Economics A level Theme2

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131 Terms

1

GDP

the value of all goods and services produced in one year.

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2

Year-on-year Growth

the percentage change between one year and the previous year.

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3

Recession

Two consecutive quarters of negative GDP growth.

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4

Gross National Product

The total value of all output produced by an economy in a given year.

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5

Gross National Income

The total income earned by nationals of a country.

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6

Nominal

not adjusted for inflation

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7

Real

adjusted for inflation

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8

Limitations of GDP

doesn't show- environmental degradation, non market transactions, wealth/income distribution, population size, PPP.

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9

Purchasing power

value of a currency expressed in terms of the number of goods or services that one unit of money can buy.

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10

Price level

measures the average price of a "basket of goods".

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11

Inflation

an increase in prices/ fall in the value of money.

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12

Index

used to compare values across years. Base year = 100

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13

Real

adjusted for inflation.

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14

Nominal

not adjusted for inflation.

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15

PPP

compares prices across countries to look at the true cost of living.

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16

GNH

an index which is used to measure the collective happiness and well-being of a population (in Bhutan).

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17

Limitations of CPI

-not all household consume all the basket of goods eg single person households, four-children households, non-car owners, students, pensioners, rich, poor, -quality of the product changes over time (e.g telephones) -Basket of goods changes - but not fast enough. -Data handling/ collection issues/ arithmetic vs geometric method. -can't compare internationally

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18

How is inflation measured?

Consumer Price Index (CPI)

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19

How is CPI calculated?

Weights are set against a basket of 650+ goods, 'living costs and food survey' collects data from 7,000 households. CPI is the calculated relative to a base year.

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20

Alternatives for CPI

RPI (includes housing costs)

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21

Disinflation

Fall in price level, inflation >0.

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22

Deflation

Fall in price level below 0.

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23

Hyperinflation

period of very high rates of inflation, leading to a loss of confidence in an economy's currency.

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24

Problems with (Hyper)Inflation

-Erodes the value of money, savings & wages. -Uncertainty leads to lower consumer and business confidence. -Less internationally competitive so leads to fewer exports. -Menu costs: the cost of changing price listings.

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25

Problems with Deflation

-Discourages consumer spending: downwards spiral. -Debt values increase in real terms. Borrowers worse off.

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26

Causes of inflation

demand pull and cost push

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27

demand-pull inflation

increases in the price level (inflation) resulting from increased pressure on existing FOP, increasing price of resources and COP, therefore increasing PL.

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28

Factors that can cause demand pull inflation

  • decrease in interest rates (cheaper to borrow, increased I+C) -lower income/ cooperation tax (more disposable income/prices) -increase GS -weak exchange rate (exports cheap, imports dear, increases export revenue). -wealth effect

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29

cost-push inflation

When prices rise due to an increase in the cost of production.

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30

Causes of Cost-pull inflation

-increased raw material prices -increased wages -increased indirect taxes -currency depreciation

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31

chain for why rising properties price causes inflation

rising property prices, wealth effect, more consumer confidence + more spending, demand pull inflation

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32

chain for why increased global oil prices causes inflation

higher COP, passed onto consumers, cost pull inflation

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33

Working age population

all those between the ages of 16-64 years.

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34

Labour force

all those able and willing to work.

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35

Employment

the proportion of the working-age population that is working.

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36

Unemployment

the proportion of the working-age population that is actively seeking work but not working.

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37

Underemployment

Employed but seeking more hours.

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38

Two measures of unemployment

ILO LFS + Claimant counter

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39

Pros/cons of JSA

+Easy, cheap and quick to collect -excludes people that are actively seeking work but don't claim -fraud could lead to overestimation -not internationally comparable

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40

Pros/cons of ILO LFS

+more accurate +based on international standards -more costly to compile -only need to work one hour a week to count as employed

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41

Types of Unemployment

-Seasonal unemployment -Frictional unemployment -Geographical unemployment -Structural unemployment -Real wage (classical) unemployment -Cyclical (demand-deficient) unemployment

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42

Seasonal Unemployment

unemployment caused by seasonal changes in the demand for certain kinds of labour

eg: •Tourism •Construction •Post Office/ delivery workers •Farming

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43

Frictional Unemployment

A mismatch in information - the time involved in finding a new job.

•Search costs (internet!) •Hiring/ firing policies & laws •Worker dissatisfaction •Interview process

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44

Geographical Unemployment

A mismatch between the location of a worker and a job.

Vacancies in London (Jan 2020): 700,000 Unemployed in Scotland (Jan 2020): 105,000

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Structural Unemployment

unemployment that occurs when workers' skills do not match the jobs that are available

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46

Real wage (Classical) Unemployment

unemployment that results from wages being higher than the market-clearing level causes: minimum wages, trade unions

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47

Cyclical Unemployment

unemployment that rises during economic downturns and falls when the economy improves

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48

How does unemployment impact workers?

-loss of income -fall in living standards -social/ psychological cost -loss of skills -less attractive to future employers

however, this forces workers to become more productive.

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49

How does unemployment impact businesses?

  • Fall in the demand for goods & services.

  • Fall in demand further back along the supply chain.

  • Decrease in profits.

  • Redundancy/ downsize costs.

  • Larger surplus labour pool

  • Less pressure to increase wages

  • Reduced risk of industrial strike action

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50

How does unemployment impact the government?

-Increase in welfare spending (income support, tax credits)

  • Fall in tax revenue •Income •Corporation (profits) •VAT (sales)

  • Increase in government borrowing

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51

How does unemployment impact the economy?

-Loss in GDP

-Under utilisation of factor inputs (productively inefficient)

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52

What is the BOP made up of?

-Current account (X-M), Investment income, transfers -Capital account -Financial account

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53

What are the 4 macroeconmic goals?

Low and stable inflation, low unemploymet, BOP, stable economic growth

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54

What is the Current account made up of?

-trade in goods -trade in services -investment income (eg remmitances) -transfers (eg EU payment fees, paying foriegn aid to developing countries)

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55

What is the capital account made up of?

-debt forgiveness -inheritance taxes

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56

What is the finacial account made up of?

  • portfolio investments e.g. bonds, shares and derivatives. -FDI

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What may worsen a current account deficit?

-strong domestic growth (incomes increase, M increases) -recession overseas (overseas incomes decrease) -strong ER (SPICED) -High inflation

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58

AD equation

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

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59

Circular flow of income

a model of the economy which shows the flows of goods, services, factors of production and their payments.

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60

National Income

Total value of money earned within an economy = GDP.

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61

Withdrawal/ Leakage

Taxes, Savings, Imports

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62

Injections

GS, X, Investment

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63

Consumption makes up about _____ of overall GDP.

65% (2/3)

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64

Factors affecting consumption

-consumer confidenct -interest rates -wealth effects -animal spirits -employment rates

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65

animal spirits

psychological factors that lead to changes in the mood of consumers or businesses, thereby affecting consumption, investment, and GDP

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66

Factors affecting investment

-rate econ growth (increased GDP, more capital needed to meet demand) -confidence levels (confidence in tomorrow, more likely to invest today) -intrest rates (low Intrest rates, cheaper to borrow) -access to credit (easier to get a loan to invest) -risk (low risk, more likely to invest) -animal spirits

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67

Fiscal budget surplus

TR>GS

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68

Fiscal budget defecit

TR<GS

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69

Factors causing a change in (X-M)

-increase in ER (spiced, X decreases) -changes in real income (M increases) -overseas recession (overseas income decrease, X decreases) -protectionism (e.g tarrifs, quotas reduce X.)

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70

Short run

At least one FOP is fixed

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71

What causes a shift in SRAS?

changes in COP eg oil prices

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72

What causes a shift in LRAS

changes in FOP (Capital, Enterprise, Land, Labour).

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73

What is the difference between the kenysian vs classical LRAS?

Kenyesian model believes that in the long run an equilibrium can exist whilst an economy still has spare capacity.

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74

Shifts in LRAS are caused by

changes in the quality/ quantity of FOP. eg productivity, education, migration.

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75

Firms provide households with...

Wages, rent, profits

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76

Households provide firms with...

consumer expenditure

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77

Increase in minimum wage shifts out...

AD and AS AD- increased wages= increase disposable income, AD increases due to increase C, demand pull-inflation. AS increases due to increased COP,AS increases causing cost push inflation.

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78

Appreciation of currency causes...

Increase in AS, decrease in AD.

AS cost of importing raw materials cheaper, SRAS increases. Cost push inflation. AD imports become cheaper, exports dearer.

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79

Increase in quality of education...

Eduation increases productivity, increase productive capacity, LRAS increases. Education increases productivity, higher wages and spending AD increases.

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80

MPC

change in C/change in Y

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81

MPS

change in savings/ change in income

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82

MPM

change in imports/ change in income

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83

MPT

change in tax/ change in income

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84

MPW

MPS+MPM+MPT or 1-MPC

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85

Multipler equation

1/MPW or 1/1-MPC

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86

Postive multiplier effect

Initial injection, AD increases causing a more than proportionate effect, further increasing output. eg investment in infrastructure, increases AD, workers in the are consume, further shifting out AD.

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87

Negative multipler effect

Initial withdrawl, AD decreases, Real output decrease, demand pull deflation.

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88

Output Gap

a measure of the difference between actual output (Y) and potential output (Yf)

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89

Negative Output Gap

Producing below trend. Spare capacity and unemployment present.

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90

Positive Output Gap

Producing above trend. Growth is unsustainable and inflationary.

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91

Negative output gap diagram

AD> LRAS yfe

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92

postive output gap diagram

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93

Postive output gap reasoning

economic growth rate is greater than trend growth, occur during a boom. eg due to overtime.

eval- can cause inflation, may exhaust FOP + unsustainable in LR

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94

Eval of output gap

hard to measure due to unkown quantity of: unemployed workers, worker,captial productivity, spare capacity?

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95

business cycle

Fluctuations in economic activity, such as employment and production

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96

Monetary Policy

Involves using interest rates and other monetary tools to stabilise the economy.

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97

MPC

The Monetary Policy Committee is a panel of experts who are responsible for setting Bank of England monetary policy.

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98

Qualitative easing

creating new money electronically to buy assets (government/ corporate bonds).

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99

Hot money

capital that investors regularly move between economies to profit from the highest rate of return.

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100

Reflationary/Loose/ expansionary/ inflationary monetary policy.

Decrease bank base rate, commercial banks decrease interest rates, cost of borrowing decreases, C+G+I increases, savings decrease increasing AD. -hot money outflow, ER decreases, imports decrease, exports increase.

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