(1/2) economic policy objectives (chap 22-27)

economic growth, development, unemployment, inflation, bop, exchange rates

what is short term economic growth

short term effects influencing economic growth such as changes in real gdp, changes in aggregate demand, changes in SRAS, short term supply and demand shocks, short term policy changes

what is long term economic growth

growth of the economy that will be sustained in the long run through improving labour and capital productivity, technological processes, strength in enterprise, changes in labour force, investment rates

example of short run economic growth/ decline

covid

example of long run economic growth/ decline

brexit

how is long term economic growth shown on a ppf

outward shift

how is short term economic growth shown on a ppf

movement or being closer to full capacity

provide some examples of drivers of economic growth

expansion of capital stock, increasing active labour supply, extracting and selling natural resources, improving factor productivity, increased enterprise

economic growth

% increase in real GDP

FDI

foreign direct investment, other countries providing investment

policies to attract inwards FDI

low coorperation tax, soft loans (long payback periods with low interest), subsidies, trade agreements, flexible labour market, special economic zones, high quality infrastructure, low cost labour

what is the effect of economic growth on interest rates and inflation

rise in interest rates and inflation due to increased consumption

demand pull inflation

higher demand so prices go up

cost push inflation

business costs increase so prices must rise accordingly

what are the effects of economic growth on the environment

negative externalities such as pollution and increased waste, over consumption of non-renewable resources so unsustainability

what are the effects of economic growth on people

those at the top receive the most economic benefit from growth increasing wealth inequality

what are some constraints and drawbacks of economic growth

weaknesses to human capital through skills shortages, infrastructure gaps, rising income inequality, primary export dependency, corruption and financial misconduct,insufficient savings and more debt, natural capital depletion

explain how an increase in savings leads to increased gdp

more savings= more investment= more capital stock= increase in gdp/gni= increase in incomes

capital deepening

more capital per worker through investment

brain drain

skilled educated workers leaving the coutry to work overseas

what are some main benefits of economic growth

improved living standards, lower unemployment, accelerator, increased tax revenue, decreased welfare dependency

benefits of technological change

rise in productivity, new goods and services produced, improved health

what are the three types of economic growth

balanced economic growth, sustainable growth, inclusive growth

balanced economic growth

balance between sectors and industries, stock and output grows at the same rate

sustainable economic growth

meeting the needs of current generations without limiting growth for future generations

inclusive economic growth

everyone benefitting from economic growth

what is sustained long run economic growth

building trust and social capital, growing intra-regional trade, improving institutions, growing a dynamic private sector, controlling inflation, addressing fairness

unemployed

people that are available to work but cannot find a job despite actively searching for one

what % of unemployed people have been so for over a year

40%

claimant count

(JSA, jobseekers allowance), count of how many people are claiming jobseekers benefits, counted by jobcentres

Labour force survey

survey conducted once a month analysing the attitudes and behaviours of unemployed people

long term unemployed

unemployed for atleast one year

full employment

when there are enough job vacancies for all the unemployed

discouraged workers

people that are out of work and may give up seeking work such as criminals

economically inactive

people of working age (16+) that are not working or actively seeking work

employment rate

% of population in full time or part time work

unemployment rate

% of population not in full time or part time work

underemployment

a person possessing the skills or willingness to work other jobs but not

hidden unemployment

people not declaring themselves as unemployed due to embarrassment

seasonal unemployment

changes in employment due to seasons such as christmas

structural unemployment

mismatch of skills and job opportunities as pattern of labour demand changes e.g decreased coal miners

frictional unemployment

transitional unemployment when moving between jobs

cyclical unemployment

the economic cycle resulting in an increase or decrease in employment in relation to an increase in AD or decrease

what will firms do to their labour force when a recession hits

reduce employment to cut labour costs through labour shedding

what are some reasons for structural unemployment

decline of manufacturing, occupational immobility, geographical immobility, technology replacing jobs, foreign competition i.e imports, long term regional decline, disincentives such as the poverty trap, outsourcing production overseas

what are some economic effects of unemployment

fall in real incomes and living standards, brain drain, higher levels of welfare and a drop in tax revenue so less investment by government

what are some social effects of unemployment

increase in welfare dependency and therefore poverty, increase in relative poverty, extra institutional demand such as pressure on the NHS due to stress related illnesses

what are some benfits of unemployment

low inflation/ reduced risk of inflation, pool of unemployed labour for growing businesses

what are the effects on unemployment on labour

less work experience for people leading to cv gaps and a loss of skills, loss of income leading to a decline in health due to stress related illness along with high interest, changing job patterns as new jobs differ from old ones and structural unemployment makes it harder for people to get into new jobs that require skills

what is youth unemployment

people aged 16-24 who are unemployed

what are the causes of youth unemployment

skills gaps such as reading and numeracy, reluctant employers not willing to upskill youth, falling retirement where people are either retiring later or coming out of retirement later so decreasing job opportunities, low GDP growth and business confidence

NEET

not in education employment or training, outsiders of society that do not provide to the economy

what are some labour demand (targeted towards business and government) policies that aim to reduce unemployment

macro stimulus (low interest rates, depreciation of the exchange rate, infrastructure investment) cutting employment costs (reducing national insurance, financial support for apprenticeships, extra funding for policy such as business grants), competitiveness policies (reduction in cooperation tax, tax incentives for research and innovation, enterprise policies for start ups such as grants)

what are some labour supply (targeted towards individuals) policies that aim to reduce unemployment

reducing occupational immobility (training funding, teaching new skills such as coding, expansion of apprenticeship programmes), improving geographical immobility (increase in housing, decrease in rent and mortgage costs, regional policy fir new jobs), stimulation of stronger work incentives (higher minimum wage, reductions in income tax or national insurance, welfare reforms to reduce the poverty trap)

what are some barriers to lowering unemployment

high levels of structural unemployment, pockets of areas with low employment and economic activity, complex welfare system, high housing costs, high childcare costs, low paid jobs, underemployment, high dependency on public sector, skills shortages and differences in education

nominal

current price, usually not adjusted for inflation

real

actual price, adjusted for inflation

inflation

sustained increase in the general price level

how is the rate of inflation measured

annual percentage change in consumer prices

what is the government targeted rate of inflation

2%

CPI

consumer price index, measure of the price levels in an economy based on the prices of a collection of products that are thought to reflect average consumption (food, holidays, entertainment etc)

deflation

decline in general price level and inflation going below 0%

disinflation

inflation declining from the previous value but not below 0% e.g 5% to 2%

hyper-inflation

rapid and unrestrained increases in inflation, usually over 50% which results in a fall in consumer confidence and a loss of confidence in an economy’s currency

unit labour costs

average costs of labour per unit of output produced

what are the two types of inflation

demand pull and cost push

demand pull inflation

inflation that arises due to an increase in demand pulling prices up as firms are able to charge more money due to more disposable income

positive output gap

usually follows demand pull inflation, economy is producing more product than planned leading to a positive output

cost push inflation

rising wage costs and component costs for materials so businesses have to push prices up to combat costs

administered prices

prices that are dictated by government bodies including goods and services (train fares, water bills), taxes (subsidies, indirect taxation, environmental taxes)

inflation expectations

the general public’s reaction to the rise in inflation, can lead to protests, strikes etc

what are some downsides to CPI

households have different spending patterns, no indication for change in spending following change in quality, new products take long to come into CPI

RPI

retail price index, everything that is sold on the domestic market regardless of popularity, includes mortgages and taxes

what are some internal causes of inflation

surge in property prices, boom in credit/ money supply, higher wages/ labour costs, rises in business taxes/ VAT

what are some external causes of inflation

increase in world oil/ gas prices, inflation of global commodity prices, depreciation of the exchange rate, high inflation in other countries

what are some issues that arise because of inflation

inequality as low income households hold most of their wealth in cash, falling real incomes, negative real interest rates as savings are lower than inflation, cost of borrowing, business competitiveness, business uncertainty

who benefits the most from inflation fluctuation

strong bargaining power workers (doctors and nurses), debtors upon low inflation, producers if prices rise faster than costs

who looses out the most from inflation fluctuation

retired on fixed incomes, lenders of money, those with savings, low paid jobs

fiscal policy

control of government spending and taxing

monetary policy

management of interest rates and supply of money in the circular flow (quantitative easing)

direct controls

controls that are placed upon the manufacturing, distribution or pricing of goods e.g public sector pay controls, capping energy bills

BOP

balance of payments, recording all transactions made with overseas

inflows and outflows of foreign currency

positive or negative entry of income e.g exports or imports

current account of BOP

main overall measure of all of the inputs and outputs of a country within their business transactions

what are the four components of the current account

trade balance in goods, trade balance in services, net money transfers, net investment income

what does a deficit in the current account indicate

more outflow in current account so more imports

what does a surplus in the current account indicate

more inflows into current account so more exports

causes of trade deficit

poor price or non-price competitiveness (weakness in product design/ quality, higher inflation than trading partners), strong exchange rate (stronger currency), recession, volatile global prices, low investment in innovation and research

what is the export multiplier effect on AD

fall in exports reduces AD and vice versa, many industries rely on the competitiveness of other industries e.g logistics, more competition means more distribution and more accessibility to reach international markets and sell more goods/ services, AD shifts outwards

what are some issues with the trade deficit

loss of AD is slower GDP growth and reduction in living standards, loss of jobs through structural unemployment, currency weakness and higher inflation, lack of competitiveness and supply side weaknesses

policies to reduce the trade deficit

demand management lowering imports, lower exchange rates, supply side policies such as labour productivity and human capital, protectionist measures such as tarrifs and import taxes

what are issues with trade surplus

GDP is close to full capacity and full employment, can cause demand pull inflation, threat of protectionism, high saving and low consumption may lower living standards, commodities exports can be volatile and unpredictable

reasons for the UK trade deficit

high income elasticity of demand for imports, supply side weaknesses, hard to finance rise in exports, most exports go to slower growing countries

what are some indicators of global competitiveness

institution effectiveness, infrastructure quality, higher education, health, innovation

cost competitiveness

unit labour costs and other factors that influence final cost of the product

non-price competitiveness

quality of the product, reliability, performance, branding, marketing

non-wage costs

meeting environmental health standards, laws, safety for employees, pensions

interest rate

reward for saving and costs for borrowing expressed as a percentage

how does the interest rate work in the UK

Bank of England set the base interest rate, companies build on it based on what they are offering e.g mortgages have a higher interest rate and they are fixed as companies need to protect themselves incase the interest rate surges up

exchange rate

price of one currency in terms of another

what demand is associated with exchange rates

derived demand as an increase in the demand of one currency increases the demand of anotehr