Government Objectives

aggregate demand

total demand

aggregate demand formula

= consumption + investments + government spending + (exports - imports)

aggreate supply

total annual quantity of goods and services produced by all businesses

what leads to contraction on the business cycle ?

high unemployment
low production levels
decreased inflation
decreased GDP

what leads to expansion in the business cycle ?

low unemployment
high production levels
increased inflation
increased GDP

what is overheating on the business cycle ?

when an economy grows too quickly
when demand > supply

recession

negative real GDP growth for two consecutive quarters
( 6 months )

GDP

total value of output, goods and services, being produced in a country in a given time period

how is GDP measured ?

expenditure ( spending )
factor incomes
value of output

what happens when GDP decreases?

economy is shrinking - weak economy

what happens when GDP increases?

economy is expanding - strong economy

nominal GDP

total value of input produced

real GDP

nominal GDP adjusted for inflation ( changing price levels )

per capita income

income per head of population
GDP/population

why do we use population estimates?

there has been a sharp rise in migrant flows, so official population data may be inaccurate

UK population forecast

projected to increase by 9.6 milltion over the next 25 years

economic growth

the increase % of Real GDP

economic boom

real GDP is growing at a rapid rate dis

disadvantages of an economic boom

unsustainable

slump

sharp decline in real GDP

consequences of an economic boom

higher GDP
decreased unemployment
higher inflation rate
rising asset prices

consequences of a recession

lower GDP
increased unemployment
lower inflation rate
decreasing asset prices
- results in economic damage

equation for rate of economic growth

( change in GDP / original GDP ) x 100

equation for GDP per capita

( gross domestic product / population )

causes of economic growth

short - run growth ( DEMAND )
increase in spending and demand

long-run growth ( SUPPLY )
improvement in factors of production

benefits of economic growth

innovate - new goods and services
fiscal dividend - more tax revenue for government
improvments in living standard
more jobs
business confidence
higher output - productivity
improved health

drawbacks of economic growth

inflation risk
environmental concerns
negative externalities
sustainability
income and wealth inqueality

why is economic growth important ?

more demand can lead to inflation, so more output would avoid this
allows for improvements in standards of living
solving economic problems
international competitiveness

unemployed people

people who are able, available and willing to work at the going wage rate but cannot find a job, despite an active search for work

how is it possible to see a rise of both employment and unemployment ?

population increase
increase in migration

equation for unemployment rate

number of unemployed/workforce x 100

ways of measuring unemployment

claimant count
those claiming jobs seekers allowance

labour force survey
sample of population used to analyse labour markets, employment and unemployment

why control unemployment ?

- reduce crime rates
- increases taxes to the government ( income tax )
- increase productivity
- improve living standard, more disposable income
- economic growth - more spending
- impact demand
- reduction in tax revenue

4 types of unemployment

cyclical
seasonal
structural
fictional

what is cyclical unemployment ?

demand deficient unemployment - caused by a downturn in the economic cycle ( recession )
labour is a derived demand, so if consumer spending falls firms will cut or close down

for example : housing market struggles, so construction workers laid off

what is seasonal unemployment ?

regular seasonal changes in employment/labour demand

for example : tourism, agriculture and construction

what is structural unemployment ?

arises from a mismatch of skill and job opportunities as the pattern of labour demand changes
( demand < supply of labour )

for example : technology taking over jobs such as in the manufacturing industry - workers have no other qualification

what is frictional unemployment ?

transitional unemployment due to people moving between jobs and new entrants to the labour market

consequences of unemployment - individual and households

loss of confidence
loss of earning - lead to reduced spending + living standard
lack of self-esteem
loss of skills + employability
increased mental health issues

consequences of unemployment - business

loss of job security amongst staff - lower morale
lower productivity
less consumer spending - fall in demand and profits

ADV - big pool of labour to draw from, recruitment easier

consequences of unemployment - government

less revenue collected in income tax and VAT
more money to pay out in benefits ( opportunity cost )
lost output ( GDP )
may become unpopular

consquences of unemployment - society

crime
depression
poverty
NHS and policing spending rising
ghost towns - ambitious and young move, elderly and unemployed left

demand side policies to reduce unemployment

increasing demand in the economy
government spending - lower taxes and interest rates

supply side policies to reduce unemployment

education and training
transport and housing
incentives - to lower income tax and lower benefits
labour markets - reduce trade union power and minimum wage

inflation

persistent increase in the levels of prices in an economy

Consumer Price Index ( CPI )

measures changes in the cost of living of a typical household

The Inflation Rate

the annual percentage change in the consumer price index

target for UK inflation rate

2% CPI ( + or -1% )

what is price stability ?

low and stable inflation rate ( price increases )
sustainable for economic growth

weightings

placed on items based on their importance, then a record of prices for 700+ items is compared to give the CPI

problems with monitoring changes in prices of goods and services

changes in quality not taken into account
special offers and second hand goods
changes in spending patters - weighting will lag behind any new product trends

disinflation

prices are rising but inflation is falling ( slower RATE of inflation )

causes of inflation

DEMAND PULL
economic boom where demand > supply
firms increase prices due to increased demand
consumers are confident and spend more

COST PUSH
production costs have increased
e.g oil prices increase firms cost so prices increase to maximise profit
could lead to wage demands, since real incomes have fallen

consquences of inflation

erodes wealth, in cash and savings
lead to wokers demanding higher wages
investment and expansion decrease
goods and services more expensive
potical instability
poorest suffer - income inequality

hyperinflation

inflation goes out of control
huge amounts of money printed to meet peoples demand
money effectively worthless

balance of payments ( current account )

a record of the financial transactions between the UK and the rest of the world over one year

export

product sold to a foreign market - money flows in

import

produce bought from foreign firms - money flows out

defecit

imports > exports, more money leaving economy than flowing in

surplus

exports > imports, more money flowing into economy than leaving

UK current account

trade in goods ( exports - imports )
trade in goods and services
investment income ( interest profit dividends )
transfers

why is the UK's current account deficit a problem ?

aggregate demand decreases, loss of multiplier effect
effect on exchange rates
profit for UK firms decrease - so investment and unemployment decrease
government finance affected
some regions more dependent on exports

current account surplus benefits

adds to a country's reserves
indicates higher domestic demand for domestic products

current account surplus drawbacks

could lead to lower domestic employment
surplus caused by a recession which has hit domestic demand and led to a fall in imports spending

how can we reduce a current account defecit ?

EXPENDITURE - REDUCTION
reducing demand for goods and services - so imports fall

EXPENDITURE - SWITCHING
encouraging consumer spending to switch to domestically produced goods and services
getting foreign countries to purchase our g&s

SUPPLY - SIDE
businesses need to become more competitive - quantity and quality of resources
increases productivity

income distribution

a measure of how many people earn different levels of income in the economy
it shows income inequality
gap between rich and poor

causes of income inequality

difference in skill/ability
education level
technological growth/change
job demand in market
risks involved in job
location/wealth of country
age ( experience )
gender
ethnicity
type of work

income

flow of earnings
labour wages, interest, dividends, profits and pensions

wealth

source of assets that have a market value
property, savings, shares, bonds, businesses, pension FUND

how does wealth and income link ?

wealth can generate income

what is the trickle down effect ?

high income earners spend more, increasing employment and benefiting low income earners with more job opportunities

consequences of income inequality

decreased productivity of low income job holders
low income earners -> cant afford g&S -> poverty
increased government spending - opp cost
trickle down effect
increased poverty
increase in the social problem
increase in health issues
lack of access to the housing market
increase in employment

the poverty trap

affects people on low incomes
creates a disincentive to look for work or work longer hours because of the effects of the tax and benefits system

advantages of income inequality

incentive to be innovative
encourages enterprise
promotes efficient resource allocation
trickle down effect

disadvantages of income inequality

trickle down may not occur - money may go to rich
social cots, poverty trap, crime rate
unequal opportunities
government spending ( budget strain )
high income earners spend money abroad

overcoming income inequality

REDISTRIBUTION
progressive taxation ( as you earn more, more tax charged )
welfare system and benefits ( job seekers allowance )

LABOUR MARKETS
reducing unemployment
increasing minimum wage

REGIONAL DEVELOPMENT
economy focuses on low income regions to develop policies
e.g north UK