T2 2.1.1 - 2.6.4 The UK economy - Performance and Policies

ECONOMIC GROWTH (2.1.1 / 2.2 / 2.3 / 2.4 / 2.5)

ECONOMIC GROWTH (2.1.1 / 2.2 / 2.3 / 2.4 / 2.5)

Why did Birmingham’s economy suffer during covid 19?

Large proportion of the employment is in the retail sector

What AD = to

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

What happens to supply as price increases

The supply increases as more money can be made by firms

What happens to demand as price decreases

Demand increases as more people can afford the service

State 3 Money leakage methods

1. Savings

2. Taxation

3. Imports - Buying internationally and not nationally

State 3 Money injection methods

1. Exports - Money coming in

2. Investments

3. Government spending - Money coming back in

How often is GDP measured

GDP is measured QUARTERLY (Every 3 months)

What are the 2 best ways to reduce need for benefits

Investing in healthcare (people get better faster and return to work)

Investing in education (People gain better qualifications which allows them to access higher paying jobs)

What 4 main things do we need for economic growth

1. Social infrastructure (Housing)

2. Energy infrastructure

3. Transport Infrastructure

4. Broadband Infrastructure

Can economic growth accurately be predicted

No because unexpected events such as COVID - 19 happen

Why is some degree of inflation good?

Shows there is a demand which suggests that the economy is doing well and people have money to spend

High inflation downsides

Larger proportion of disposable income gone

Social + political discontent

Businesses lose confidence

Low inflation benefits

Should encourage investment and promote international competitiveness

What is the Uk current inflation rate

3.6%

Impact of inflation on individuals

Less money to spend

Impact of inflation on firms

Have to put prices up

Smaller margins

Less customers

Impact of inflation on government

Cost of services increases therefore if budget stay the same, services will suffer

How can the government combat inflation

Increase taxes

Reduce spending

Entering free trade agreements (more supply which reduces prices)

What is the governments biggest expense

Welfare benefits so when more benefits are needed, the expenses increase

What does labour being a derived demand mean

The higher the demand for a particular product or service, the higher the demand for labour in that sector

Why does the supply of labour differ in each industry

Many industries in the UK suffer from shortages - teaching

Some industries suffer from surpluses

How does unemployment stifle growth and vice versa

Unemployment means consumers have less money to spend which is a big issue as the UK is a consumer based economy

Conversely, economic growth reduces unemployment as there is a greater demand for services and so more labour opportunity to fill that demand

What is the UK current unemployment rate

4.7%

What are the two types of economic growth

Short run growth 

Long run growth

What is short run growth

the increase in a country's real GDP over a year, driven by a rise in Aggregate Demand (AD), utilizing spare capacity within the economy, shown by an outward AD shift or movement along the PPF towards full employment

What is long run growth

Occurs due to an increase in the capital stock of the economy which enables the economy to increase their potential and produce more goods

What are some examples of demand side-shocks

Economic downturn in trading partner

Unexpected tax increases

Financial crisis

Rise in unemployment

What are some supply side-shocks

Steep rise in oil and gas prices

Political turmoil

Natural disasters causing sharp fall in production

Unexpected tech breakthroughs (ie AI)

What is a price deflator

A price deflator is a statistical tool used to adjust for price changes, converting a nominal value (measured in current prices) into a real value (measured in constant prices) By removing the effects of inflation

Define interest rates

Reward for saving or the cost of borrowing

Possible causes of recession

External events

Increase in interest rates

Fall in asset prices or supply of credit

Drop in business/consumer confidence (Reduced spending, investment and employment)

Short term economic effects of a recession

Business profits and capital investment fall

Unemployment

Government finances

Inflation

Longer term economic effects of a recession

Rising structural unemployment (long term unemployment)

Low rates of investment reduces amount of capital stock (Less productivity)

Long term social effects of a recession

Falling real wages = less demand

Widening income inequality (Lower payed/skilled workers worst affected as they are first to go in a recession)

Threats to democracy 

Negative output

When the economy produces less than its potential

Positive output gap

When the economy produces more than its potential

Effects of a boom

Higher wages

Increased productivity

Lower inflation

Effects of a recession

High inflation

Higher unemployment

What is the multiplier effect

This concept is based on the fact that one persons spending is anothers income

What is the marginal propensity to consume (MPC)

Proportion of increase in income spent on consumption

(ie if income increases by £5000 and you spend £4000 then your MPC is 0.8)

An MPC of 1 = 100% consumption spend

What is the marginal propensity to save

Proportion of increase in income saved

(ie if income increases by £5000 and you save £4000 then your MPS is 0.8)

An MPS of 1 = 100% save

What is the multiplier coefficient formula simple multiplier

K = 1/(1-MPS)

This is assuming that the only leakage methods are savings

What is the multiplier coefficient for formal multiplier

K = 1/(MPS + MPT + MPM) With S, T and M being savings, taxation and imports respectively

When is the value of the multiplier higher

In a recession when there are less leakages so we are spending more

What do C,I,G,X,M stand for

Consumption

Investment

Gov. spending

Exports

Imports

What are some short run growth factors

Lower interest rates

Lower taxes

Lower oil prices

Economic boom within trading partner country (Buy more of our stuff)

What are some long run growth factors

Investment

Increased productivity

Increased labour supply

Research

Innovation

What is GNP

Gross national product is the estimate of the money value of the goods and services produced by the 4 factors of production

Why are national income statistics gathered

For the bondholders (holders of national debt)

Comparison with peers

Comparison with other countries

Helps economists forecast

Allows companies to gain knowledge so they can invest

Limitations of national income data

Does not show standard of living

Does not show purchasing power

Does not show income distribution

What does purchasing power parity allow us to do

See the relative cost of living compared to other countries

What is the Easterlin paradox

Rich people tend to be much happier than poor people

Rich societies are not happier than poorer societies

As countries get richer, they do not get happier

What affects happiness

Relative income because happiness is subjective and heavily influenced by comparison

Key drivers of economic growth

Expanding capital stock

Extracting natural resources

Increasing active labour supply

Driving innovation

What does rising house prices do

Creates positive wealth effect by increasing equity of homeowners which encourages them to spend

What are some factors of economic growth in Africa

Improvement of trade terms

Improved governance

Increasing FDI

Improved macroeconomic management

Rising GDP per capita incomes

What are some examples of policies to attract FDI

Attractive rates of corporation tax

Tax subsidies 

Trade and investment agreements

Flexible labour markets (geographically + occupational mobility)

High quality infrastructure

Availability of low cost labour

What do all of these policies have in common

All of these policies reduce the cost for firms which increases their profit margins and makes them more competitive

Why do developing countries struggle to sell high value goods in their countries

They struggle because the demand is not there

Pros of economic development in LEDC’S

Stronger currency

Higher living standards

Stronger economy

More disposable income

Easier to import

Improved government finances

Cons of economic growth in LED’Cs

Rising social tensions

Increase in income inequality

More pollution

Harder to export

How best to sustain long run economic growth

Building social trust

Growing intra regional trade

Improving institutions

Focus on addressing fairness/equality

What is profit motive

The desire for financial gain as an incentive for economic activity (what motivates the private sector)

Define sustainable economic growth

The process of increasing a nation's output over time without compromising the ability of future generations to meet their own needs

Key constraints of economic growth

Infrastructure gaps

Primary export dependency

Macroeconomic instability

Human capital weaknesses

Insufficient private savings (these are required to fuel investment)

Natural resources being depleted

Why does corruption stunt entrepreneurship

Higher expenses involved

Why do savings act as consumption smoothing

If you lose your job or their is a recession you can still spend and buy which maintains the demand

Savings are also the fuel for investment

What are some advantages of using HDI as a measure of economic development

You can compare countries

Composite (includes multiple measures)

Easy to compare improvements over time

What are some limitations of using HDI as a measure of economic development

HDI methodology has changed over time so it is difficult to compare

Development is very subjective

Does not include the informal economy

What is capital deepening

When the capital per worker is increased (often by investment in education)

INFLATION (2.1.2)

INFLATION (2.1.2)

Define inflation

Inflation is a sustained rise in the general price level

What is the term given when inflation is still increasing but at a slower rate

Disinflation

What is deflation

Deflation is a fall in the general price level

How is inflation in the UK measured

Inflation in UK is measured using the consumer price index (CPI)

What is the CPI composed of 

CPI is based on an average price of a bundle of approx 720 goods measured from a sample of 7000 households

How is each good weighted

Based on the average spending on that good

What does the CPI exclude

It excludes owner occupiers’ housing costs and council tax that are included in the CPIH

Why is the CPI shopping basket reviewed every year

To ensure it is up to date with consumer spending patterns

What is the formula for the price index

(Price x Weight) / (Sum of weights)

How do we calculate index numbers using base years

Index number in year Y = (Data value in year Y) / (Base year value) x 100

What is the current CPI for inflation

3.6%

What is hyperinflation

Hyperinflation is when money loses its value so fast that it loses its value as a medium of exchange (inflation > 1000%)

What is something that the RPI considers that the CPI does not

Mortgage interest rates which tend to be higher than the current inflation rates

Why is CPI more applicable internationally and RPI more applicable nationally

CPI doesnt include volatile mortgage interest rates

RPI includes mortgage interest rates making it more relevant to the UK where home ownership is high

What is the wealth effect

Property prices increase

Homeowner equity increases

Confidence rises

Aggregate demand rises which leads to higher prices

What 2 ways does an increase in cost of labour cause inflation

Cost of labour increase

More consumption/spending as higher disposable income

What 3 ways does an increase in oil prices cause inflation

Used in manufacturing so higher costs

Used in transportation

Used in every production

What are the two types of inflation

Demand pull

Cost push

What is demand pull inflation

Where an increase in demand causes scarcity and hence firms raise prices in order to maintain or increase profits

Give 3 causes of demand pull inflation

Fall in exchange rate - Makes foreign prices of UK goods cheaper so firms raise prices

Fall in taxation - Consumers have more disposable income

Economic growth in trading partner - Can afford more UK goods

What is cost push inflation

Increase in production costs passed onto consumers

Give 2 causes of cost push inflation

Fall in exchange rate - costs more for firms to import stuff

Acceleration in wages - increases cost of production

What are some costs of production for firms

Rent/energy

Raw materials

Labour costs

What is price elasticity

The response of demand to a change in price

Which type of inflation is worse and why

Cost push because it means businesses supply less and so growth slows down. Demand pull however fuels growth

Effect of inflation on consumers

Lower real incomes

Consumption options reduced

Wealth rises - value of assets rises

Effect of inflation on producers

Costs rise - raw materials and wages

Profit margins fall

Effect of inflation on government

Spending rises - pensions are index linked and wages may rise

Tax receipts rise

Rise in debt payments