The UK economy - performance and policies

What is the acronym to remember macroeconomic indicators?

TIGER

What are the macroeconomic indicators?

Trade

Inflation

Growth

Employment

Redistribution of income

Stability

What are non core macroeconomic objectives?

Sound government finances

Environmental sustainability

Productivity growth

What is the macroeconomic objective for trade?

Balanced

What is the macroeconomic objective for inflation?

Low and stable

What is the inflation target for the UK?

2% +/- 1

What is the macroeconomic objective for growth?

Strong sustained and sustainable

What is the macroeconomic objective for employment?

Full employment

What is the macroeconomic objective for redistribution?

Fair

What is productivity?

output per worker per hour

What is a trade deficit?

when a country imports more than it exports

What is a trade surplus?

when a country exports more than it imports

What is a current account?

The balance of trade in goods and services

What is the circular flow of income?

The movement of spending and income across the economy

What are 3 leakages in an economy?

Savings

Imports

Tax

What are 3 injections into an economy?

Investment

Exports

Government spending

What is investment?

When firms spend on capital goods to increase their productive capacity

What are the 3 methods to calculate GDP?

Output

Income

Expenditure

What is the output method relating to calculating GDP?

The value of all final goods and services produced in a year

What is the income method relating to calculating GDP?

Adding up all factor incomes in a year

What is the expenditure method relating to calculating GDP?

C+I+G+(X-M)

Why are index numbers good?

To make numbers more appealing

To allow for quick and easy data comparisons

What is the equation for an index number?

Index number = raw number/ base year raw number x 100

What is the index value of a base year?

100

What is aggregate demand?

the total demand for a countries goods and services at a given price level at a given time

What is aggregate demand a measure of?

Expenditure

What is the equation for aggregate demand?

AD = C + I + G + (X-M)

What does the graph for aggregate demand look like?

What are the 3 factors causing AD to slope downwards?

Wealth effect

Trade effect

Interest effect

What is the wealth effect in regards to AD?

As price level decreases the purchasing power of income increases therefore increasing consumption

What is the trade effect in regards to AD?

As the price level decreases exports become more competitive and imports become less competitive, hence increasing net exports

What is the interest effect in regards to AD?

As the price level decreases interest rates can be kept lower increasing consumption investment and net exports

What is consumption?

Total spending by households on goods and services in the economy

What is the marginal propensity to consume (MPC)?

A measure of the proportion of an increase in income that a person is likely to spend on consumption

What are 5 determinants of consumption?

Level of real disposable income

Interest rates

Consumer confidence

Asset prices

The level of household debt

What are 6 determinants of saving?

Level of real disposable income

Interest rates

Level of consumer confidence

Trust of financial institutions

Tax incentives

Age structure of the population

What are 6 determinants of investment?

Interest rates

Business confidence

Corporation tax

Spare capacity

Level of competition

Price of capital

What are 4 parts of government spending?

Current spending

Capital spending

Welfare spending

Debt interest payments

What is current spending?

maintenance of public sector services and payment of public sector wages

What is a budget deficit?

Where government spending is more than taxation in a fiscal year

What is a budget surplus?

Where government spending is less than taxation in a fiscal year

What is national debt?

The total stock of a nations debt

What are 5 determinants of net exports?

Real disposable income abroad

Real disposable income at home

Strong/weak exchange rate

Protectionism at home and abroad

Relative inflation rates at home

What does SPICED stand for?

Strong Pound Imports Cheap Exports Dear

Why does the pound being strong mean imports are cheap?

As it requires less money to buy the same good/service

What does WIDEC stand for?

Weak Pound Imports Dearer Exports Cheaper

What does the classical model of SRAS look like?

What does the classical model of LRAS look like?

What does the position of the SRAS curve depend on?

The costs of production

What are 5 costs of production?

Wages

Raw materials

Oil prices

Tax

Import prices

What does the classical model of LRAS represent?

One level of output the economy will always produce in the long run

What is YFE?

The maximum level of output an economy can produce using all of its factors of production at sustainable levels

Why does LRAS shift?

Due to an improvement in the quantity and quality of the factors of production

What are 6 factors that cause a shift to LRAS?

Labour productivity

Investment

Infrastructure

Quantity of labour

Competition

Discovery of new resources

What does the Keynesian LRAS curve look like?

Why is the Keynesian model different to the classical model of LRAS?

To depict how there is spare capacity in the economy due to unemployment of the factors of production

Why does the price level increase dramatically when approaching YFE?

As there is more pressure put on the existing factors of production

When does macroeconomic equilibrium occur?

When AD=AS

When does short run macroeconomic equilibrium occur?

When aggregate demand is equal to SRAS but not equal to LRAS

When does long run macroeconomic equilibrium occur?

When AD is equal to SRAS and is also equal to LRAS

What 4 things happen in the economy due to a shift in AD to the right?

Increased economic growth

Decreased unemployment

Increased inflation

Worsened trade position

Why does the trade position worsen when there is a shift in AD to the right?

As when the price rises exports become less competitive leading to a contraction in demand for exports

What 4 things happen in the economy due to a shift in LRAS to the right?

Increased economic growth

Decreased unemployment

Decreased inflation

Improvement in trade position

What is the multiplier effect?

Process by which any changes in the components of AD will lead to an even greater change in national output

What are the 2 equations for the multiplier effect?

1/1-MPC or 1/MPW

What can the multiplier effect do to an initial shift in AD?

It can make it shift again

What is the accelerator effect?

changes in investment can be directly linked to changes in the rate of GDP growth

Why does the accelerator effect occur?

If the rate of GDP growth occurs firms may be more encouraged to invest to meet future demand

When can output gaps occur?

When the actual output is not equal to the potential level of output

What is a negative output gap?

Where actual output is less than potential output

What is a positive output gap?

where actual output is greater than potential output

Can an economy produce more than YFE?

Yes however this would only happen unsustainably and would lead to high inflation

What are 4 reasons why measuring economic growth important?

-Allows government to see if they are reaching their objectives

-Allows the evaluation of policy

-Allows businesses and government to forecast to change future policy or investment

-Allows for comparison between economies

What are 4 measures of economic growth?

GDP

GDP per capita

GNI

Green GDP

What is GDP?

The value of all final goods and services produced in an economy in a year

What are 3 negatives of using GDP?

Disregards inequality

Disregards negative externalities

Illegal activity not accounted for

What is the equation for GDP per capita?

GDP/population

What are 3 negatives of using GDP per capita?

Disregards income earned abroad

Illegal activity not accounted for

Errors with data collection

What is GNI?

the total income generated by a country's factors of production regardless of where those factors of production are located

What is the equation for GNI?

GDP + net factor income

What are 3 negatives of using GNI?

Errors with data collection

Illegal activity not accounted for

Disregards income inequality

What is the equation for green GDP?

GDP - environmental costs

What are 3 negatives of using green GDP?

Putting a value on pollution is difficult

Would decrease the value significantly

Disregards income inequality

What is actual growth caused by?

An increase in AD using spare capacity to increase real GDP

What are 5 factors that can increase AD?

Low interest rates

Lower taxes

Higher consumer/business confidence

Higher government spending

Weak exchange rate

What is potential growth caused by?

An increase in LRAS increasing the productive capacity of the economy

What does the graph look like showing potential growth and actual growth?

What do we call it when actual growth peaks?

An economic boom

What do we call it when actual growth falls?

An economic recession

What is a recession?

Where real GDP falls for 2 consecutive quarters

What is the lowest point of a recession called?

A trough

What do we call it when the economy starts to get better?

An economic recovery

When actual growth is greater than potential growth what is this known as?

Positive output gap

When actual growth is lower than potential growth what is this known as?

Negative output gap

What are 4 benefits to economic growth?

higher disposable income

higher employment

higher profit for firms

fiscal dividend for Government (increase in tax revenue)

What are 4 costs of economic growth?

inflation (demand-pull)

income inequality

environmental costs

current account deficit

What makes an individual unemployed?

Working age

Willing and able to work

Actively seeking work

Do not have a job

What does it mean to be economically inactive?

Individuals who are of working age but are not willing to work

What are 2 ways we can calculate unemployment?

Labour force survey

Claimant count

What is the labour force survey?

Survey conducted by the ONS to UK households