ECON THEME 2

How is a loss of work experience is a labor scarring effect from high unemployment?

skills degradation, decreased employability, decline in quality of human capital

What is Macroeconomics?

Studies the behaviour of an economy as a whole

What is national income?

Measures the monetary value of the flow of output of goods and services produced in an economy over a period of time

What are the key uses of National income data?

The rate of economic growth (real GDP), changes to living standards (real GDP per capita), changes to the distribution of income between groups within the population

What is GDP?

Measures the total value of national output produced in a given time period

What are the three ways of calculating GDP?

National Output = National Expenditure (Aggregate Demand) = National Income

What are the key objectives of macroeconomic policy?

Price Stability, Growth of Real GDP, Falling Unemployment, Higher average Living Standards, Stable Balance of Payments on the current account, An equitable distribution of income and Wealth

What are the additional objectives of macro economic policy?

Balancing the budget and reducing the national debt, Improving economic well-being, Better regional balance in UK economy, Improved access to public services, Improved competitiveness, Environmental sustainability

What is a tradeoff?

Giving up some of one thing to get more of another

What percentage do developing countries grow at?

2.5% - 3.5%

What happened in 2007-2008 to the UK economy?

The credit crunch

How did the credit crunch affect the UK economy?

It lead to a deep financial crisis and recession, with contracting GDP and rising unemployment.

Why did the credit crunch happen in the UK?

It happened as a result of excessive risk taking by banks in lending money and the collapse of huge financial institutions

What is a recession?

a period of temporary economic decline identified by a fall in GDP in two successive quarters.

What happened in 2009 in the UK economy?

There was a huge recession because of the credit crunch in the previous years cause a rise in unemployment and a cut in interest rates

What is a fan diagram?

A diagram used to illustrate the range of possible future outcomes for a variable

What is value added?

The increase in the market value of goods or services as a result of the production process

What is formula for value added?

Value of production - Value of intermediate input

What does it mean to be a low value added industry?

This is one where the difference between the cost of raw materials and the final products selling price is small for an industry

What are examples of low value added industries?

Textiles, Mass processed foods, Farming, Social care

What are the prices like for low value added industries?

Low prices

What does it mean to be a high value added industry?

This is one where the difference between the cost of raw materials and the final products selling price is high for an industry

What are examples of high value added industries?

Information Technology, Renewable energy, Aerospace

What are the prices like for high value added industries?

High prices

What are manufacturing industries?

The industries that produce goods in factories

What are the examples of manufacturing industries in the world?

Food Processing, Earth moving equipment

How many percent of the workforce works in the manufacturing industry

8.1%

How many percent of the UK output did the manufacturing industry account?

9%

How many percent of the UK workers work in the service industry

85%

How many percent of the UK output did the service industry account?

81%

What happens to the service sector as a country develops?

It increases

Why does the services sector increase as a country develops?

More people have disposable income and therefore with like to spend it in way that can satisfy them

What are the different types of values?

Real and Nominal

What are nominal values?

values for which no adjustments to inflation have been made

What are real values?

values that have been adjusted for the effects of inflation

What is the difference between real and nominal value?

Real value is adjusted to remove the effects of inflation, whereas nominal values are unadjusted. Data expressed at current prices for nominal value and data is expressed at constant prices for real value

What does nominal GDP measure?

Measures the value of goods produced in the economy at current market prices.

What is the formula for real GDP using nominal GDP?

(Nominal GDP/Price Index) x 100

How did the credit crunch affect construction industries?

A recession hit in 2009 because people aren't spending / investing in buildings and peoples aren't buying house

What is Remittance money

money sent from a migrant back to their family in the home country.

What is GNI?

It is GDP plus income paid in to the country by other countries for things such as interest and dividends.

What are some examples UK business that have set up aboard?

BP (British Petroleum), Rolls Royce

What is the formula for GDP per capita?

GDP / Population

What is Real GDP?

Measures the value of national output at constant prices

What is PPP?

purchasing power parity

What is purchasing power parity?

Measures how many unit of one's country currency are needed to buy exactly the same basket of goods and services as can be bought with a given amount of another country's currency

What will happen to the GDP in relation to PPP in a country where is cost of living is relatively high?

There will be a downward adjustment to a nations PPP-adjusted GDP

What is the most important macro economic policy?

Inflation

What is real income?

The purchasing power of a given amount of nominal income

What is happening to real income in the UK in these recent years?

Real income is falling

Why is real income falling in the UK in recent

The annual growth of earnings for people in work has been less than inflation

What are some reasons for slow wage growth?

Tough pay restraint, Pay freeze, Trade union bargaining power, Consumer price inflation, Labour productivity, Pandemic, Brexit, National Insurance Contributions, VAT for school

How has tough pay restraint in the public sector cause a fall in REAL wages?

What are tough pay restraint in the public sector?

Policies that limits the growth of wages for public sector workers often below the rate of inflation

What are the four key parts of the Circular Flow model

Households Businesses Government External Sector

Explain households as a part of the circular flow model?

House holds receive income through wages from their jobs and investments and they then buy goods and services supplied by firms

Explain businesses as a part of the circular flow model?

Businesses hire land, labour & capital inputs when making products for which they pay wages and rent. Firms receive payment from consumers.

Explain government as a part of the circular flow model?

Government collects taxes to fund spending on public services

Explain external sector as a part of the circular flow model?

The UK buys imports from other countries and overseas businesses and consumers buy UK products (exports)

What is the basic circular flow model?

Main components are Households, Government and firms. Transfer from Firms Households - Wages, Dividends, interest, profit and rent. Transfer from Households to Firms - Purchases of goods and services. Transfer from Household to government - Taxes. Transfer from Government to Households - Social transfers. Transfer from Government to firms - Govt Purchases. Transfer from firms to government - Taxes

What is a circular flow with an external sector?

Main components are Households, Government, firms and Rest of the World. Transfer from Firms Households - Wages, Dividends, interest, profit and rent. Transfer from Households to Firms - Purchases of goods and services. Transfer from Household to government - Taxes. Transfer from Government to Households - Social transfers. Transfer from Government to firms - Govt Purchases. Transfer from firms to government - Taxes. Transfer into rest of the world - Imports. Transfer out of the rest of the world - Export

What is the Marginal propensity to consume?

MPC refers to the proportion of extra income that a consumer spends on goods and services rather than saving it.

What is the Marginal propensity to save?

MPS refers to the proportion of extra income that is saved rather than spent

What is the equation for Marginal propensity to consume?

change in consumption/change in income

What is the equation for Marginal propensity to save?

change in saving/change in income

What does 'crowding in' mean?

Crowding in occurs when increased government spending actually encourages more private sector investment

What does 'crowding out' mean?

refers to a situation where increased government spending leads to a reduction in private sector investment or consumption

What are injections?

Money flowing into the economy

What are the injections into the circular flow of income?

investment, exports, government spending

What are leakages?

Money flowing out of the economy

What are the leakages into the circular flow of income?

Saving, Imports, Taxations

How do you calculate the budget deficit?

Government spending / Revenue

What is the equation for the national income equilibrium?

Investment + Government spending + Exports = Imports + Tax + Savings

What is aggregrate demand?

Total level of planned real expenditure on the goods and services produced within a country

What are components of Aggregate demand?

Consumers, Net Investment, Government consumption, Net Exports

What are short term fluctuations in a cycle?

Recession and recovery, boom and slowdown

What are the three reasons why the AD curve slope downward?

Falling real income, Balance of trade, Interest rate effect

Explain why the AD curve slope downwards?

As the price level rises, the real value of income falls and consumers are less able to buy what they want or need, known as the real balance effect. A persistent rise in the price of level could make foreign produced goods and services cheaper, causing a fall in exports and a rise in imports. If the price level rises, this causes inflation and an increase in demand for money and a possible rise in interest rates on loans which then has a deflationary effect on consumers and businesses demand.

What will an outward shift of the AD curve do to the price level and output?

It will raise national price levels

What will an inward shift of the AD curve do to the price levels and output?

Reduce national output at all price levels

What is the formula for aggregate demand?

Consumption + investment + Government spending + (Exports - Imports)

What are some factors that can affect the components of AD and cause a fall in the AD curve?

Fall in exports, Cut in government spending, Higher interest rates, Decline in household wealth

What are some factors that can affect the components of AD and cause an increase in the AD curve?

Depreciation of the exchange rate, cuts in direct and indirect taxes, Increases in house price, Expansion of supply of credit + lower interest rates.

How can a fall in exports cause a fall in AD?

It can lower business revenue and investment falls. As business revenue decreases, jobs are lost and consumption falls and since export are a direct part of AD, they will cause it to fall.

What is negative equity?

When your asset is worth less than what it initially cost

What are the policies that causes the shift in the Aggregate demand?

Changes to the monetary policy, changes to government fiscal policy

What is monetary policy?

When the government manipulates the interest rate to increase or decrease spending

What is expansionary monetary policy?

This is when the interest rate is decreased to increase spending and increase the aggregate demand

What is tight monetary policy?

This is when the interest rate is increased to reduce spending and decrease aggregate demand

What is expansionary fiscal policy?

This is when taxes are cut to increase disposable income

What is contractionary fiscal policy?

This is when the taxes are increased so there is less disposable income

What is a 'time of austerity'?

A time of cut backs to reduce the fiscal deficit

What are external shocks to the aggregate demand?

A large rise or fall in the value of the exchange rate, A recession, slowdown or boom in one or more of a nations's key trading partners, A slump in the housing/construction market, An event (like the Global Financial Crisis) that causes a fall in the supply of credit available to businesses and households. A large change in commodity prices for a country that is a commodity exporter.

What is exports?

Injections into a nations circular flow of income and spending, goods and service sold to other countries

What are the factors affect a countries exports?

Relative prices of exports in World markets, the exchange rate, non-price demand factors, the strength of the AD in key export countries

What is net trade balance?

Measured the value of exported foods and services minus the value of imported products

What is a trade surplus?

When exports are greater than imports

What will a trade surplus do the AD?

AD will rise

What is a trade deficit?

This is when imports are greater than exports

What is a trade deficit do to the AD?

AD will fall