Economics Ao3

Definition of economic growth

An increase in the output of goods and services in an economy over time

Measurement of economic growth

Measured using increases in Gross Domestic Product GDP

Limitations of GDP as a measure

GDP does not show income distribution or quality of life

Economic cycle

Shows fluctuations in economic growth over time

Boom

When GDP grows strongly and unemployment is low

Downturn

When GDP growth slows and confidence falls

Recession

When GDP falls for two consecutive quarters

Recovery

When GDP begins to rise again after a recession

Effect of boom

High growth low unemployment possible inflation

Effect of recession

Low growth high unemployment low inflation

Impact of growth on employment

Economic growth increases jobs and reduces unemployment

Impact of growth on living standards

Higher income and better quality of life

Impact of growth on poverty

Economic growth can reduce poverty by creating jobs

Impact of growth on productive potential

Growth increases the productive capacity of the economy

Impact of growth on inflation

Rapid growth can cause inflationary pressure

Impact of growth on environment

Growth can increase pollution and resource use

Definition of inflation

The sustained rise in the average price level

Definition of deflation

The sustained fall in the average price level

Measurement of inflation

Measured using the Consumer Price Index CPI

Type of inflation demand pull

Inflation caused by excessive demand

Type of inflation cost push

Inflation caused by rising production costs

Inflation and interest rates

Higher inflation usually leads to higher interest rates

Impact of inflation on prices

Prices rise reducing purchasing power

Impact of inflation on wages

Workers may demand higher wages

Impact of inflation on exports

Exports become less competitive

Impact of inflation on unemployment

High inflation can cause uncertainty and lower investment

Impact of inflation on menu costs

Firms must update price lists and menus frequently

Impact of inflation on shoe leather costs

People spend time and effort reducing cash holdings

Impact of inflation on uncertainty

Firms find it hard to plan investment

Impact of inflation on confidence

High inflation reduces business and consumer confidence

Impact of inflation on investment

Inflation discourages long term investment

Definition of unemployment

When people able and willing to work cannot find a job

Measurement of unemployment

Measured using International Labour Organization ILO standards

Cyclical unemployment

Unemployment caused by lack of demand during a recession

Structural unemployment

Unemployment caused by decline of industries or mismatch of skills

Seasonal unemployment

Unemployment during parts of the year

Voluntary unemployment

People choose not to work at the current wage

Frictional unemployment

Unemployment between jobs

Impact of unemployment on output

Less output and lost income for the economy

Impact of unemployment on poverty

Higher unemployment increases poverty

Impact of unemployment on government spending

More spending on benefits

Impact of unemployment on tax revenue

Less tax collected

Impact of unemployment on confidence

Lowers business and consumer confidence

Definition of current account

Records trade in goods services income and transfers with other countries

Current account deficit

When imports are greater than exports

Current account surplus

When exports are greater than imports

Trade in goods visibles

Physical products such as cars and food

Trade in services invisibles

Non physical products such as tourism and banking

Exchange rate

The price of one currency in terms of another

Reasons for deficit high imports

Domestic goods are expensive or low quality

Reasons for surplus high exports

Domestic goods are competitive

Impact of current account deficit

Can cause leakage low demand and inflationary pressure

Business activity damaging environment

Firms may cause air water noise and visual pollution

Government protection of environment

Uses taxation subsidy regulation fines and permits

Definition of income inequality

Unequal distribution of income within an economy

Definition of absolute poverty

When people cannot afford basic necessities

Definition of relative poverty

When people earn less than others in society

Reasons to reduce poverty

To meet basic needs and raise living standards

Government intervention to reduce poverty

Progressive taxation benefits and investment in education and healthcare