Econ Theme 2

AD Curve

Shows the relationship between the level if real planned expenditure and the general price level in an economy

Components of AD

C + I + G + X - M

SRAS

total planned output when the GPL can change but prices and productivity of factor inputs are held constant.

GDP

the value of goods and services produced in the economy over a period of time

Real GDP

GDP taking into account inflation

Purchasing Power Parities

comparing the value of the same amount of goods in different countries

Inflation

the rate of change in average price level

types of inflation

demand pull, cost push, growth of money supply

measures of inflation

CPI and RPI

demand pull inflation

when there is excessive demand

Causes of demand pull inflation

reduced taxes, lower interest rates, high consumption, increased gov spending, weak exchange rate, certainty

Cost push inflation

when prices increase due to higher costs of production

causes of cost push inflation

wage increase, tax increase, raw materials increase, import prices increase, natural disasters

How does inflation impact consumers?

saving value falls, purchasing power falls, value of debt falls

how does inflation impact firms?

loss of international competitiveness, more uncertainty, lower investment from abroad, lower profits

how does inflation impact the government?

redistribution of income, cost of borrowing falls

hows does inflation impact workers?

expecting higher wages, less disposable income

Quantitative easing

making money electronically to buy gov bonds from financial institutes so the price of bonds increase and interest rates decrease. the institutes loan the money and invest in corporate bonds so price of bonds increase and interest rates decrease. this leaves more access to credit and increased spending increases AD

Budget deficit

gov expenditure > tax revenue

National debt

total accumulation of debt

deflation

decrease in general price level

causes of deflation

slow growth, low demand, delayed purchasing, low consumption, less confidence

disinflation

inflation increasing at a slower rate

ways to contract AD

increase interest rates, decrease government spending, increase taxes, reduce money supply, decrease exports

unemployment

the number of people who are willing and able to work, but are unable to find employment.

claimant count

the number of people claiming unemployment benefits in a given period.

Labour force survey

A survey that measures the number of people who are employed and unemployed, providing insights into the labor market.

underemployment

when workers cant find a job that is suitable for their qualificsation and experience or cant find enough hours to work

Seasonal unemployment

regular seasonal changes in employment during holidays and tourist times

Structural employment

arises from the mismatch of skills and job opportunities as the patter of labour demand changes

frictional unemployment

transitional unemplyment due to people moving between jobs

cyclical unemployment

when there is a fall in demand and occurs when there is a negative output gap to cut down on costs

causes of structural unemployment

decline of manufacturing, robotics replacing jobs, foreign competition, outsourcing, occupational immobility, geographical immobility

Net migration

the difference between emigration and immigration

interventionist SSPs to reduce structural unemployment

growth of education and training, subsidies for work training, growth of infrastructure, grants or low housing costs

market based SSPs to reduce structural unemployment

reduce benefits, deregulate hiring or firing laws

ways to reduce cyclical unemployment

lower interest rates, increase growth, decrease taxes

interventionist SSPs to reduce frictional unemployment

better resources for job centres, subsidies to private job agencies, growth on infrastructure

market based SSP to reduce frictional unemployment

reduce benefits

ways to reduce real wage unemployment

reduce minimum wages, reduce strength of trade unions

demand side policies to reduce unemployment

lower interest rates, lower exchange rate, lower direct taxes, gov spending on major capital projects, employment subsiidies, incentives to encourage foreign investment

balance of payments

the balance of trade in goods and services

surplus

exports > imports

deficit

imports > exports

why is there a deficit on the current account?

high propensity to consume imported goods, uk firms have become less competitive, exchange rate is too strong, having an unbalanced economy

ways to reduce trade deficit

consumer less and save more, depreciate the exchange rate, tax capital inflows

what determines the level of consumption in a household

disposable income, interest rates, level of personal debt, levels of personal wealth, confidence

Marginal propensity to consumer or save

how likely someone is to consume of or save extra income they receive

influences on consumer spending

interest rates, consumer confidence, wealth effects

determinants of saving

interest rates, confidence, inflation

influences on investment

rate of economic growth, business expectations, keynes and animal spirits, demand for exports, interest rates, access to credit, influence of government and regulations

accelerator affect

when an increase in national output stimulates additional investment

main influences on government expenditure

trade cycle, fiscal policies

merit goods

socially desirable but under-produced so the government usually provides them

public goods

commodities available to all members of society and free of charge through public tax

main influence on the net trade balance

real income, exchange rates, state of the world economy changing, degree of protectionism, non-price factors

supply side shocks

wages, raw materials, oil prices, import price via exchange rates

factors of LRAS

quantity, quality, capital, enterprise, labour, land

circular flow of income

an economic modal saving the flow of goods and services, the factors of production and their payments between households and firms within an ecnomy

Injections

extra spending into the circular model

types of injections

investment, exports of goods and services, government spending

leakages

withdrawals from the circular model

types of leakages

savings, imports of goods and services, taxation

how to calculate multiplier coefficients (K)

k = 1/MPS or k = 1/(1-MPC)

2.6.1