3 - Economic Objectives and the Role of the Government

What is Economic Growth:

Economic growth is an increase in the real output of goods and services produced in an economy over time, measured by a rise in real GDP

Define GDP:

Total value of final goods and services produced within a country in a given period of time(usually a year)

How to measure economics growth (formula)?

Change in GDP. x 100

Original GDP

Define Real GDP

the total monetary value of a country's output measured at constant prices, adjusted for inflation, allowing meaningful comparison over time.

Define Nominal GDP

Nominal GDP — the total monetary value of a country's output measured at current prices, not adjusted for inflation

Define GDP per capita:

Total GDP divided by population

What is a boom?

When economics growth is positive over a period of time

What is a recession?

When economics growth is negative over a period of time

What do determinants of economic growth do?

Affect quality or quantity of FoP, and the FoP affect economy’s potential to make Goods and Services

Name the 6 determinants of Ec growth

Investment

Changes in technology

Size of Workforce

Education and Training

Natural Resources

Government Policies

Define capital Goods:

Man-made aids to production (ex: delivery vehicles, computers)

What does the “investment” determinant of Ec Growth do?

Spending on Capital goods by firms

This increases efficiency over workers and speeds up the process of production or helps workers become more efficient

What does the “Changes in technology” determinant of Ec Growth do?

Advancement in tech can improve quality of capital goods

Improved capital may mean a country can use all other factors of production more efficiently

Because, same amount of capital produces more goods and services

Are capital goods and capital interchangeable in GCSE?

YES SO DON’T WORRY

What does the “Size of the Workforce” determinant of Ec Growth do?

Increase in number of workers means an increase in the labour factor of production so it means more Gds and Services can be produced

What does the “Education and Training” determinant of Ec Growth do?

Affects quality/quantity of labour (fop)

More spending on Edu/Training means more skilled workers in future. (means more productive and produce more goods in the future)

Could increase output and increase GDP and hence increase Economic Growth

What does the “Changes in “Natural Resources” determinant of Ec Growth do?

Quality of Natural Resources affect the Land(FoP)

Find more NR means sell/make more goods ( both lead to increased output, GDP and ec growth)

Vice versa if losing NR

What does the “Government Policies” determinant of Ec Growth do?

Gov interference can affect specific markets or the whole economy

ex: Increased infrastructure means it’s easier for producers to supply goods and services by increasing efficiency and reducing costs (new roads lower transport time)

leads to increased output, GDP and increased Ec growth

Benefits of Ec Growth:

1. More output:

Leads to increased supply of gds and services available to buy, leads to lower prices and increased living standard of consumers

2. Increased workers may be needed

Lowers unemployment and increases jobs

3. Increased tax revenue

More people working and the increased tax revenue can be used to increase welfare (ex:health/education)

4. Less U.E benefits spent and increased tax revenue means government budget balance improves

Costs of Economic Growth

1. More production leads to increased pollution and more non-renewable resources used up lowers environmental sustainability

2. Congestion

More output means more gds transported which means more congestion on roads

3. Affects worker’s mental health

Increased pressure on workers can affect worker’s mental health

4. Inflation (main one)

If demand increases faster than supply then price level will increase

5. Inequality

Ec growth leads to increased average incomes, but there could be increased inequality if the increase in incomes is not evenly spread between the people

Effect of Ec growth on Economics, social and environmental sustainability:

Ec growth should increase quality of life now and into future without reducing it for future generations.

There’s increased pollution due to increased output during Ec growth may lead to increased pollution which can lead to global warming which harms environmental sustainability

Define Employment:

When people who are willing and able to work can find a job

What’s the incentive to work?

Wages

Define Unemployment:

When people who are willing and able to work can’t find work

Define economically inactive:

Those who are able to work but not willing/seeking

ex: students, sick or homewives, or retired

Economic objectives of the government:

Economic Growth:

Low Unemployment:

Price Stability:

Stable Balance of Payments:

Balanced Redistribution of Income:

Environmental Sustainability:

Define Claimant Count:

Measurement of Unemployment using Number of people who claim U.E benefits

Define level of Unemployment:

Total number of people who are in workforce and are without a job

Example of the claimant count?

JSA (Jobe seeker’s allowance)

Why are U.E benefits provided?

Benefits are a way for those without jobs to get money for essential gds and services to obtain a basic SoL

Calculate the unemployment rate:

No. of unemployed.X 100

Workforce

What does a rising U.E rate do for ec growth?

Ec growth slowws down and may even become negative so fewer workers are needed for less output

What does a falling U.E rate do for ec growth?

Ec growth increases so more workers are needed for more output

Define Cyclical Unemployment:

Workers become unemployed due to a fall in total demand for goods and services

Define Frictional Unemployment:

Period in which workers are switching between jobs (not an actual problem for the government)

Define Seasonal Unemployment:

Workers without employment due to a fall in demand at certain times of the year (ex: fruit pickers in the winter)

Define Structural Unemployment:

Workers without employment due to decline of an industry (ex: coal mining since electricity was invented)

Benefits of U.E:

1. Easier to find workers: More workers seeking Employment which means it’s easier for firms to find workers

2. International competitiveness: Workers may have to accept lower wages for lower cost of FoP for firms so they can lower prices and be more competitive against overseas firms

3. Lower inflation: Less wages means less demand for goods and services due to being able to afford less, so lower price level

Costs of U.E for individuals:

1. Lower Sol because of lower income

2. Deskilled workers: workers may become deskilled after a long time of not working and firms may not hire them because of that

3. Lower SoL - Gov decides to lower spending on public sector: (transport, healthcare)

4. Increase Tax on the employed: Employed may be taxed more to pay off the U.E benefits

Costs of U.E for the government:

1. Less output than potential (labout FoP) is not fully used so resources are wasted

2. Budget Deficit: Gov spends more than it receives in tax revenue due to increased costs (U.E benefits) and falling revenue (income tax and vat)

3. Social problems: Increased health problems due to U.E having less money to spend on food

4. Cycle of increased unemployment: Lower incomes means lower consumption and lower total demand which means less workers needed for less output and hence more unemployment

Define Distribution of income:

How income is divided between individuals and households in a country

Define income

flow of money received by individuals or households over a period of time in exchange for providing factors of production, primarily labour

5 types of income and their definition

Wages: Reward for work

Interest : Reward for saving and cost of borrowing

Rent: Reward for use of land for a period of time

State benefits: Government transfers income by taxing some people and paying benefits to others

Profit: Reward for enterprise

Define Wealth:

Monetary value of all the assests owned by an individual person, firm or country at a specific time

KEY Difference between WEALTH and INCOME

Wealth is a stock and Income is a flow

Gross income vs net income:

Gross income is income pre-tax

Net income is income after direct taxes are subtracted and benefits are added

Causes of differences in distribution of income:

1. Assets are unevenly distributed - Individuals don’t have any land, capital or shares in an enterprise, they won’t receive income in form of interest or profits

2. Wage differences - Wage rates are based on demand and supply for specific jobs, so equilibrium price varies. Many people may be paid minimum whereas more high demand and low supply of labour jobs, the wage rate will be higher

3. Benefit reliance: State benefits are usually lower than wages and may be only source of income for a household

4. Age: Both young and old people are likely to have a lower share of income. People under 25 have a lower level of national minimum age and younger workers have less experience so are usually paid less, older people may be retired and their pension is likely to be less than their previous wage.

5. Gender: Average income is less than that of men. legally men +women should be paid same for same work but reasons such as time taken looking after family and gender bias are cited as reasons lower may be given to women.

Causes of differences in distribution of Wealth:

Inheritance: Some families may own more possessions (Ex: property) which can be passed onto the next generation

Savings: Some people with enough income may decide to save some of their income rather than spend it all. These saving receive interest and may increase their wealth over time

Property: Some people with enough income may decide to buy property. All these properties can generate income or increase in value

Enterprise: Entrepreneurs with a business idea may have invested their income or borrowed money to set up a business. A successful business may be worth an increasing amount of money and its increasing value would be included in the sum of wealth

Consequences of inequality of a difference in distribution of income and wealth:

1. Poverty: Some countries, people without jobs or government benefits may be in absolute poverty so cannot afford to buy necessities to survive and have less than minimum SoL.

2. Housing: People on low incomes may not be able to afford to buy a house or may have to live in poor quality housing

3. Health: People in low incomes may not be able to afford to buy a house or may have to live in poor quality housing

4. Education: In countries with no state education, families on low income may not be able to afford education which can lead to fewer skills, which results in lower wage and continues poverty cycle

5. Lower ec growth: Less educated, unhealthy and unhappy workers are less productive, so there’s less output in the economy

Benefits of inequality (very few):

Incentives: Possibility of higher income may motivate people to work harder, which may lead to greater productivity in an economy as its resulting benefits

Trickle down effect: Some argue that if individuals are a higher incomes, they may spend more in an economy or set up business which may lead to income for other people