Economics Section C Part 1

What is macroeconomics?
Looking at the economy as a whole, e.g. analysing total income patterns.
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What are macroeconomic objectives?
When managing the economy the gov has aims- inflation, economic growth, balance of payments, unemployment, protect the environment.
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What is economic growth?
Exists if output grows or if national income is rising.
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How can economic growth be measured? What are the limitations of this measure?
Using GDP- the sum of the value of all the G&S in an economy over a period of time. Inflation distorts growth rates, population changes will affect real economic growth, statistical errors are common, the hidden economy is not measured.
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What is the economic cycle?
The rate of growth will fluctuate over time and GDP may fall. Boom, downturn, recession, recovery.
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What is a boom?
Peak of the cycle- GP growing fast; demand, job creation, wages, profits and prices may be rising.
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What is a downturn?
Economy grows at a slower rate; demand flattens, wage and price increases slow.
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What is a recession?
GDP is flat or falling. Economic growth may be negative; demand falls, unemployment rises and business confidence is low.
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What is a recovery?
GDP begins to rise again. Businesses and consumers regain their confidence. Demand rises and unemployment falls.
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What are the benefits of economic growth?
More leisure, higher incomes, longer life expectancy, better public services.
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What is inflation?
A rise in the general price level.
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How can inflation be measured?
The consumer price index and the retail price index (CPI & RPI). Prices of about 600 G/S recorded each month. Average price change is calculated and then converted to an index number. RPI also included house prices and council tax.
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What is demand pull inflation?
Too much demand in an economy, prices rise. Could be caused by consumer/gov spending, firm investment, or increased export demand. If aggregate demand rises, then so will average prices.
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What is cost push inflation?
Rising costs mean businesses raise prices to protect profits. Could be due to rising import costs, rising wages, rises in sales taxes e.g. VAT, or an increase in profit margins.
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What is money supply inflation?
If the money supply increases too quickly, then prices will rise too. Somke believe this is the only cause of inflation. Caused when more money is borrowed to fund extra spending. Causes more demand and prices rise.
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What are the consequences of inflation?
Reduced purchasing power (cannot but as much with income, LSs fall); reduced savings value; increased business costs; BoP problem (if inflation higher than overseas, exports more expensive); unemployment; increases in gov spending (linked to I).
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What are the functions of money?
Medium of exchange, unit of account, standard for deferred payments, store of value.
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What can inflation do to the functions of money?
Erode them. Hyperinflation- people find other ways of trading. Money is a poor store of value during inflation (savings value falls if higher than IR); may not be unit of account (values distorted, uncertainty); benefits those in debt.
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What is unemployment and how is it measured?
Those who want work but cannot find it. ILO survey or unemployment benefit claimant count.
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What is cyclical unemployment?
Linked to the economic cycle- during a downturn, business activity slows and workers are laid off.
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What is structural unemployment?
Over time an economy's structure changes. Workers are slow to switch from one job/region to another. E.g. sectoral (industry declines); technological (machinery used instead); regional (geographical area declines)
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What is frictional unemployment?
Short term unemployment, when people move between jobs. Always exists and is not a serious problem.
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What is seasonal unemployment?
Unemployment at different times of year, e.g. holiday resort staff.
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What is voluntary unemployment?
A minority choose not to work- may feel that wages are too low or might now like the idea of work.
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What is visible and invisible trade?
Visible- trade in physical goods, e.g. clothes, furniture. Visible balance = balance of trade. Invisible- trade in services, e.g. shipping, tourism.
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What are the balance of payments and the current account?
BoP- a record of all international business transactions. Current account- value of all imports and exports over a period of time (V and IV trade, income, interest payments, profits, dividends)
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What is the capital account and what is it included in?
Flows of money between countries from transactions relating to savings, investments and speculation. Included in the BoP.
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What are the effects of a surplus?
Shortages of domestic goods; rising exchange rates; rising growth; rising exports; higher currency reserves; rising employment.
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What are the effects of a deficit?
Rising unemployment; higher external debt; declining industries (overseas comp); falling exchange rates; rising imports.
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What might governments aim for in relation to the BoP? Why?
A BoP equilibrium- the value of exports = the value of imports over time. If a BoP deficit persists the economy will suffer.
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What might governments be trying to do in relation to the environment?
Tackle climate change by cutting greennhouse gas emissions; encourage activities that minimise carbon emissions, waste and non-renewable resource use.
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How can the government do this?
Legislation, regulations, guidelines, codes of practice, an Environment Agency.
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How can taxation help the environment?
Taxes can be placed on those that damage the environment- it ensures the social costs from production and consumption are met by those who impose them. E.g. petrol taxation to reduce car use and cut carbon emissions.
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Give examples of other methods the government can use.
Subsidies (incentive to reduce damaging activities); compensation (offered to victims of damage); recycling (collect waste and produce something from it); international targets (set to reduce global pollution); road pricing and charges.
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Other cards in this set

Card 2


What are macroeconomic objectives?


When managing the economy the gov has aims- inflation, economic growth, balance of payments, unemployment, protect the environment.

Card 3


What is economic growth?


Preview of the front of card 3

Card 4


How can economic growth be measured? What are the limitations of this measure?


Preview of the front of card 4

Card 5


What is the economic cycle?


Preview of the front of card 5
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