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Economics Unit 2

QuestionAnswer
What is an Injection? Any spending in the economy that is not consumer spending.
What are some Injections? Investment, Exports, Government spending.
What are Leakages? A withdrawal of funds from the circular flow.
What are some Leakages? Savings, Imports, Taxation.
What is the circular flow? (outside) Households provide resources to Firms. Firms provide goods and services to Households.
What is the circular flow? (inside) Households - consumer spending - Firms. Firms - Payments (rent, wages, interest and profit) - Households.
When is the economy growing? When Injections are greater than Withdrawals.
When is the economy shrinking? When Withdrawals are greater than Injections.
When Injections = Withdrawals, what is the economy in? Equilibrium.
What is national income? The value of goods and services that are produced by an economy in a year. It is a measure of a country's economic performance.
How is a country's economic performance measured? Gross Domestic Product (GDP), Gross National Product (GNP), Net National Product.
What is Gross Domestic Product (GDP)? It is the output of goods and services produced within the UK in a year.
What is Gross National Product (GNP)? This is the output produced by UK-owned resources. GDP + net income from foreign investments.
What is Net National Product (NNP)? This is the loss of value of capital goods during the year.
What is a Business / Trade cycle? Income and Employment fluctuating.
What are some characteristics of an economy in a "boom' GDP high and Unemployment low. Wages and Profits rising. Investment spending will be high. High demand for imports. High tax revenues.
What is a recession? When there are 2 successive quarters of negative growth of real GDP.
What happens during a recession? (GDP) and employment fall. Consumption and investment spending fall. Less spending on imports. Tax revenues fall, (more on benefits).
What happens during a slump? High unemployment. Consumption and Investment is low. Low demand for imports. Tax revenues are low.
What happens during a recovery? Everything begins to rise.
What is Fiscal Policy? When the government changes its spending / taxation in order to influence a nations economy.
What is the Governments role? Provide public, merit goods. Controlling and regulating the private sector. Controlling overall economic performance. Redistributing income.
What is a Public good? A good that benefits everyone in society. Everyone gets the benefit. Paid for out of taxes. e.g. defence, street lighting, police, roads.
What is a Merit good? A good that would be under produced if left to private enterprise. Paid for out of taxes. e.g. healthcare, education, libraries.
What are current items? nurses; wages, paper for schools.
What are capital items? hospital equipment, machinery, buildings.
What are Transfer Payments? Money transferred from taxpayers to those who qualify for benefits. (pensions, unemployment benefit, child benefit, grants, subsidies.)
What effects Government Spending? Cyclical trends. Demographic and social change. Political priorities. Interest rates.
What are Cyclical trends? (booms and recessions) more spending on JSA, income support, housing benefit.
How do demographic and social changes effect Government Spending? ageing population - increased spending on pensions and Healthcare.
How do political priorities effect Government Spending? (elections) Spend more on healthcare (NHS) to be successful in elections.
How do interest rates effect Government Spending? (the cost of borrowing) past borrowing - difficult to pay off - massive debt.
Case for reducing growth in Public Spending (1) Lowers income tax, public sector borrowing. Resources given to the private sector - more efficient.
Case against reducing growth in Public Spending (1) Money may be spent on imports rather than in UK. Resources may take a while to be taken up by private sector - they may remain unemployed.
Case for reducing growth in Public Spending (2) Income tax could be reduced - increase consumers freedom to chose what their income is spent on. Public sector borrowing - reduced. Resources - use for the private sector - more efficiently.
Case against reducing growth in Public Spending (2) Spending creates employment. reduces capital spending - reduces the efficiency of the economy (housing and transport). Resources released from the public sector - not automatically taken up - remain unemployed. Low incomes depend on public spending.
What are Direct Taxes? Taxes taken directly from individuals and firms (takes on income and wealth)
What are Indirect Taxes? Taxes on spending (firm passes on cost of VAT to customer)
Name 3 Direct Taxes. Income tax, Capital gains, Corporation tax.
Name 2 Indirect taxes. VAT, Excise Duties and customs duties.
What makes a good tax? Equity - relate to taxpayers ability to pay. Efficiency - be inexpensive to collect. Certainty - taxpayer aware of how much is payable and when. Convenience - payable at a time and place that suits the taxpayer.
What are Progressive taxes? Takes a larger percentage of income as income rises. (Income tax)
What are Regressive taxes? Lower income earners will pay a higher percentage of their income. (VAT)
What is Inflation? The (percentage increase)in the (general level of prices) in a period of time. - not all prices are rising. rise in cost of living, fall in purchasing power.
How to measure general level of prices? Retail Price Index (RPI) or Consumer Price Index (CPI) (RPI without housing costs and council tax costs.)
How to calculate an Index (weighted average) 1 Identify basket of products bought by majority of households. Each item given a (%) according to the amount of spending on it. Each month the price of each item is compared and expressed as (%) of its price at the base date. This price - price relative.
Example of price relative. Petrol increased in price from 50p /l (at base date) to a current price of 70p /l is would have a price relative of 140. (70 \ 50 x 100)
How to calculate an Index (weighted average) 2 The price relative is multiplied by its weighting. 140 x 5% = 7. This is repeated for each item, the figures are added to give the weighted average total. Note that the CPI at the base date would be 100.
Difference between an Index and CPI? The CPI automatically excludes mortgage payments, and other housing costs - repairs, insurance and council tax.
Why do we use the CPI? It is closer to the method used by the rest of the EU, easier to compare inflation rates. It is an important part of judging the right time for Britain to join the euro.
What is the target CPI? The government set the Bank of England a target of 2% CPI.
Calculating rate of inflation using index figures. eg, if CPI was 500 on 30 September 2003, and 525 on 30 September 2004. The rate of inflation would be 5% (25 / 500 x 100).
What is the formula for calculating the rate of inflation using index figures? (Current Index - Last index) / Last index x 100
Notes on Inflation. The rate of inflation measures the rate at which prices are increasing. A fall in the rate of inflation does not mean prices are falling, they are rising at a slower rate.
Harmful effects of inflation on individuals. (1) Reduces standard of living on those whose incomes are fixed, or don't rise as fast as the rate of inflation. Their real incomes fall as money loses its purchasing power.
Harmful effects of inflation on individuals. (2) Reduces the disposable incomes of those on low wages, because an increase in their money wage, arising from inflation , may make the liable for income tax. They may lose social benefits - this is called fiscal drag.
Harmful effects of inflation on individuals. (3) Reduces the real value of savings if the interest rate is less than the inflation rate. If the real rate of interest is negative, the saver will lose. The rate of interest on savings is called the nominal rate of interest.
What is the real rate of interest? The nominal rate adjusted for inflation.
Why do people still save when the purchasing power of savings is falling? It is a habit. If they cannot afford a product out of one weeks income. People are unaware of the effects of inflation on the real value of savings.
Harmful effects of inflation on individuals. (4) Causes unemployment, as wage inflation may force some firms to reduce labour costs by laying off workers. Reduced competitiveness in domestic and foreign markets, either force firms out of business or to downsize.
Harmful effects of inflation on firms. (1) Reduces the real value of profits of firms which operate in markets where there is foreign competition. Foreign competitors may be somewhere where inflation is lower. Uk firms may not be able to raise their prices sufficiently to cover inflated costs.
Harmful effects of inflation on firms. (2) It makes UK firms less competitive (if UK inflation is above competitors inflation rates. Leads to loss of market share and profitability.
Harmful effects of inflation on firms. (3) Reduces willingness to invest - inflation creates uncertainty about future costs and prices. Causes unemployment
Harmful effects of inflation on firms. (4) It encourages inefficiency - firms which operate in markets where there is little competition may be able to mask inefficiency by raising prices.
Harmful effects of inflation on the economy. (1) The balance of payments on current account may deteriorate (if the rate of inflation is higher than that in other countries) leads to more expensive imports - less attractive to foreign buyers. Cheaper imports - more attractive to domestic buyers.
Harmful effects of inflation on the economy. (2) Reduces economic growth if firms are discouraged from investing.
Harmful effects of inflation on the economy. (3) Distorts the balance of taxation (balance between direct + indirect taxes) - income tax revenue rises automatically with inflating incomes. Expenditure taxes which are fixed in money terms, tend to fall in real value.
Harmful effects of inflation on the economy. (4) A period of inflation creates an expectation that is will continue - this ensures it does. E.g workers expect 5% inflation, they demand a 5% increase in pay. This may not match productivity, Employers are faced with increased costs, and increase prices.
3 Advantages of inflation. 1) Borrowers gain - they have the use of money when it's purchasing power is greater. 2) Some firms are able to increase prices + profits before paying higher wages. 3) The government finds that people earn more - pay more income tax.
Causes of inflation (Keynesianism) 1. Demand-pull inflation (excessive spending - money available > demand. 2. Cost-push inflation (increased production costs) 3. Expectations of inflation.
Causes of inflation (Monetarism) Inflation is the result of an excessive growth in the money supply.
What is aggregate demand? the total demand for goods and services within a particular market.
What us unemployment? Where someone is unable to find a job - while actively seeking one.
How is unemployment measured? Claimant Count (the JSA) or Labour Force Survey.
What is the Claimant count? Each month the Government publishes the number of people eligible to claim the Job Seekers Allowance (JSA).
What is the Labour Force Survey? Surveys a sample of 150,000 people each quarter and counts people who (were able to start work in 2 weeks, had actively looked for work in last 4 weeks, had found a job and waiting to start)
Causes of unemployment. Cyclical, Structural (Sectoral), Frictional, Seasonal
What is Cyclical unemployment? Not enough Aggregate Demand (demand deficient)
What is Structural unemployment? (Sectoral) Falling demand in certain industries - product no longer required, unable to compete. Leave workers with specific skills unable to find a job.
What is Frictional unemployment? Why workers are unemployed. - benefits are too high, poor job information, occupationally immobile, geographically immobile. (moving from job to job)
What is Seasonal unemployment? The job is dependant on the season - agriculture, tourism, building industries - employment fluctuates with the seasons.
Cyclical policy? Try to boost demand - lower taxes, higher government spending, lower interest rates.
Structural policy? (Sectoral) Protect the industries involved - put taxes on imports, give subsidies (payments), retrain workers.
Frictional policy? Lower benefits, Raise minimum wage, improve job centres, retrain the occupationally immobile (encourage apprenticeships for the young, offer courses for all workers.
What is a NEET? A young person (16-24) who is Not in Education, Employment, Training
Why are NEETs a particular focus to the government? They are 20x more likely to commit a crime. 22x more likely to become a teen mum.
What groups of people are more at risk of becoming a NEET? Young people with (few/no qualifications, health problems, disabilities, low aspirations)
How to solve Youth Unemployment? Sponsor entrepreneurship, Education reform, school - offer courses with real business value, companies - provide mentors + apprenticeships, remove barriers to job creation.
What are the consequences of unemployment on an Individuals? Reduced income - reduced standard of living. Reduced efficiency - loses skills, fitness and motivation - makes it harder to find a job. Reduced status - social exclusion from friends. Increased health problems - both physical and mental.
What are the consequences of unemployment on Businesses? Fall in demand for goods and services - people fear unemployment, or facing unemployment. Knock-on effect on suppliers - firms have to reduce output + order less materials. Positive impacts - bigger pool of labour (reduces wage pressure)
What are the consequences of unemployment on the Economy? Lost output - real GDP is likely to fall. Multiplier effect of reduced demand - reduced spending from unemployed affects the jobs of others too. Reduced taxation revenue. Increased burden on taxpayers (fund benefits) Increased crime, burden on healthcare
Why is 0% unemployment rate unattainable? Frictional unemployment will remain - workers moving jobs.
What is the Non Accelerating Inflation Rate of Unemployment? (NAIRU) 3-5% unemployment = people who lack skills required for jobs. (if employed they would be paid above their productivity, cost push pressure.)
What is Full Capacity? When unemployment falls to 3-5%, inflationary pressure starts to build in the economy.
What is a Recession? 2 successive quarters of negative growth in real GDP
What happens during a recession? Low inflationary pressure due to low demand. High unemployment due to lack of demand. Growth is negative. Low demand - improvement in trade record. (low house prices, consumer spending, confidence, budget position deteriorates.
What is Economic Growth? An increase in the productive potential of an economy. (an increase in our capacity to produce goods and services.)
How is Economic Growth measured? Cant be measured - look at the growth in actual output (in the form of changes to real Gross Domestic Product, real GDP) short run - current activity.
How do natural resources cause economic growth? The discovery of any extra resource (wave/wind power, fracking.)
What determines your capacity to produce things? The quantity + quality of your resource base.
What is fracking? Injecting liquid into rocks etc, at high pressure to extract oil or gas.
How does capital resources cause economic growth? Investing in new equipment - help the economy to produce goods more efficiently. Investment can be helped by the Bank of England - reduce interest rates - borrowing becomes more attractive.
How does better quality Capital resources cause economic growth? Governments can use universities in the public sector to generate research and new ideas. Improves the quality and productivity of capital.
How to increase Labour? By encouraging immigration, more woman to enter the workplace, higher birthrate.
How to get better quality labour? By improving Healthcare, Education, Training
What are the benefits of Economic Growth? Increased living standards - (produce more - consume more) (new g's + s's) Improved confidence for households + firms - greater investment in new capital - further growth. Increased investment - incomes grow, more is saved. More tax revenue.
What are the consequences of Economic Growth? Unequal distribution of income - creates divisions + social tensions. Environmental damage - pollution (too much production). High stress levels - forced to work hard. Non-renewable resources used up too quickly.
What were the top 5 exporting industries in 2011? 5. financial and insurance activities. 4. wholesale retail trade, repair of motor vehicles + motor cycles. 3. legal, accountancy, management, architecture, engineering, 2. manufacture of coke, refined petroleum, 1. food and beverages.
What were the top 5 export destinations in 2012? USA, Netherlands, France, Germany, Norway.
What was the total value of exports from Scotland to the rest of the UK in 2012? £47.6 billion.
What are Scotland's key growth sectors? Creative Industries, Energy, Financial + Business Services, Food + Drink, Life Sciences, Tourism, Universities.
What are Creative Industries? Industries that have the potential to create wealth + job creation. Examples: advertising, architecture, music, performing arts, publishing, film.
Created by: StudyMore6outof7
 

 



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