Economic policy objectives

OCR Alevel marcoeconomics - 2.1,2.2,2.3,2.4,2.5,2.6,2.7

economic growth

increase in real gdp over time

gdp

total value of goods and services produced in an economy in a period

nominal gdp

gdp at current prices

real gdp

gdp adjusted for inflation

gdp per capita

gdp/population

growth rate formula

(new real gdp - old real gdp)/old real gdp → *100

actual growth

rise in real gap

AD shifts right

potential growth

rise in productive capacity

PPC / LRAS shift right

output gap

actual output minus potential output

trend growth rate

long term average growth of potential output

economic cycle

fluctuations in real gdp around trend

boom

rapid growth, low unemployment, rising inflation

recession

two consecutive quarters of negative growth

trough

lowest point, high unemployment

primary sector

extracting raw materials

secondary sector

manufacturing and construction

tertiary sector

services

deindustrialisation

fall in manufacturing’s share of output and. jobs

economic development

improvement in living standards and quality of life

sustainable development

meeting present needs without harming future generations ability to meet theirs

human development index (HDI)

index of life expectancy education and GNI per capita

Purchasing Power Parity (PPP)

adjusts income for price differences between countries

informal economy

unrecorded or untaxed activity so GDP understates output

Multidimensional Poverty Index (MPI)

Measures deprivation in health education and living standards

Gender Inequality Index

Gender gaps in health empowerment and labour market

Happy planet index

wellbeing and life expectancy relative to ecological footprint

Genuine Progress Indicator

GDP adjusted for inequality and environmental damage

Employment

People in paid work

Unemployment

working age, willing and able to work and can’t find a job

Labour force

Employed + unemployed

Economically inactive

Not working and not seeking work

Unemployment rate

(unemployed / labour force) * 100

Participation rate

proportion of working age population in the labour force

full employment

everyone willing and able to work can find a job

ways of measuring unemployment

• labour force survey

• claimant count

Labour force survey

survey asking families to classify as self employed, unemployed or economically inactive

Claimant count

people claiming unemployment benefits

problem with claimant count

misses non claimants

benefits of claimant count

quick and cheap

frictional

temporary between jobs

structural

skills or location mismatch after industry decline

seasonal

linked to time of year

real wage

wages above market clearing level

underemployment

wanting more hours or working blow skill level

hysteresis

unemployment persists after the cause has gone

problem with hysteresis

skills erode

mass unemployment

when 1 in 10 people in the labour force are out of work

reasons for high youth unemployment

• lack of experience

• lack of education or training

• age discrimination

• economic downturns

• technological advancements and automation

How does a lack of experience affect youth unemployment

young people may have fewer work experience

How does a lack of education affect youth unemployment

young people may not have the skills

How does age discrimination affect youth unemployment

young people are less likely to be hired

How does economic downturns affect youth unemployment

young people are the first to be laid off work when the economy is struggling

causes of unemployment

• reduction in AD

• frictional unemployment

• structural unemployment

• technological advancements

what is reduction in AD caused by

higher prices

high interest rates

low consumer confidence

external shocks

what is frictional unemployment caused by

people changing jobs

what is structural unemployment caused by

a mismatch between employee skills and skills required by the employers

long term unemployment

people who have been unemployed for at least 12 months

consequences of unemployment

• lower output

• increase in unemployment rate

• lower standard of living

• increase in poverty

• reduction in GDP

• increase in govt spending on benefits

• increase in social issues - crime, health

what can the national rate of unemployment hide

• regional variation

• local variation

• variation in unemployment by age gender and other social backgrounds

• how long people have been jobless

why are the values of unemployment higher for females

• manual labour

• discrimination

• family building

how does family building affect female values of unemployment

women take time off for maternity leave

how does discrimination affect female values of unemployment

some employers feel that men are more capable to do a job

how does manual labour affect female values of unemployment

men are more keen on taking jobs involving manual labour

why is universal credit not always claimed

• embarrassed

• illegal in the country

• may not understand

• rich family

• savings to fall back on

what can cause mass unemployment

• recession

• international conflict - Israel/Palestine

• external shocks - COVID

inflation

sustained rise in the general price level

deflation

sustained fall in the general price level

disinflation

fall in the rate of inflation

hyperinflation

extremely rapid inflation - over 50% per month

Nominal value

measured at current prices

real value

adjusted for inflation

consumer price index

weighted basket of household goods, excludes most housing costs

retail price index

includes housing costs

index number

change relative to a base year

demand pull

AD rises faster than AS, especially near full capacity

cost push

rising production costs shift SRAS left

imported inflation

rising import prices often after depreciation

wage price spiral

higher wages raise prices, leading to higher wage demands

core inflation

inflation excluding food and energy

menu costs

cost of changing prices

shoe leather costs

time and effort spent searching for better prices

malign deflation

caused by falling demand, output and jobs fall

benign deflation

caused by falling costs or productivity

SRAS shifts right

fiscal drag

rising nominal incomes push people into higher tax bands

depreciation

when market demand and supply cause its value to fall relative to another currency

balance of payments

record of all financial transactions between a country and the rest of the world

current account

trade in goods and services + primary and secondary income

primary income

income from employment and investment abroad

secondary income

transfers with nothing in return

current account balance

goods + services + primary income + secondary income

current account deficit

outflows exceed inflows

current account surplus

inflows exceed outflows

capital and financial account

records capital transfers and investment flows

sustainable BoP

deficit that can be financed long term without loss of confidence

structural deficit

long term caused by weak competitiveness

cyclical deficit

temporary caused by the cycle

imports rise in a boom

causes of imbalances

• competitiveness

• exchange rate

• relative growth

• productivity

• quality

• commodity prices

productivity

output per worker per hour

productivity puzzle

weak uk productivity growth since 2008