Economics unit 4

What goods does the government provide as a producer?

Merit goods, public goods, welfare services, public services, infrastructure.

In what role does the government provide jobs?

As an employer.

Name two ways governments help society apart from production.

Support agriculture/industries, redistribute income, manage macroeconomy, manage trade.

What is economic growth?

An increase in national output as measured by an increase in real GDP

What indicates economic recession?

Falling output over time.

Two effects of falling output?

Falling employment & incomes / lower govt tax revenue / lower investment / lower living standards.

What is inflation?

A sustained increase in the average price level of goods and services in an economy.

What is inflation target governments typically aim for?

3%

Two negative effects of high inflation?

Reduced purchasing power, hardship for poor, higher business costs, less competitive exports.

Define full employment.

When most people willing and able to work are employed.

Two problems caused by unemployment?

Lower national output, increased govt benefits cost, lower tax revenue, public unrest.

What is the Balance of Payments?

Record of exports & imports and transactions with other countries.

BoP surplus meaning?

Exports > imports.

BoP deficit meaning?

Imports > exports.

Why avoid persistent BoP deficit?

Currency may fall which can lead to expensive imports.

What is income redistribution?

Reducing inequality by taxing rich & supporting poor.

Full employment vs price stability problem?

Low unemployment → higher incomes → higher demand → inflation.

Growth/full employment vs BoP stability conflict?

Higher incomes lead to more imports lead to BoP deficit.

Growth vs employment long-run conflict?

Capital investment may replace labour leading to unemployment.

Define a budget.

Forecast of government revenue and expenditure for coming year.

What do governments aim for in budgets?

Balance.

Government spending forms part of what macro component?

Aggregate demand.

Give 4 areas governments spend on.

Defence, infrastructure, education, health, pensions, subsidies, etc.

Two reasons governments spend?

Provide goods private sector won’t / improve productivity / reduce inequality / correct externalities / support industries / promote growth.

Increased govt spending effect on AD?

Increases AD leading to growth.

Excessive public spending risk?

Inflation or crowding out private investment.

What is crowding out?

Govt borrowing increases interest rates, private investment falls.

Define tax.

a compulsory payment made to the government by all people in an economy.

Main purpose of taxes?

Govt revenue.

Tax on foreign goods name?

Customs duty.

Tax on demerit goods name?

Excise duty.

Two reasons for taxes?

Redistribute income, control consumption, protect industries, manage demand.

Direct tax definition?

Tax on income paid directly by individuals/companies.

Indirect tax definition?

Tax on goods/services collected through spending.

Advantage of direct tax?

High revenue & reduces inequality (progressive).

Disadvantage of direct tax?

Reduces work/investment incentive; tax evasion.

Advantage of indirect tax?

Wide tax base, flexible, cost-effective, influences consumption.

Disadvantage of indirect tax?

Inflationary & regressive.

Progressive tax meaning?

the rate of taxation increases as incomes increase.

Regressive tax meaning

the rate of taxation falls as incomes increase.

Proportional tax meaning?

Same % for all income levels.

Fiscal policy definition?

Govt policy using spending & taxation to influence economy.

Expansionary fiscal policy results in?

Higher growth, employment, prices.

Contractionary fiscal policy results in?

Reduced inflation but risk unemployment.

What are qualities of a good tax system

Equity, certainty, economy, convenience, elasticity, simplicity.

What is fiscal policy?

a government policy which adjusts government spending and taxation to influence the economy.

What is money supply?

Total value of money in economy at a time.

Interest rate meaning?

Cost of borrowing OR reward for saving.

5 reasons governments levy taxes.

Revenue, redistribute income, discourage demerit goods, protect domestic industries, manage economy.

Why do banks charge higher loan interest than savings interest?

To profit (interest spread).

What is expansionary monetary policy?

A policy used by the central bank to increase money supply and reduce interest rates to stimulate economic activity.

What is the main goal of expansionary monetary policy?

Boost economic growth, increase spending and investment, reduce unemployment.

What is the key tool used in expansionary monetary policy?

Lowering interest rates (cheaper borrowing/less reward for saving).

How does lowering interest rates stimulate the economy?

Cheaper loans lead to more borrowing leading to more investment & consumption causing a rise in total demand leading to more production leading to more jobs.

Chain of effects of expansionary monetary policy (memorize sequence).

fall in interest rates leads to a fall in saving and increase in borrowing. Leading to an increase in investment & consumption, leading to an increase in AD. This leads to an increase in output leading to increased employment, leading to economic growth.

When is expansionary MP used?

During recession, low growth, high unemployment, low inflation, negative output gaps.

What is contractionary monetary policy?

A policy used to reduce money supply and increase interest rates to slow down excessive economic activity.

Chain of effects of contractionary MP (memorize sequence).

an increase in interest rates leading to an increase in saving leading to a decrease in borrowing leading to a decrease in investment & consumption leading to a decrease in AD leading to a decrease in output leading to an increase of unemployment risk leading to a decrease of inflation.

What are the governments major macroeconomic objectives

Economic growth, price stability, full employment, balance of payments stability, and income redistribution.

What are supply-side policies?

microeconomic policies aimed at increasing supply and productivity in the economy, to enable long-term economic growth.

Do supply-side policies mainly affect demand or supply?

Supply, they shift the productive capacity of the economy outward.

What is the long-term goal of supply-side policies?

Increase productive potential, output, economic efficiency, and sustainable growth.

What is the long-term goal of supply-side policies?

Increase productive potential, output, economic efficiency, and sustainable growth.

What is public sector investment in supply-side policy context?

Government spending on infrastructure such as transport and communication.

How do investments in transport/communication boost supply?

They improve resource flow efficiency, reduce delays, improve logistics, and enable faster production growth.

Why is infrastructure important for productivity?

Better roads, ports, internet etc. reduce costs and time, allowing firms to produce/output more.

How does improving education affect supply?

Increases labour quality and skills leading to higher productivity & innovation.

What does vocational training specifically improve?

Practical job-related skills, workers become more efficient & employable.

Why is human capital development a supply-side tool?

Skilled workforce produces more output per worker, raising long-run supply.

Why does spending on healthcare raise productivity?

Healthy workers are absent less, work longer and more efficiently.

How does better healthcare affect labour supply?

Increases number of productive workers and reduces hours lost to illness.

How does investment in housing support supply-side growth?

Increases geographic mobility, workers can move easily to where jobs exist.

Why is mobility important for productivity?

Efficient labour matching reduces unemployment & increases output.

What is privatization in supply-side policy?

Transfer of state-owned firms to private ownership.

How does privatization increase productivity/output?

Private firms are profit-motivated which reduces waste and are more innovative leading to increased efficiency.

What are some examples of supply-side policies?

Public sector investments, improving educational and vocational training, spending on health, investment on housing, privatization, income tax cuts, subsidies, deregulation, removing trade barriers, and labour market reforms.

What is economic growth?

an increase in the amount of goods and services produced per head of the population over a period of time

What is the national output?

The total value of output of goods and services produced

What are the three ways national output can be calculated?

output, income or expenditure.

What is GDP (Gross Domestic Product)?

the total market value of all final goods and services provided within an economy by its FOP in a given period of time.

What is nominal GDP?

the value of output produced in an economy in a period of time, measured at their current market values or prices

What is real GDP?

the value of output produced in an economy in a period of time, measured assuming the prices are unchanged over time.

What is GDP per head/capita?

measures the average output/ income per person in an economy it provides a good measure of the living standards of an economy.

Formula for GDP per capita?

GDP / Population

What does an increase in real GDP over time indicate?

It indicates economic growth as more goods and services are being produced.

What does economic growth imply about resource utilization?

The economy is utilizing its resources better or its productive capacity has increased.

Causes of economic growth:

Discovery of more natural resources, investment in new capital and infrastructure, technical progress, increasing the quantity and quality of FOP, and reallocating resources

How does the discovery of more natural resources contribute to economic growth?

It increases production capacity, allowing economies to grow rapidly

How does investment in new capital and infrastructure aid economic growth?

By expanding production capacity through machinery, buildings, and modern infrastructure like airports and roads.

What is the role of technical progress in economic growth?

New inventions and processes boost productivity, increasing output and efficiency in industries.

How does increasing the quantity and quality of factors of production help economic growth?

A more skilled and productive workforce, better capital, and natural resources raise GDP in the long run.

How does reallocating resources improve economic growth?

By shifting resources from less-productive to more-productive uses.

What is one benefit of economic growth related to goods and services?

Greater availability of goods and services to meet consumer needs.

How does economic growth affect employment?

It increases employment opportunities and incomes.

How can economic growth impact living standards in developing countries?

It can improve living standards and reduce poverty

How does economic growth affect business performance?

It leads to increased sales, profits, and business opportunities.

What encourages investment in capital goods during economic growth?

Rising output and demand

What impact does economic growth have on inflation?

It can lead to low and stable inflation if output growth matches demand.

How does economic growth affect government revenue?

It increases tax revenue, enabling more public investment.

How can technical progress negatively affect employment?

It can replace labor with capital, causing a rise in unemployment, especially in highly populated underdeveloped and developing economies.