1
Q
What is an economy
A
The economy refers to an area’s ability to produce and consume goods and services.
2
Q
Current account
A
Value of exports - value of imports
3
Q
Unemployment
A
People who are able and willing to work but do not have a job
4
Q
Economic Growth
A
An increase in the number of good and services a country produces (GDP)
5
Q
Inflation
A
A general and sustained rise in the level of prices
6
Q
What are the government targets for the economy
A
High but Sustainable Economic Growth (2-3%)
Low and stable inflation (for the UK this is 2%)
Low unemployment
A balance on the current account (for the UK we need to reduce our deficit)
7
Q
3 Policies to improve the economy
A
Fiscal Policy
The use of government spending and taxation to influence the level of aggregate demand
Monetary Policy
Used by the Bank of England to influence aggregate demand by changing the value of money e.g. by changing interest rates
Supply- Side policy
Policies which increase the level of aggregate supply in an economy e.g. Investment in research & development
8
Q
What is GDP
A
Gross domestic product (GDP) is the total value of goods and services produced in the country in a year.
9
Q
What is the economic cycle’s stages
A
Recession, recovery, boom, slump
10
Q
How does economic growth occur
A
Economic Growth occurs through an increase in the quantity or quality of the factors of production.
Output = f (land, labour, capital, enterprise)
11
Q
How can improvements in CELL be made
A
Capital
Investment in new technology
Enterprise
Lower income tax rates to encourage more people to start a business
Land
Improved mining techniques to extract natural resources
Discovering new natural resources
Labour
Immigration of new workers
Higher birth rates leading to more people
Improvements in education and training leading to higher skills
12
Q
Benefits of economic growth
A
Higher living standards: Everyone has more income, so wages generally increase (depends on spread of income)
Less poverty: Higher incomes. Also govt tax revenue increases, so more to spend on reducing poverty
Higher welfare: Higher govt revenue leads to better services (eg health)
13
Q
Negatives of economic growth
A
Envt impact: More consumption and production leads to more pollution
Loss of renew.: Natural resources used as consumption and production increase
Inequality: Often growth benefits the richer more than poorer (eg Jobs)
14
Q
What is AD (Aggragate Demand)
A
the total demand in the economy of all goods and services
15
Q
How is AD calculated and what do each of the factors mean
A
AD = Consumption + Investment + Government Spending + (Exports – Imports)
Consumption: Spending by consumers and households
Investment: Spending by firms on capital goods
Government Spending: Investment by the government on things which will affect the society
Exports: UK goods and services sold overseas(Money enters the UK)
Imports: Good / Services bought from overseas (Money leaves the UK)
16
Q
What is AS (aggregate supply)
A
Aggregate Supply: The total value of all goods and services that can be produced in a country
17
Q
What affects AS
A
Quality/quantity of FoP
18
Q
How do you draw a macro diagram with AS and AD
A
Same as Micro but D is AD and S is AS. Output is real output and Price is Price Level. Instead of Q when labelling the equilibrium its Y.
19
Q
What is spare capacity
A
In an economy, spare capacity is resources that are not fully used:
Could be unemployment (as workers could be working)
Some firms may not be using all their capital (eg short working days, or unused machinery)
Not all land may be being used
20
Q
What are the 2 ways of measuring Unemployment
A
Claimant count
Those people that claim Job Seekers Allowance (unemployment benefit)
Labour Force Survey (LFS)
A survey of households asking if people are looking for work or not
21
Q
Why are the results from both different and which collects more people as unemployed
A
LFS because
1) There is a stigma for claiming the JSA and people dont want it
2) Although people can be unemployed they might not be able to claim the JSA as ie: If you have 16k in savings of both you and your partner you cannot claim JSA
22
Q
What’s the difference between the level and rate of unemployment
A
Level of unemployment is the total amount of people who are able and willing to work and do not have a job e.g. 1.4 million unemployed
Rate of unemployment is the % of the labour force (employed + unemployed - not including economically inactive) who are able and willing to work and do not have a job e.g. 8% of the labour force
23
Q
Why is the target for unemployment not 0
A
Impossible- it is very unlikely everyone will get a job
Undesirable- some levels of frictional unemployment are needed + full employment would risk inflation
24
Q
Costs of unemployment for workers
A
Lower Living Standards (loss of wages)
Mental Health Issues- Loss of status + stigma
Long-term unemployment if they can’t get a job soon
Homelessness
25
Costs of unemployment for Government
Inefficient use of resources
Lower demand in the economy = more
unemployment = lower demand (multiplier effect)
Less tax revenue (income tax + VAT) + Higher welfare spending = budget deficit
26
Costs of unemployment for society
Widespread deprivation
Closing down of local businesses
Increase in Crime
Drop in property values
27
Positives of Unemployment
Frictional unemployment allows workers to move between jobs
If the economy is at full capacity there will be a risk of inflation (as demand may rise but supply can’t)…
…However a small degree of unemployment will keep
inflation low
Encourages people to start their own business
28
Cyclical Unemployment
Caused by low levels of AD in the economy
EG: Andrew used to sell luxury cars. Since the recession people have had less money and are no longer buying expensive cars.
29
Frictional Unemployment
People out of work, as they are moving between jobs
Likely to be temporary
30
Structural Unemployment
Due to lack of demand for your job / skill
EG: Derek is 50 years old. Since the age of 14, he worked in the old shipbuilding industry in Newcastle. However, he was made redundant 8 years ago ships started to be made in China.
31
Seasonal Unemployment
Due to time of the year
Erik sells ice creams on the beach in Brighton but does not work in the winter.
32
Real wage unemployment
Trade Unions or minimum wage laws push wages above their equilibrium rate, so firms hire les workers as they are too expensive
33
Technological unemployment
When people are replaced by new tech (eg machines or AI)
34
Policy to fix cyclical unemployment with disadvantage
Cutting income tax or reducing interest rates would boost demand by encouraging spending
If the government increases demand by too much it can cause inflation. Lowering income tax could cause a budget deficit
35
Policy to fix Structural unemployment with disadvantage
Protectionist policies like tariffs reduce imports and stop jobs moving abroad
Other countries may retaliate and other countries may be more efficient than the UK leading to higher prices
36
Policy to fix Real wage unemployment with disadvantage
Lowering the minimum wage will mean more firms want to hire workers
This may lead to an increase in poverty as people cannot support themselves
37
Policy to fix Seasonal unemployment with disadvantage
Workers could be retrained so they can also work in the winter
There is a time lag in workers taking time to retrain
38
Policy to fix Frictional unemployment with disadvantage
The government could build new JobCentres to help people find new jobs faster
Some degree of frictional unemployment is both useful and inevitable
39
Inflation is
a sustained rise in the average price level over a period of time
40
Price stability happens when
the average level of prices is kept constant or at an acceptably low rate (2%) over a period of time
41
Rate of inflation
the % increase at which the average price level rises over time.
42
How do you calculate inflation
The ONS finds out what British households buy through expenditure surveys. They then create an average basket of goods of about 700 goods to track the prices of (as it isn’t possible to track every price change).
The government will record the prices these goods are sold at in different shops in a Price Survey. The average prices of the 700 items are then calculated.
The average inflation rate is then calculated. Each individual price change is weighted according to how important it is in the typical household’s budget.
An index number is then given to the level of prices. The level of prices in one year is called ‘100’ and the change in prices is compared to this base figure.
43
How are cost push and demand pull inflation initiated
Demand pull: A higher increase in demand
Cost push: An increase in cost of production by the firm means they have to raise prices and sort of pass the cost onto the consumer indirectly
44
How would you show cost push and demand pull inflation on a digram
Demand pull:
Demand shifts Outwards
Cost push:
Supply shifts inwards
45
What is the wage price spiral
Inflation leads to demand for higher wages leading to Inc in consumer spending and higher confidence, which leads to demand pull inflation
46
What is deflation
When inflation is negative
47
What is disinflation
Inflation is falling but still positive
48
What is hyperinflation
When inflation is extremely high and out of control
49
How do these people suffer from inflation
Pensioners/Savers
Entrepreneur
Consumers looking for the best prices
Small café owners
Businesses that sell products abroad
The value of their savings are worth less over time as inflation erodes the value of money
High prices can cause interest rates to rise (increasing borrowing costs) and make business owners less likely to invest/hire staff
Shoe leather costs of shopping about for the best price
Menu costs of changing adverts
Falling demand due to higher prices (customers cutting back)
If prices are higher in the UK than in France then there will be less demand for UK products causing unemployment
50
How would these people win from inflation
People in debt
Land/Property owners
Firms
Governments
Anyone in debt sees their debts fall in real terms
Land / Property owner's items will rise in price from what they originally bought it as
Firms can cut wages in real terms while increasing them in nominal terms
Governments likely to be in debt
Governments receive more in tax revenue, as higher earnings leads to more taxable incomes (Fiscal Drag)
51
Why do the government spend on these things
Social Protection
Personal Social Services
Housing and Environment
Defence
Industry, Agriculture & Employment
Education
Public order and safety
Health
Debt Interest
Transport
Social Protection
To provide a social safety net e.g. Pensions and Benefits
Personal Social Services
Care for vulnerable members of society e.g. care homes,
Housing and Environment
To ensure people have somewhere to live and to protect animals and wildlife
Defence
To protect the country from external threats
Industry, Agriculture & Employment
Subsidies to support businesses, farming and jobs
Education
To improve the level of skills and knowledge
Public order and safety
To keep us safe and secure inside the country e.g. police
Health
To keep the population healthy and productive
Debt Interest
Repaying loans
Transport
Provision of public transport e.g. buses, trains
52
Adv and dis for direct taxes
Adv:
Unavoidable
Progressive
Dis:
Discourages work
Might lead to emigration from workers or companies
53
Adv and dis for indirect taxes
Adv:
Can be used to discourage negative externalities
Dis:
Regressive
Avoidable
May discourage spending --> Less Econ growth
54
What is a budget deficit, surplus and balanced budget
Deficit: Where gov is spending is greater than tax revenue
Surplus: Where spending < tax revenue
balanced: Where spending = Revenue
55
What is expansionary fiscal policy
Where the government decreases taxes and increase spending to run a budget deficit. EXPAND the spending
56
Give an analysis for the effects of expansionary fiscal policy
Tax cuts (eg Income)
Consumers have higher disposable incomes
Consumption will increase
Aggregate Demand will increase
Firms have to respond by increasing output to meet demand
Higher growth and higher cyclical employment
Demand-pull inflation
Some of additional consumption will be imports, so C.A deficit
Spending Increases
Government have higher demand for goods and services
Jobs will be created to meet this demand from the government
These people will in turn spend money in shops etc, who hire more staff
Higher growth and higher cyclical employment
Demand-pull inflation
Some of additional consumption will be imports, so C.A deficit
57
How do governments have the funding to run a deficit
Governments sell government bonds to fund a deficit
These are paid back with interest over a long period of time (eg 10 years)
Bonds are a really safe investment, so are popular with banks and pension companies
58
Why would a government run a deficit
Governments will automatically run deficits in economic downturns/recessions as tax revenue falls and welfare spending increases
They also may decide to increase spending on projects to boost growth and create jobs
59
how does the multiplier effect work
There is an initial injection by the govt in the economy (increased spending)
This creates jobs and increases incomes
These people then spend their money in shops etc, boosting those firms incomes
They hire more staff etc
Multiplier effect: Effect on the economy is much larger than the initial injection by the govt
60
What are the main areas of gov spending (capital + current spending)
Current spending: maintenance on key public services
Capital spending: Spending on infrastructure/welfare (ie: benefits)
61
How would expansionary and contractionary fiscal policy look like on a graph
Expansionary:
Demand shifts outwards
GDP rises so inflation rises (demand pull)
Demand pull inf: Low tax -> high disposable income -> high consumer confidence
Contractionary:
Demand shifts inwards
GDP lowers so inflation lowers (deflationary spiral)
High tax means low disposable income meaning low consumer confidence
62
What are the funcitons of taxes
Raise revenue for the government
Reduce the deficit
63
What is the benefit to firms from countries trading
More potential customers in other countries increases sales…
…More sales = more production = economies of scale
Access to cheaper raw materials from abroad
Being able to sell in different countries diversified risk as if there is a recession in one country sales aren’t hit too hard
Higher efficiency from more competition
64
What is the benefit to consumers from countries trading
Lower Prices due to…
Comparative/Absolute advantage- some countries are more efficient at producing some products than others e.g. the UK has a comparative advantage in financial services…
Increased quality due to…
The possibility of having superior foreign alternatives
Firms in the UK will have to improve their quality to compete e.g. staycations in the UK
Increased choice due to…
Access to products which are not available in the UK e.g. tropical fruit
A wider range of competitors e.g. Audi cars from Germany, Toyota cars from Japan
65
What is protectionism,
Protectionism is government action aimed at protecting domestic firms from international competition.
66
What are the types of protectionism
Tariff – a tax placed on imports to make them relatively more expensive than domestic goods.
Quota – a limit placed on the number of imports.
Embargo – a total ban on the import of a good or service.
Regulation – rules that increase the cost of importing goods and services.q
67
What is free trade and the adv of it
When countries remove barriers to trade
All the advantages of trade count here (Choice, prices, specialisation etc)
68
what is the single market (adv+dis)
The single market is a common set of regulations which make it easier for businesses to trade inside the EU. This means there is a free movement of products and people.
This means the UK sometimes had to accept rules it does not agree with
69
What is the customs union
The UK can trade with any other EU country without paying any tariffs
If any other country wants to trade with the UK they must pay a tariff which is the same for all EU nations (common external tariff)
70
What is the impact of consumers on leaving the EU(pos + neg)
The UK can make its own trade deals with non-EU countries, which could increase competition and lead to lower prices for consumers.
Strict laws when trading raise prices for imports
71
What is the impact of workers on leaving the EU(pos + neg)
EU workers could create more job opportunities for UK citizens.
labour shortages may occur in key sectors, reducing productivity and raising costs.”
72
What is the impact of the government on leaving the EU(pos + neg)
Higher growth as they dont need to pay into the EU budget and can spend elsewhere
Leaving the EU can reduce trade with member countries, leading to lower exports, less investment, and slower economic growth.
73
What is the impact of big businesses on leaving the EU(pos + neg)
fewer EU regulations, reducing costs
trade barriers with the EU increase, raising costs for exporters and making the UK less attractive for investment.
74
What is the impact of small businesses on leaving the EU(pos + neg)
New markets
Economies of scale - both harder to access
Rival firms - more at risk
75
What is the impact of the financial sector on leaving the EU (pos + neg)
New markets
Restrictive EU laws increasing costs
76
What are imports
“Goods and Services which are bought from other countries which lead to MONEY GOING OUT of the UK”
77
What are exports
“Goods and Services which are sold to other countries which lead to
PAYMENTS TO THE UK” (money coming into uk)
78
what is the current account
Definition “The Current Account (part of the Balance of Payments) records the UK’s trade with other countries”
79
What 3 things does the current account contain:
Balance of Trade in Goods (visible trade)
Value of Exported Goods- Value of Imported Goods
Balance of Trade in Services (invisible trade)
Value of Exported Services- Value of Imported Services
Income Flows & Transfers (e.g. remittances, international aid, foreign interest payments)
Money Flowing In (Exports)- Money Flowing Out (Imports)
80
How can you have a current account surplus and deficit and balance
if E > I then surplus
if I > E then deficit
if E = I then balance
81
What are the reasons the UK has a current account deficit
Rising real incomes in UK
falling incomes abroad
high rate of inflation
exhcange rates
lack of raw materials
other countries producing goods at either low price or high quality
globalisation
82
explain this reason for the current account deficit in the UK: Rising real incomes in UK and explain short/long term
People want luxury goods from abroad and foreign holidays (short term - real incomes can change due to increase in inflation or decrease in wage growth)
83
explain this reason for the current account deficit in the UK: Falling incomes abroad and explain short/long term
People abroad have less money to spend on the UK’s expensive exports (short term - there could be a sustained period of growth after which may mean the demand for UK exports increases)
84
explain this reason for the current account deficit in the UK: High inflation and explain short/long term
sustained inc in price level
our good r more expensive
harder to buy for foreign countries (more expensive)
les demand for export
(short term - It reduces the demand for the (and the) inflationary pressure in the uk)
85
explain this reason for the current account deficit in the UK: exchange rates and explain short/long term
A strong pound can make exports more expensive (SPICED) (short term - Floating exchange rates can appreciate or depreciate)
86
explain this reason for the current account deficit in the UK: Lack of raw materials and explain short/long term
Uk has less raw mats
they rely on importing raw mats to make up for the deficiency
(long term - Its a structural problem of the UK caused by geography which we cant change)
87
explain this reason for the current account deficit in the UK: other countries producing goods at either low price or high quality and explain short/long term
UK has low productivity - higher wage cost
this means higher CoP
Other countries have better productivity - cheaper
higher demand for imports
(long term - UK gov spends only 2% on R and D so no research can be put into innovating new products or training)
88
explain this reason for the current account deficit in the UK: globalisation and explain short/long term
businesses have developed international influence and communication across countries and continents. So, i.e., we now trade internationally, which is an example of globalisation.
imports have increased as trade has become easier with foreign countries due to globalisation.
(long term - Globalisation is a process which has happened across hundreds of years and is rooted with world trade)
89
Reasons for Current Account Deficit mattering to Uk
UK not self-sufficient as it is reliant on imports
The deficit is mostly caused by the low quality and high price of UK goods- this is a long-term problem
Lower exports mean lower demand for UK goods which lead to less tax revenue, business bankruptcy and unemployment
90
reasosn for Current Account deficit not mattering to UK
The deficit should self-correct. Low exports but will lead to less demand for the £, weakening the £, which will make our exports cheaper
The UK economy is growing so we can afford to pay for it
Lower aggregate demand reduces inflation
Importing raw materials and capital can make us richer in the long-run
91
what are the policies the gov can do improve the CA deficit
Increase Tax
Decrease Government Spending
Increase Interest Rates
Supply Side Policies e.g. Improve education and training
Introduce Protectionism e.g. Tariffs and quotas
Do nothing/Devaluation
92
how do Increase Tax, Decrease Government Spending and Increase Interest Rates help improve the CA deficit and its problems
Reduces income in the UK which leads to less money to be spent on expensive imports
This will lead to less demand in the UK as well and could create unemployment
Doesn’t affect export quality or price
93
How does Supply Side Policies improve the CA deficit and its problmes
This should increase productivity in the UK, leading to cheaper goods
These policies take a long-time to happen
Increases Budget Deficit
94
How does introducing protectionism help improve the CA deficit and its problems
Tariffs will make imports more expensive deterring demand
Other countries may retaliate
Illegal under WTO and EU rules
95
How does doing nothing help improve the CA deficit and its problems
The pound should weaken leading to the current account self-correcting
Demand for imports and exports is inelastic so this won’t work
96
what is globalisation
“An expansion of world trade in goods and services leading to greater international interdependence”
97
what are some causes for globalisation
Technology
Cheaper Transport
Increased Migration
98
Globalisation for poor countries: whats the pos and neg impact for consumers
pos
Imported products will be cheaper
neg
More external demand can force up prices
99
Globalisation for poor countries: whats the pos and neg impact for workers
pos
More opportunities for those who work in exporting industries
neg
Wages are low and working standards are dangerous
Unskilled workers benefit less
100
Globalisation for poor countries: whats the pos and neg impact for government
pos
Exports can rise leading to more jobs and higher tax revenue
neg
Some industries may need help (structurally unemployed workers)
101
Globalisation for poor countries: whats the pos and neg impact for environment
pos
Rising earnings could improve govts ability to protect the envt
neg
MNCs may damage the environment when producing
101
Globalisation for poor countries: whats the pos and neg impact for businesses
pos
Reduction in tariffs means business can sell more aboard
neg
Businesses can be forced out by cheaper foreign rivals
102
Globalisation for poor countries: whats the pos and neg impact for inequality
pos
Absolute poverty tends to fall
neg
Inequality tends to increase under globalisation
103
Globalisation for rich countries: whats the pos and neg impact for consumers
pos
More choice
Imported products will be cheaper
neg
Less choice due to large MNCs (multi-national companies)
104
Globalisation for rich countries: whats the pos and neg impact for workers
pos
More opportunities to live and work abroad
neg
Structural unemployment from outsourcing to developing countries
More immigration leads to more competition for jobs
105
Globalisation for rich countries: whats the pos and neg impact for government
pos
Cheaper foreign imports and competition haver reduced inflation
neg
Many rich countries have current account deficits
106
Globalisation for rich countries: whats the pos and neg impact for businesses
pos
Reduction in tariffs means business can sell more aboard
neg
Businesses can be forced out by cheaper foreign rivals
107
Globalisation for rich countries: whats the pos and neg impact for environment
pos
Rich countries have seen most polluting industries leave
neg
Large amounts of imports can increase CO2 emissions
108
What is economics development
Development measures the well-being of people.
109
prod of using gdp to measure development
It is clear that a certain level of income is needed to reduce absolute poverty and ensure people can meet their basic needs
Furthermore, higher incomes lead to higher tax revenues which can be invested into education, healthcare, infrastructure etc.
110
problems of using GDP to measure development
No quality of life indicators included e.g. pollution, political freedom
Doesn’t include factors such as healthcare and education
No account of income distribution (inequality)
111
What is the HDI
The HDI is a composite index that measures the average achievements in a country in three basic dimensions of human development:
Life Expectancy (1/3)
Years of Education (1/3)
GDP per capita (1/3)
112
What do HDI figures mean
0-0.54 = low development
0.55-0.69 = medium development
0.7-0.79 = high development
0.8+ = very high develpoment
113
What are 5 reasons why a country may have low development
Corruption
Discrimination
High Inequality between individuals
High Inequality between regions
Capital Intensive Growth
Economics
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