Unit 9, The circular flow of income, economic growth and sustainability, and employment and unemployment flashcards

multiplier

a numerical estimate of a change in spending in relation to the final change in spending, calculated by dividing the change in income by the change in injection

multiplier calculation ahead of time

1/marginal propensity to withdraw

multiplier calculation for a two sector closed economy

1/mps or 1/(1-mpc)

marginal propensity to save (mps)

the proportion of extra income that is saved, calculated as change in saving divided by change in income

marginal propensity to consume (mpc)

the proportion of extra income that is spent, calculated as change in consumption divided by change in income

aggregate expenditure

the total amount spent in the economy at different levels of income

equilibrium income (circular flow)

occurs where aggregate expenditure is equal to output

multiplier calculation in a closed economy with a government sector

1/(mps+mrt)

marginal rate of taxation (mrt)

the proportion of extra income which is taxed

multiplier effect in an open economy with a government sector

1/(mps+mrt+mpm)

marginal propensity to import (mpm)

the proportion of extra income spent on imports

consumption

spending by households on goods and services

average propensity to save (aps)

the proportion of disposable income which is saved, calculated as saving divided by income, or 1-apc

average propensity to consume (apc)

the proportion of income that is consumed, calculated as consumption divided by income, or 1-aps

average propensity to import

the proportion of income that is spent on imports calculated as imports divided by income.

consumption function

the relationship between income and consumption, given by the equation C = a+bY

autonomous consumption

the level of consumption that occurs when income is zero, reflecting basic needs regardless of income level.

savings function

the relationship between income and savings, given by the equation S = -a + sY

autonomous dissaving

how much of their savings people will draw on when their income is zero

autonomous investment

investment that is made independent of income

induced investment

investment that is made in response to changes in income

accelerator theory

a model that suggests investment depends on the rate of change in income

capital-output ratio

a measure of the amount of capital used to produce a given amount, or value, of output

inflationary gap

the excess of aggregate expenditure over potential output, equivalent to a positive output gap

deflationary gap

a shortage of aggregate expenditure so that potential output is not reached

actual economic growth

an increase in real GDP, also referred to as short run economic growth

potential economic growth

an increase in the productive capacity of the economy, also referred to as long run economic growth

output gap

a gap between actual and potential output

negative output gap

a situation where actual output is below potential output

positive output gap

a situation where actual output is above potential output

business cycle

fluctuations in economic activity, also known as the trade cycle

phases of the business cycle

upturn, peak, downturn, trough

upturn of the business cycle

a phase where the economy is growing at a faster rate, households and firms are optimistic, leading to increases in consumption and investment, employment is also likely to rise

peak of the business cycle

a phase at the top point of the business cycle, the economy will likely be experiencing a positive output gap and the high level of aggregate demand is likely to result in inflation and balance of payment difficulties

downturn of the business cycle

a phase during which the economic growth rate decreases and negative economic growth may occur, households and firms become less optimistic about future economic prospects, savings rise and net investment falls

trough of the business cycle

a phase at the lowest point of the business cycle with the economy experiencing a lack of aggregate demand and a negative output gap, an economy may experience a recession or even a depression

depression

a fall in real GDP that lasts several years

causes of the business cycle

fluctuations in aggregate demand and aggregate supply

causes of fluctuations in aggregate demand

business confidence, changes in the money supply, political cycles

causes of fluctuations in aggregate supply

supply-side shocks, such as significant technological advance or natural disasters

automatic stabilisers

economic policies that counteract fluctuations in economic activity, reducing the rise of GDP during a boom and the fall in GDP during a recession

policies to promote actual economic growth

policies used to increase aggregate demand, such as expansionary fiscal and/or expansionary monetary policy, however these can result in demand-pull inflation

policies to promote potential economic growth

policy used to increase aggregate supply such as supply-side policy tools, can also cause an increase in actual economic growth if the policy tool used increases government spending

inclusive economic growth

economic growth that us fairly distributed across society and creates opportunities for all, providing both monetary and non-monetary benefits

gig economy

a labour market based on short-term contracts

policies to promote inclusive economic growth

redistribution of income using progressive taxes and transfer payments, improved access for all to high quality education, a relatively high minimum wage, anti-discrimination legislation, improvements in transport and communication links

sustainable economic growth

economic growth that does not threaten future generations’ ability to experience economic growth, balancing economic, social and environmental objectives

argument for using resources (sustainable economic growth)

using natural resources now can increase short run economic growth, increase exports and increase tax revenue though higher output which can be used to improve infrastructure and education

argument for conserving resources (sustainable economic growth)

maintaining rainforests and wildlife in a reserve may encourage tourism to the country if a country does not have a comparative advantage in producing the related product buy may have in future

climate change

a change in the weather of a region over time

greenhouse gases

carbon dioxide, methane, nitrous oxide

policies to mitigate the impact of economic growth on the environment and climate change

subsidies cleaner sources of energy, provide information on the damage that certain activities can cause the environment, pass legislation to ban the consumption or production of certain products, tax firms that create pollution, create pollution permits

polluter pays principle

a policy that makes those responsible for causing damage to the environment pay for that damage

full employment

the level of employment corresponding to where all who wish to work have found jobs, excluding frictional unemployment

equilibrium unemployment

the unemployment which exists when the labour market is in equilibrium, it includes voluntary, frictional and structural unemployment

voluntary unemployment

unemployment that arises when workers are not willing to work at the current wage rate

disequilibrium unemployment

unemployment that arises when the aggregate supply of labour is greater than the aggregate demand for labour at the current wage rate

involuntary unemployment

when workers are willing to work at the current wage rate but cannot find a job

natural rate of unemployment

the rate of unemployment that exists when the aggregate demand for labour equals the aggregate supply of labour at current wage rate and price level

factors influencing the natural rate of unemployment

the value of unemployment benefits relative to the value of low pay, national minimum wage legislation, the quality of education and training, the quantity and quality of information about job vacancies and workers’ skills and qualifications, the degree of labour mobility

policy tools to reduce the natural rate of unemployment

widen the gap between low pay and unemployment benefits, remove wage restrictions, improve education and training, increase the quantity and quality of information about the job market, improve labour mobility, increase flexibility in the labour force

hysteresis

unemployment causing unemployment due to workers becoming deskilled and demotivated when they are out of work for a long time

long-term unemployed

those who have been unemployed for a year or longer

labour mobility

ability of workers to change where they work and in which occupation

patterns and trends in unemployment

higher in declining industries and declining occupations, varies between regions in a country, higher among young workers and certain groups such as women, people with health conditions and impairments and ethnic minorities

patterns and trends in employment

changes in industrial structure, the proportion of women in the labour force, the number of employed and self-employed people, the proportion of full-time and part-time workers, employment in the formal and informal economy, secure and insecure employment, private and public sector employment

self-employed

those working for themselves

occupational mobility

the ability of workers to move from one occupation to another occupation

geographical mobility

the ability of workers to move to a job in a different location

factors affecting occupational mobility

quality of education and training, information available, barriers to entry and exit, time

factors affecting geographical mobility

price and availability of housing, information available, personal ties, immigration controls, language barriers, cultural differences, differences in pay and the cost of living

fiscal policy tools to reduce unemployment

a reduction in indirect or direct taxation to increase consumer expenditure, a cut in corporate taxes to stimulate investment, an increase in government spending

monetary policy tools to reduce unemployment

reduce the rate of interest to increase consumer expenditure and firm investment, increase the money supply to increase consumer expenditure and firm investment, lower the exchange rate to increase net exports

likely policy to reduce frictional and structural unemployment

supply-side policy tools, however they do take a long time to take effect and workers may not respond as expected