Government economic policy objectives and indicators of national economic performances

What does economically inactive mean?

·people who are aged between 16 and 65 who are not in the labour force (e.g. they are homemakers, disabled or have retired early) ·they are not regarded as unemployed

1 of 149

What indicators do economists examine to assess how well an economy is performing?

·economic growth ·unemployment levels ·inflation/ deflation ·balance of payments ·how evenly income is distributed ·changes in productivity

2 of 149

If a government is concerned that income is too unevenly distributed what might they do?

·redistribute some income from rich households to poor households ·tax the rich & provide state benefits for the poor

3 of 149

Why have governments recently been increasingly concerned with promoting economic stability?

·prevent significant fluctuations in output- can create uncertainty & make it difficult for households, firms & the gov to plan ahead ·this can discourage workers from improving their skills, firms from investing & the gov from undertaking major reforms

4 of 149

What are some reasons why the inflation are has fallen and stayed relatively low?

·reduction in inflationary expectations resulting from the success of the government's monetary policy ·high value of the pound ·increase global competition putting pressure on firms to keep their costs low & prices high

5 of 149

How can economic growth that is maintained year after year achieved?

·if increases in aggregate supply match increases in aggregate demand

6 of 149

How can you sustain economic growth from one generation to another?

·avoid depleting non-renewable resources ·avoid damaging the environment ·reduce pollution ·cleaner sources of energy ·conserve non-renewable resources

7 of 149

What does full employment mean?

·3% unemployment

8 of 149

What does price stability mean?

·low and consistent rate of inflation

9 of 149

Why do government's not aim for zero inflation?

·measures of inflation tend to overstate price rises ·a low level of inflation can bring advantages e.g. it may enable firms to reduce their costs by not raising wages in line with inflation rather than by making some workers redundant

10 of 149

How do you calculate the rise in the volume of output?

(GDP figure x base year price index) ÷ (current year price index)

11 of 149

How can the real GDP be calculated?

·output method ·income method ·expenditure method

12 of 149

How can economic growth be calculated?

·by changes in the output, income or expenditure of the country

13 of 149

What can be the issues with using the 'output method'?

·avoid double counting (counting the same output twice)

14 of 149

When can be the the issues with using the 'income method'?

·only include incomes that have been earned in return for providing goods and services are included ·transfer payments are not included

15 of 149

What can be the issue with using the expenditure method?

·include exports ·exclude imports

16 of 149

What happens if productivity rises by more than wages?

·labour costs will fall ·a country can become more price competitive

17 of 149

What is the informal economy and what problems does it bring?

·unrecorded economic activity ·means that the country's output is higher than than official real GDP figures suggest ·distorts a range of economic data ·tax revenue is lower than would be possible if all economic activity were taxed

18 of 149

How is the unemployment rate calculated?

(the unemployed x 100%) ÷ labour force

19 of 149

In the UK what are the two main measures used to calculate unemployment?

·Labour Force Survey (LFS) ·Claimant Count

20 of 149

What is the LFS?

·Labour Force Survey ·survey of 60,000 households (of the labour force) ·based on the International Labour Organisation’s definition of unemployment ·collects information about type of employment, earnings and educational qualifications

21 of 149

What is the ILO?

·International Labour Organisation ·agency of the United Nations

22 of 149

How does the ILO define someone as unemployed?

“out of work, want a job, have actively sought work in the last four weeks & are available to start work in the next two weeks or are out of work, have found a job and are waiting to start it in the next two weeks”

23 of 149

Who carries out the LFS to find out how many people are unemployed according to the ILO definition?

·the ONS ·Office for National Statistics

24 of 149

What does the ONS publish in the middle of each month?

·Using an average for the latest three-month period, they publish the number of people unemployed on the LFS measure ·unemployment figures based on the claimant count

25 of 149

What is the claimant count?

·a monthly count of those claiming unemployment-related benefits like the job seeker’s allowance (JBS)

26 of 149

What are the advantages of the LFS measure?

·thought to capture more of those who are unemployed ·very suitable for international comparisons as it is widely used internationally (e.g. it is used by the Statistical Office of the European Union & by the OECD and most countries)

27 of 149

What are the disadvantages of the LFS measure?

·more expensive than the claimant count ·more subject to sampling errors

28 of 149

What are the advantages of the claimant count?

·relatively cheap ·quick to compile ·available earlier than the LFS-based unemployment data

29 of 149

What are the disadvantages of the claimant count?

·not suitable for international comparisons because the categories of people entitled to benefits, varies over time and between countries

30 of 149

What are the measures of inflation?

·CPI (consumer prices index) ·RPI (retail prices index)

31 of 149

What is the RPI used for?

·adjusting pensions & other benefits to take account of changes in inflation ·frequently used in wage negotiations

32 of 149

What does the CPI exclude?

·all housing costs including mortgages, interest payments & council tax ·the road fund licence ·the television license

33 of 149

What does the CPI include?

·university accommodation fees ·foreign students' university tuition fees ·stockbrokers' chargers

34 of 149

What are the CPI weights based on?

·spending by all private households, foreign visitors to the UK & residents of institutional households

35 of 149

What are the RPI weights based on?

·expenditure by private households only (excluding the highest income households & pensioner households mainly dependent on state benefits

36 of 149

What is constructed from the RPI?

·RPIX (RPI minus mortgage interest payments) ·RPIY (RPI minus mortgage interest payments & indirect taxes)

37 of 149

What are the difficulties of measuring inflation?

·they tend to overstate inflation ·they do not take into account peoples' ability to alter what they buy during the year

38 of 149

What are the main elements of the balance of payments?

·the current account ·the capital and financial account ·the net errors and omissions

39 of 149

What does the current account include?

·trade in goods, trade in services, income & transfers ·income part covers largely investment income ·transfers covers transfer of money made & received by gov & individuals ·trade in services includes insurance, financial(invisible balance)

40 of 149

What does the capital and financial accounts of the balance of payments show?

·the movement of direct investment

41 of 149

Why are net errors and omissions added to the balance of payments?

·to ensure that the balance of payments does balance

42 of 149

What are the short term causes of economic growth?

·increase in aggregate demand (in an economy with spare capacity) ·consumption-led growth (e.g. caused by cut in income tax)

43 of 149

What are the causes of long term economic growth?

·increase in productive capacity- increases in the quantity and/or quality of resources ·rising size of labour force= increased economy's resources

44 of 149

What are the three types of unemployment?

·frictional unemployment ·structural unemployment ·cyclical unemployment

45 of 149

What causes cyclical unemployment?

·also called demand deficient unemployment ·arises due to a lack of aggregate demand ·in this case demand for most products will be low and unemployment will be high

46 of 149

What is regional unemployment?

·the name for structural unemployment that is concentrated in a particular area

47 of 149

What is structural unemployment?

·problems of occupational & geographical immobility (problems with supply of labour e.g. employers may be unwilling to employ people who lack certain skills or the unemployed may live in a different part of country to job vacancies)

48 of 149

What usually causes structural unemployment?

·decline of certain industries and occupations due to changes in demand and supply

49 of 149

What are other forms of structural unemployment?

·technological unemployment (arises when workers lose their job because of advances in technology) ·international unemployment (occurs when jobs are lost because firms decide to outsource or because households buy imports)

50 of 149

What contributes to frictional unemployment?

·immobility of labour

51 of 149

What is frictional unemployment and what categories can it be broken down into?

·occurs when workers are in-between jobs ·search unemployment (search for good job) ·seasonally unemployed (labour only demanded at specific times of year) ·casual unemployment (out of work in-between irrregualr periods of unemployment)

52 of 149

What are the consequences of unemployment?

·lost output ·lost tax revenue ·government spending on unemployment benefits ·costs to the unemployed ·hysteresis ·costs for other economies

53 of 149

How is 'lost output' a consequence of unemployment?

·having people who are willing and able to work without jobs is a waste of resources

54 of 149

How is 'lost tax revenue' a consequence of unemployment?

·unemployment results in tax revenue being lower than possible ·if more people were in work, incomes, sending & possibly profits would be higher ·government could collect more revenue from income tax

55 of 149

How is 'government spending on unemployment benefits' a consequence of unemployment?

·if unemployment rises the gov may have to spend more on unemployment related benefits e.g. JSB ·may mean they have to reduce its spending on other areas or raise its borrowing or tax rates ·money spent on unemployment benefits has opportunity cost

56 of 149

How is 'pressure on other forms of government spending' a consequence of unemployment?

·when people are unemployed they are more likely to suffer health problems e.g. mental health problems, marital difficulties & some may even turn to crime ·more health problems= higher waiting lists for health care unless gov spends more on sector

57 of 149

How are 'costs to the unemployed' a consequence of unemployment?

·the unemployed may suffer from poor health & family break-ups & experience a loss of income ·some people may experience loss of status or purpose & worth

58 of 149

How is 'hysteresis' a consequence of unemployment? (demand of side)

·the longer people are out of work, the more difficult it can be to gain another job ·problems arise in demand for labour ·employers may be reluctant to employ someone who's been out of work for a long time

59 of 149

What is hysteresis?

·a cost of unemployment can be unemployment itself

60 of 149

How is 'hysteresis' a consequence of unemployment? (supply of side)

·the longer people are out of work, the more difficult it can be to gain another job ·problems arise in supply of labour ·the long-term unemployed may tend to seek work less actively over time (lose work habit & get discouraged by rejection)

61 of 149

How are the 'costs for other economies' a consequence of unemployment?

·unemployment in a country's trading partners is likely to reduce demands for exports ·in turn will reduce country's AD & may cause some unemployment ·country may experience immigration from countries with high unemployment (beneficial or burden)

62 of 149

What are the benefits of unemployment?

·May give people time to search for more rewarding job ·makes it easier for firms, wishing to expand, to recruit workers ·can reduce demand pull & cost push inflation ·High levels of unemployment may discourage workers from seeking wage rises

63 of 149

What is the significance of unemployment?

•DEPENDS ON THE LEVEL OF UNEMPLOMYENT AND LONG ON AVERAGE PEOPLE ARE UNENMPLOYED

64 of 149

What is the significance of 3% unemployment?

•A 3% rate of unemployment is not seen as being a problem. There will always be some people in between jobs.

65 of 149

What is the significance of 10% unemployment?

•A 10% rate of unemployment would lead to a loss of output, higher government spending on benefits and a greater loss of tax revenue

66 of 149

What is the significance of 6% average over 2 years unemployment?

•A 10% rate of unemployment would lead to a loss of output, higher government spending on benefits and a greater loss of tax revenue

67 of 149

What are the consequences of inflation?

•fall in the value of money •shoeleather costs •administrative costs •inflationary noise •random redistribution of income •fiscal drag •uncertainty •inflation causing inflation •loss of international competitiveness

68 of 149

What is the only way an economy can increase its output if it currently using all of its resources, and thus producing on its production possibility curve and what are the effects of this action?

•switch resources from making consumer goods to making capital goods •opportunity costs of producing capital goods= consumer goods •in the long run extra capital goods will enable more consumer goods to be made

69 of 149

What are the potential negative impacts of economic growth?

•reduce quality of some people's lives (e.g. adopting new skills/ changing jobs/ pace of work may increase/ stressful changes) •depletion of non-renewable resources •damage to the environment •

70 of 149

What is the main benefit of economic growth likely to be? But what is this influenced by?

•a rise in people's material standard of living- increase in real GDP per head means people can enjoy more goods and services •influenced by the distribution of income

71 of 149

What is another benefit of economic growth?

•it enables poverty within a country to be reduced without having to redistribute income (higher output can be used to finances schemes to help the poor)

72 of 149

How can higher output help the poor?

Higher output raises tax revenue without having to increase tax rates •can be used to finance schemes to help the poor •higher tax revenues can be used to improve public services e.g. education, health care & improve the environment

73 of 149

What is an additional way higher output may reduce poverty?

•by increasing employment

74 of 149

What is the risk of aggregate demand not increasing in line with production?

•higher output may be accompanied by higher unemployment

75 of 149

What does actual economic growth raise the level of?

•a country's real output and can thereby increase its status and power in international organisations and in international negotiations

76 of 149

What is the USA a member of?

•the UN (United Nations) •the IMF (International Monetary Fund) •WTO (World Trade Organisation)

77 of 149

When is economic growth beneficial?

•when it is sustainable

78 of 149

What is nominal GDP and how is it calculated?

•output measured in current prices and so not adjusted for inflation •??

79 of 149

What is the 'output method' of calculating real GDP?

·total up the output, income or expenditure of the country

80 of 149

When an economy is expanding will production always rise?

·it tends to rise but if less skilled workers have to be recruited to make the extra output, productivity may fall

81 of 149

What are some general issues with measuring economic growth?

·the informal economy ·consider the composition of real GDP (extra output consisting of capital goods will not make people feel better off immediately) ·calculate GDP per head to ensure it is a true rise in GDP rather than rise in population

82 of 149

What are the RPI and CPI?

·weighted price indices

83 of 149

What is the CPI?

·the main measure used in the rest of the European Union and in most other countries in the world

84 of 149

What is the Family Expenditure Survey?

·involves sampling 6,000 households, which are asked to keep a record of their expenditure

85 of 149

What are the CPI and RPI both measures of?

The average change from month to month in the prices of consumer goods and services bought in the UK.

86 of 149

What does the income part of the current account cover?

·investment income (the UK usually has a surplus on income)

87 of 149

What does the transfers part of the current account cover?

·the transfer of money made and received by the government and officials

88 of 149

Where can inflation arise from?

·demand side ·supply side

89 of 149

When analysing its causes, which two categories can inflation be put into?

·demand-pull inflation ·cost-push inflation

90 of 149

Where does demand-pull inflation arise from?

·aggregate demand increasing at a faster rate than aggregate supply

91 of 149

When may there be an excessive growth in aggregate demand?

·when money is growing faster than real output (AD increases more rapidly than AS)

92 of 149

When are increases in aggregate demand likely to push up the price level?

·When the economy is producing at or near its productive capacity.

93 of 149

When does cost-push inflation arise?

·when the price level is pushed up by increases in the costs of production (e.g. a rise in wage rates above increases in the costs of production) ·a rise in the costs of raw materials (e.g. rise in price of oil will push up cost of fuel etc)

94 of 149

When does a deficit on the current account occur and what are the main situations why this situation can arise?

·when the country's expenditure abroad exceeds its revenue from abroad 1- the country's inhabitants have spent more on goods & services from abroad than overseas residents have spent on the country's products 2- net outflow of investment income

95 of 149

What are the causes of a deficit on the trade in goods and services?

·changes in come at home & abroad ·changes in the exchange rate ·structural problems

96 of 149

What may a rise in the exchange rate result in?

·a deficit as it will raise export prices and lower import prices

97 of 149

When may a deficit be of less concern to a government?

·when it is caused by changes in income ·when it is caused by a change in the exchange rate

98 of 149

When may a deficit persist?

·if it is caused by the country's firms charging too much for their products, producing poor quality products or not picking picking up on changes in demand

99 of 149

When will an outflow of investment income occur?

·if the investments that foreign residents have made in the country earn more than investments the country;s inhabitants have made in other countries

100 of 149

When is a surplus on the current account experienced?

·when a country's revenue from abroad is greater than its expenditure abroad

101 of 149

Why does care have to be taken in interpreting a surplus on trade in goods and services?

·because it may arise from the strength of the economy, from a change in its exchange rate or from a weakness of the economy

102 of 149

When is a country likely to have a surplus?

·If its products: ·are of high quality ·produced at a low cost ·reflect what households & firms at home & abroad want to buy ·a fall in the exchange rate ·a recession

103 of 149

What are the effects that may arise as a result of inflation?

·fall in the value of money ·menu costs ·shoeleather costs ·administrative costs ·inflationary noise ·random distribution of income ·fiscal drag ·uncertainty ·inflation causing inflation ·loss of international competitiveness

104 of 149

How is a 'fall in the value of money' consequence of inflation?

·rising price level- the purchasing power of money falls

105 of 149

How are 'menu costs' a consequence of inflation?

·the costs of changing prices due to inflation ·the need for firms in general to alter their prices ·involves time, effort & possible increase in labour costs

106 of 149

How are 'shoeleather costs' a consequence of inflation?

·during periods of inflation, households & firms cannot afford to have money lying idle·relates to the costs involved in reducing holdings of cash and money in current accounts & seeking the highest rate of interest

107 of 149

How is 'inflationary noise' a consequence of inflation?

·inflation causes distortion effect therefore market prices do not signal the relative scarcity of products efficiently ·won't be sure if price rise is genuine or just in one with inflation

108 of 149

How is 'random distribution of income' a consequence of inflation?

·the outcome for a household depends upon the relationship between the change in its income and price level ·borrowers will gain an lenders will lose if inflation reduces the real interest rate

109 of 149

How is 'fiscal drag' a consequence of inflation?

·tax brackets need to be adjusted in line with inflation otherwise people's income will be pushed into the higher tax bands

110 of 149

How is 'uncertainty' a consequence of inflation?

·inflation can create uncertainty ·firms will be more reluctant to invest

111 of 149

How is 'inflation causing inflation' a consequence of inflation?

·households expecting prices to rise may buy more & therefore increase in AD ·workers may ask for pay rises ·firms may raise their prices in order to protect real profit levels

112 of 149

How is a 'loss of international competitiveness' a consequence of inflation?

·high inflation rate= less price competitive goods & services —> fewer exports sold & more imports purchased

113 of 149

How are 'administration costs' a consequence of inflation?

·administrative costs e.g. staff time ·adjusting accounts, assessing raw material costs, negotiating with unions about wage rises, estimating appropriate prices

114 of 149

What are the benefits of inflation?

·demand-pull inflation: higher AD & rise in price level may encourage firms to increase output ·workers like rises in their pay (even if its matched by higher prices)- psychological benefit

115 of 149

What is the benefit of inflation giving firms the ability to alter workers' real pay?

·can help labour markets operate more efficiently & reduce unemployment

116 of 149

What does inflation enable firms to do with wages?

·they can reduce their real wages by keeping money wages the same or raising them by less than inflation

117 of 149

How can deflation from the supply side be beneficial?

·a fall in the price level from cut in costs of production will enable consumers to enjoy more goods & services & will increase country's international awareness

118 of 149

How can deflation caused by a fall in aggregate demand be harmful?

·Lower AD will cause firms to cut back production ·this will lead to higher unemployment ·households are likely to reduce their spending ·AD will be further reduced

119 of 149

Which type of inflation tends to be more harmful and why?

·cost-push ·it is usually accompanied by a fall in real GDP & a rise in unemployment

120 of 149

What does hyperinflation tend to lead to?

·significant menu, shoeleather and administrative costs & considerable inflationary noise (opportunity cost of time) ·risk that people will resort to barter

121 of 149

How can fluctuating inflation be destabilising?

·it creates inflationary noise & makes it difficult for government, firms & households to plan ahead

122 of 149

How can unanticipated inflation be harmful?

·causes uncertainty & can result in random distribution of income

123 of 149

Can stable and correctly anticipated inflation still have a harmful effect on an economy?

·if a country has a higher inflation rate than the main countries it trades, its current account position is likely to deteriorate

124 of 149

How does the significance of inflation vary between people?

·people have different spending patterns ·people experience different prices in different areas of the country

125 of 149

What happens if a deficit increases?

·it will reduce AD ·this will lower the economy's output, be likely to raise unemployment & put downward pressure on the price level ·also likely to lead to a fall in the exchange rate & increase debt of the country

126 of 149

What does a surplus rather than a deficit mean?

·a country is consuming less than it is producing & is experiencing a net inflow of money & income ·increase in money supply will mean banks have more money (may increase bank spending) ·rise in surplus means net exports are increasing, raise in AD

127 of 149

What does the significance of a current account deficit depend upon?

·its size ·duration ·cause ·what is happening in the capital & financial account

128 of 149

What are most countries exchange rates determined by and how does this work?

·the market forces of demand and supply ·increase demand for current= increased exchange rate ·increased supply of currency= falling exchange rate

129 of 149

What factors influence the demand for and supply of a currency and so its exchange rate?

·international competitiveness of products ·changes in income abroad ·incomes at home ·UK interest rates ·FDI (foreign direct investment) ·speculation

130 of 149

How does the 'international competitiveness of products' influence the demand for and supply of a currency and so its exchange rate?

·if UK products are internationally competitive demand for pounds is likely to be high and supply is likely to be low ·influences of international competitiveness are labour productivity, investment and relative inflation rates

131 of 149

How do 'changes in income abroad' influence the demand for and supply of a currency and so its exchange rate?

·rising incomes abroad= foreigners are more likely to buy UK exports ·this will increase demand for pounds and cause a rise in value of the pound

132 of 149

How do 'incomes at home' influence the demand for and supply of a currency and so its exchange rate?

·rising incomes at home may put downward pressure on value of the pound

133 of 149

How do 'UK interest rates' influence the demand for and supply of a currency and so its exchange rate?

·rise in UK interest rates is likely to increase demand for pounds ·foreigners will want to buy pounds in order to open accounts in UK financial institutions to benefit from higher interest rates

134 of 149

What is FDI and how does it influence the demand for and supply of a currency and so its exchange rate?

·foreign direct investment ·those wishing o undertake FDI will have to buy and sell pounds

135 of 149

How does 'speculation' influence the demand for and supply of a currency and so its exchange rate?

·can have a stabilising or destabilising effect on exchange rates

136 of 149

What do speculators do?

·speculators buy and sell currency hoping to make profit from movements in interest rates and exchange rates

137 of 149

When considering the relationship between the exchange rate and the interest rate, what will happen if the UK's exchange rate rises?

·export prices expressed in terms of foreign currencies will rise ·demand for exports will fall & this will reduce AD ·lower AD means lower inflationary pressure

138 of 149

When considering the relationship between the exchange rate and the interest rate, what does a reduction in the interest rate mean?

·tends to reduce the exchange rate because it will reduce return on money kept in UK financial institutions ·probably be outflow of funds from UK to other countries (hot money flows) ·outflow of funds means more of currency being sold

139 of 149

What does an increase in the supply of currency do to the exchange rate?

·reduces the exchange rate

140 of 149

What might a cut in the UK interest rate do to the value of the pound?

·might make foreigners more optimistic about prospects of economic growth in UK and buy pounds and so push up value of pound

141 of 149

What is a depreciation and what will it do?

·fall in the exchange rate ·will reduce the price of exports in terms of foreign currencies

142 of 149

While a fall in the exchange rat causes a fall in exports prices what will it do to the price of imports in terms of domestic currency?

·increase it

143 of 149

What does a rise in the exchange rate do to export prices and import prices?

·increases export prices ·lowers import prices

144 of 149

What effect does the exchange rate have on the current account position of the balance of payments?

·a reduction in the exchange rate is likely to improve the position

145 of 149

When will a fall in the price of exports result in a rise in export revenue?

·when demand is elastic

146 of 149

How will a lower exchange rate increase aggregate demand?

·by boosting exports and reducing imports

147 of 149

What is a rise in the exchange rate likely to cause?

·an increase in current account deficit ·likely to be deflationary, reducing aggregate demand & therefore reduce real GDP and employment

148 of 149

What is the risk of a lower exchange rate?

·it may put upward pressure on inflation because the price of imported are materials will rise and therefore increase the cost of production & price of imported finished goods

149 of 149

Get Revising

Government economic policy objectives and indicators of national economic performances

Other cards in this set

Card 2

Front

Back

Card 3

Front

Back

Card 4

Front

Back

Card 5

Front

Back

Comments

Similar Economics resources:

Other cards in this set

Card 2

Front

Back

Card 3

Front

Back

Card 4

Front

Back

Card 5

Front

Back

Comments

Related discussions on The Student Room

Similar Economics resources: