, Seasonal unemployment, Frictional unemployment, Voluntary unemployment
Laying off
To stop employing someone because there is no work for them to do
Cyclical or demand deficient unemployment
Unemployment caused by falling demand as a result of a downturn in the economic cycle
Structural unemployment
Unemployment caused by changes in the structure of the economy such as the decline in an industry
What are the types of structural unemployment?
Sectorial unemployment, Technological unemployment, Regional unemployment
Sectorial unemployment
Occurs when people are laid off because the industry they work in is in decline
Technological unemployment
Occurs when jobs that were previously done by people are now done by machines
Regional unemployment
Unemployment in a particular country is not likely to be the same in all regions
Seasonal unemployment
Unemployment caused when seasonal workers, such as those in the holiday industry, are laid off because the season has ended
Frictional unemployment
When workers are unemployed for a short period of time as they move from one job to another
Voluntary unemployment
Unemployment resulting from people choosing not to work
Impact of unemployment on output
Output is lower than it could be because the productive potential of a country is not being fully exploited
Impact of unemployment on use of scarce resources
It is a waste of resources and results in lower levels of national income as people who are out of work do not make any contribution to production
Impact of unemployment on poverty
Increased employment leads to increased poverty
Impact of unemployment on government spending
Increases because unemployed people are entitled to receive financial benefits from the state
Impact of unemployment on tax revenue
Decreases as taxes are linked to income and spending
Impact of unemployment on consumer confidence
Likely to fall because state benefits are lower than wages so people play a less significant role in the economy
Impact of unemployment on business confidence
Businesses are less likely to take risks and may postpone or cancel investment products
Balance of payments
Record of all transactions relating to international trade
Capital and financial account
The part of the balance of payments where flows of savings, investment and currencies are recorded
Current account
Part of the balance of payments where all exports and imporst are recorded
Exports
Goods and services sold overseas
Imports
Goods and services bought from overseas
Current account deficit
When value of imports exceeds the value of exports
Current balance
Difference between total exports and total imports (visible and invisible)
Current account surplus
When value of exports exceeds the value of imports
Balance of trade or visible balance
Difference between visible exports and visible imports
Invisible trade
Trade in services
Primary income
Money received from the loan of production factors abroad
Secondary income
Government transfers to and from overseas agencies such as the EU
Visible trade
Trade in physical goods
Beneficiary
Someone who gets advantages from an action or charge
Exchange Rate
Price of one currency in terms of another
What is the relationship between the current account and exchange rates?
If a country's exchange rate gets stronger, it will have a negative impact on the current account
How does increased quality of domestic goods affect the current account?
It will cause a current account surplus/improvement in the current account
How does increased quality of foreign goods affect the current account?
It will cause a current account deficit/the current account will worsen
How does an increase in the price of domestic goods affect the current account?
It will cause a current account deficit/the current account will worsen
How does an increase in the price of foreign goods affect the current account?
It will cause a current account surplus/improvement in the current account
Persistent
Continuing to exist or happen, especially for longer than is usual or desirable
How does a current account deficit affect leakages from the economy?
It suggests the country is dependent on imports, so money flows outwards to overseas businesses
How does a current account deficit impact inflation?
A country running a high current account deficit may be exposed to inflationary pressures
How would a current account deficit lead to low demand for exports?
A country with a high current account deficit may have domestic goods of either a price too high or a quality too low
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