economics study resources

Unit 7, Dartmouth Buildings, Fort Fareham Industrial Estate, New Gate Lane, Fareham PO14 1AHT 01489 861 310 or 07729 776 281 E [email protected]

© EzyEducation Ltd 2021. All rights reserved.

ECONOMICS STUDY RESOURCESMacroeconomic Performance

Macroeconomic Objectives

Economic Growth

Inflation and Deflation

Theories of Inflation

Employment and Unemployment

Causes, Effects & Solutions of Unemployment

Balance of Payments

The Phillips Curve

Productivity

Contents

Macroeconomic objectives are set by the government of a country in order to assess the economic performance of a country. The objectives attempt to measure the main performance areas of any functioning economy such as economic growth, inflation, unemployment and trade. Economists, politicians and policymakers assess the performance of an economy by analysing the progress an economy is making in each of these areas.

MACROECONOMIC OBJECTIVES STUDY GUIDETake control of your learning with our study guide for MACROECONOMIC OBJECTIVES. This guide is designed to be used whilst you watch our videos to help reinforce the key knowledge requirements of the topics.

Watch the course video(s) and fill in the definitions of the key terms.


MACROECONOMIC OBJECTIVES

KEY TERMS AND DEFINITIONS

SUMMARY


ECONOMIC GROWTH

INFLATION

UNEMPLOYMENT

BALANCE OF PAYMENTS

INEQUALITY

The UK government sets realistic and achievable macroeconomic objectives.

KEY UK MACROECONOMIC OBJECTIVES

Watch

Government attempts to achieve steady real rates of growth to improve living standards.

Government, alongside the central

bank, attempts to achieve low and

consistent inflation (2%) to achieve price stability.

Government attempts to achieve an

acceptable balance of payments position via the current and

financial account. This enables the country to live within its means.

Government attempts to achieve low levels of unemployment to

help improve aspirations and reduce social

problems.

Government attempts to reduce poverty and

improve the distribution of income and wealth

across society. This can help reduce economic hardship and improve

health and social outcomes.

NOMINAL GDP INFLATIONBALANCE OF PAYMENTSUNEMPLOYMENT INEQUALITY

1 2 3 4 5

http://ezyeducation.vzaar.me/4695197


MACROECONOMIC OBJECTIVESQUESTIONS Watch

Identify three reasons why the UK government sets macroeconomic objectives.1 MARK /3

Identify and describe the four traditional macroeconomic objectives.2 MARK /8



WatchMACROECONOMIC OBJECTIVESQUESTIONS Watch

Explain, using a diagram, why there is a conflict between growth and inflation. 3 MARK /6

Price

Leve

l

Real Output




Explain, using a diagram, why there is a conflict between unemployment and inflation.4 MARK /6

Price

Leve

l

Real Output




Explain why there is a conflict between growth and the balance of payments.5 MARK /3

Explain why there is a conflict between growth and the balance of the government budget.6 MARK /3

Explain why there is a conflict between growth and environmental objectives.7 MARK /4





Economic objectives set by the Government in order to keep policies aligned with the needs of a strong and stable economy.

ECONOMIC GROWTH The rate at which the value of an economy’s GDP rises by.

INFLATIONThe rate at which average prices across the economy are increasing by.

UNEMPLOYMENTThe number of people who are out of work but actively looking to get back into work.

BALANCE OF PAYMENTS

The trading accounts of an economy that records the value of trade and investment flows between an economy and the rest of the world.

INEQUALITYThe degree to which income and wealth across an economy is unequally shared across the economy.

MACROECONOMIC OBJECTIVES STUDY GUIDE


SUMMARY

MACROECONOMIC OBJECTIVESANSWERS



KEY UK MACROECONOMIC OBJECTIVES

The UK government sets realistic and achievable macroeconomic objectives.


SUMMARY


Government attempts to achieve steady real rates of growth to improve living standards.

NOMINAL GDP

1

Government, alongside the central

bank, attempts to achieve low and

consistent inflation (2%) to achieve price stability.

INFLATION

2

Government attempts to reduce poverty and

improve the distribution of income and wealth

across society. This can help reduce economic hardship and improve

health and social outcomes.

INEQUALITY

5

UNEMPLOYMENT

3

Government attempts to achieve low levels of unemployment to

help improve aspirations and reduce social

problems.

4

BALANCE OF PAYMENTS

Government attempts to achieve an

acceptable balance of payments position via the current and

financial account. This enables the country to live within its means.




SUMMARY


Identify three reasons why the UK government sets macroeconomic objectives.11 MARK AWARDED FOR EACH CORRECT POINT MADE

Sets objectives to help determine future policy decisions

Sets objectives to respond to changes in economic variables

Sets objectives so that economic variables can be measured and their changes analysed

Identify and describe the four traditional macroeconomic objectives.21 MARK FOR OBJECTIVE + 1 MARK FOR DESCRIPTION

Economic Growth – Desire to achieve positive and sustainable economic growth in the long-run

Inflation – Desire to achieve stable prices by keeping CPI inflation within 1 percentage point of 2%

Unemployment – Desire to achieve low and stable unemployment that is close to the full unemployment level e.g. 3%

Balance of Payments – Desire to achieve a stable trade position that does not lead to an unsustainable current account deficit or surplus

Please see the lecture video for detailed explanations to all questions





SUMMARY


3 MARKS FOR DIAGRAM + 3 MARKS FOR EXPLANATION

Economic growth results in an increase in real output. If there is rapid economic growth, it is likely to introduce inflationary pressures into the economy

An increase in AD, creates a positive output gap, and this causes the price level to rise

This causes a conflict in macroeconomic objectives because the desire is to increase growth, but not at the expense of high and unstable inflation

Explain, using a diagram, why there is a conflict between growth and inflation. 3

Award credit for any relevant diagram that represents the trade-off

Price

Leve

l

Real Output

A

B

AD2

AD1

LRAS SRAS

Y1

Y2

P1

P2




SUMMARY



There is a positive relationship between real output and employment because firms need workers to make goods and services

An increase in AD, creates a positive output gap, and causes jobs to be created and unemployment to fall, but at the expense of rising prices

This causes a conflict in macroeconomic objectives because the desire is to reduce the unemployment rate to the full employment

level, but not at the expense of high and unstable inflation

Explain, using a diagram, why there is a conflict between unemployment and inflation.4

Award credit for any relevant diagram that represents the trade-off

Price

Leve

l

Real Output

A

B

AD2

AD1

LRAS SRAS

Y1

Y2

P1

P2



SUMMARY


Explain why there is a conflict between growth and the economy’s position on the balance of payments.5

1 MARK AWARDED FOR EACH CORRECT POINT MADE

During periods of high growth, demand for all types of goods and services are higher

This means the demand for imported goods and services will also rise

Therefore, during strong periods of growth, expenditure of imports rises quicker than exports, causing the position on the current account to deteriorate

Explain why there is a conflict between growth and the balance of the government budget.6


A government policy to stimulate the economy through lower taxes or higher spending will help boost AD and growth

This will result in the budget surplus of the government to reduce or the budget deficit to increase through higher borrowing

This causes a conflict as the economy strengthens, but government finances are in a worse position post the implementation of the policy

Explain why there is a conflict between growth and environmental objectives.71 MARK AWARDED FOR EACH CORRECT POINT MADE

Growth measures how the final value of goods and services across the economy over time are rising

For an economy to grow, more goods and services will need to be produced and provided to the market

Higher levels of industrial production and energy consumption will be required to make these extra goods and services

This causes the level of pollution and the consumption of non-renewable energy sources to rise



Economic growth is an indicator that the final value of all the goods and services that are produced within an economy are increasing in value. This is a sign that an economy is more productive and adding extra value to their output. Economic growth can be measured across different time horizons and therefore can be represented using a standard AD-AS diagram, as well as an LRAS curve shift.

ECONOMIC GROWTH STUDY GUIDETake control of your learning with our study guide for ECONOMIC GROWTH. This guide is designed to be used whilst you watch our videos to help reinforce the key knowledge requirements of the topics.



ECONOMIC GROWTH


SUMMARY Watch

GDP

ECONOMIC ACTIVITY

ECONOMIC GROWTH

RECESSION

BOOM

GDP PER CAPITA



ECONOMIC GROWTH STUDY GUIDETake control of your learning with our study guide for ECONOMIC GROWTH. This guide is designed to be used whilst you watch our videos to help reinforce the key knowledge requirements of the topics.

Fill in the blanks to complete the explanation below.


ECONOMIC GROWTH

UK ECONOMIC GROWTH

SUMMARY Watch

Economic growth is officially defined as the change in the real of an economy over a given

period of time. In theory, this is supposed to increase the average level of prosperity across the

economy. However, living standards will only rise if there is an in the productive capacity

of the economy over time. This is predominantly caused by an curve shift. This is

because without this curve shift, an economy would not be able to sustain this position due to

a strain being placed on an economy’s economic resources.

However, even with this curve shift, the effect of growth on individuals in society is important to

consider to evaluate the overall impact of growth on living standards. For instance, there may be

intergenerational issues to consider, if the living standards of the generation are being put

ahead of the living standards of an infinite number of generations.

0.0

-0.5

-1.0

-1.5

-2.0

-2.5

0.5

1.0

1.5

200

7 Q

1

200

7 Q

3

200

8 Q

1

200

8 Q

3

200

9 Q

1

200

9 Q

3

2010

Q1

2010

Q3

2011

Q1

2011

Q3

2012

Q1

2012

Q3

2013

Q1

2013

Q3

2014

Q1

2014

Q3

2015

Q1

2015

Q3

2016

Q1

2016

Q3

2017

Q1

2017

Q3

2018

Q1

2018

Q3

2019

Q1

2019

Q3

2020

Q1



ECONOMIC GROWTHQUESTIONS Watch

Identify three demand-side causes of economic growth.1 MARK /3

Identify three supply-side causes of economic growth.2 MARK /3



WatchECONOMIC GROWTHQUESTIONS Watch

Explain, using a diagram, how an economy can grow sustainably.3 MARK /6

Price

Leve

l

Real Output




Explain how a traditional economic policy (fiscal, monetary or supply side policy) can cause economic growth to rise.4 MARK /6



Evaluate the costs and benefits of higher economic growth for an economy. 5 MARK /10





GDPThe final market value of all the goods and services produced by an economy over a period of time.

ECONOMIC ACTIVITY

Any behaviour or action that results in the supply or consumption of goods and services.

ECONOMIC GROWTH

The rate by which an economy’s GDP value is increasing by over time.

RECESSION Two consecutive quarters of negative GDP growth.

BOOMA period where an economy grows beyond the trend rate of growth and inflationary pressures are high.

GDP PER CAPITA

The total value of the goods and services produced in an economy over a given period of time per head of the population.

ECONOMIC GROWTH STUDY GUIDE


SUMMARY

ECONOMIC GROWTHANSWERS




SUMMARY


THE CONCEPT OF PURCHASING POWER PARITY

Fill in the blanks to complete the explanation below.

Economic growth is officially defined as the change in the real output of an economy over a given

period of time. In theory, this is supposed to increase the average level of prosperity across the

economy. However, living standards will only rise if there is an increase in the productive capacity

of the economy over time. This is predominantly caused by an outwards LRAS curve shift. This is

because without this curve shift, an economy would not be able to sustain this position due to

a strain being placed on an economy’s economic resources.

However, even with this curve shift, the effect of growth on individuals in society is important to

consider to evaluate the overall impact of growth on living standards. For instance, there may be

intergenerational issues to consider, if the living standards of the current generation are being put

ahead of the living standards of an infinite number of future generations.

0.0

-0.5

-1.0

-1.5

-2.0

-2.5

0.5

1.0

1.5

200

7 Q

1

200

7 Q

3

200

8 Q

1

200

8 Q

3

200

9 Q

1

200

9 Q

3

2010

Q1

2010

Q3

2011

Q1

2011

Q3

2012

Q1

2012

Q3

2013

Q1

2013

Q3

2014

Q1

2014

Q3

2015

Q1

2015

Q3

2016

Q1

2016

Q3

2017

Q1

2017

Q3

2018

Q1

2018

Q3

2019

Q1

2019

Q3

2020

Q1



SUMMARY

PURCHASING POWER PARITYANSWERS


Identify three demand-side causes of economic growth.11 MARK AWARDED FOR EACH CORRECT POINT MADE

Boost to consumption from an increase in disposable incomes

An increase in government expenditure to stimulate the economy

A cut in interest rates to boost consumption and investment

A fall in the value of the local currency to boost exports demand

An increase in consumer/business confidence to increase expenditure

Identify three supply-side causes of economic growth.21 MARK AWARDED FOR EACH CORRECT POINT MADE

Increase in business investment to boost the capacity to produce goods

An increase in labour or capital productivity to help produce more

An increase in the amount of natural resources available

An increase in the size of labour force through immigration or population changes

Better machinery and technology used in the production process

Please see the lecture video for detailed explanations to questions 1-3




SUMMARY




Initially, AD increases, creating short-run economic growth and an increase in employment and real output

The increase in AD prompts an increase in the LRAS curve in the long-run which creates a permanent increase in real output

The shift of the LRAS curve eliminates the positive output gap and prevents higher inflation from being introduced into the economy

Explain, using a diagram, how an economy can grow sustainably.3

Award credit for diagram that includes SRAS curves

P1

Price

Leve

l

Real OutputY1

Y2

AD2

LRAS1

LRAS2

AD1

A B



SUMMARY



Explain how a traditional economic policy (fiscal, monetary or supply side policy) can cause economic growth to rise.4

6 MARKS FOR EACH CORRECT POLICY DESCRIPTION


Monetary policies are economic policies used by the central bank to control

inflation through the manipulation of interest

rates and the money supply.

The central bank can stimulate economic growth

by cutting interest rates.

Lower interest rates reduce borrowing costs

across the economy.

This encourages higher consumption (less savings)

and greater levels of business investment.

As consumption and investment are two

expenditure components of AD, this causes the AD curve to shift to the right.

An outwards shift in the AD curve causes real output to rise.

Fiscal policies are economic policies used by

the government to influence economic activity through government expenditure

and taxation.

The government can stimulate the economy by introducing an

expansionary fiscal policy.

This results in either an increase in government

spending or lower taxation.

This injects money into the economy through higher government spending or

leaves consumers with higher disposable incomes and

boosts consumption.

As consumption and government expenditure are two expenditure components

of AD, this causes the AD curve to shift to the right.

An outwards shift in the AD curve causes real

output to rise.

Supply side policies are economic policies that are

designed to improve the capacity of the economy to

produce goods and services.

These policies attempt to introduce investment or

reforms to boost the quantity or quality of factors of production in the economy.

This delivers a long-term boost to the productive capacity of the economy

to produce goods and services over time.

Supply side policies cause the full employment level

of output to increase.

This is reflected by an outwards shift in

the LRAS curve.

This is a form of sustainable economic growth.




SUMMARY




Evaluate the costs and benefits of higher economic growth for an economy. 51 MARK AWARDED FOR EACH CORRECT POINT MADE

Economic growth helps to boost the income of workers and consumers

Generates higher tax revenue for the government due to higher economic activity

Higher demand for goods and services increases the need for workers and reduces the unemployment rate

A growing economy inspires confidence in businesses to invest into the economy

Economic growth helps certain individuals escape from poverty and long-term economic deprivation

Economic growth may boost incomes but this is counteracted by an increase in the rate of inflation and the cost of living

Economic growth may boost the demand for imports which causes the trade balance to deteriorate and the possibility of importing inflation

Higher rates of economic growth can cause environmental problems due to increased economic activity

The benefits of increased economic growth may not be shared equally amongst the population and therefore inequality may get worse before it gets better

Growth may not be sustainable due to the lack of an LRAS curve shift

Inflation provides a measure of how quickly the cost of living in an economy is changing. Price stability is the desire of many nations in order to protect living standards, protect the real value of workers wages and to maintain a stable monetary system. Central banks are responsible for keeping inflation at its target level.

INFLATION AND DEFLATION STUDY GUIDETake control of your learning with our study guide for INFLATION AND DEFLATION. This guide is designed to be used whilst you watch our videos to help reinforce the key knowledge requirements of the topics.



INFLATION AND DEFLATION


SUMMARY

PRICE LEVEL

INFLATION

DEFLATION

CONSUMER PRICES INDEX (CPI)

RETAIL PRICES INDEX (RPI)

FISCAL DRAG

MONEY ILLUSION

Identify the type of inflation as indicated by the diagram below.

TYPES OF INFLATION IN THE ECONOMY

Watch

INFLATION

An increase in the price level due to an increase in aggregate demand e.g. positive changes in C + I + G + X - M

INFLATION

An increase in the price level due to an increase in production costs e.g. taxes, wages, raw materials, components.

Price

Lev

el

Real OutputY

1Y

2

P1

P2

AD1

AD2

2

1

SRAS

Price

Lev

el

Real OutputY

2Y

1

P1

P2

AD

SRAS1

SRAS2

2

1



INFLATION AND DEFLATIONQUESTIONS Watch

Explain the difference between inflation and deflation.1 MARK /3

Explain how inflation is calculated using the Consumer Prices Index (CPI).2 MARK 7

Explain the concept of hyperinflation.3 MARK /3



WatchINFLATION AND DEFLATIONQUESTIONS Watch

Identify two benefits and two costs of inflation in the economy.4 MARK /4

Explain how deflation can cause a drop in consumption.5 MARK /3

Explain how inflation affects borrowers across the economy.6 MARK /3




Explain how inflation affects savers across the economy.7 MARK /3

Explain how inflation makes it difficult for firms to control wages.8 MARK /3




Compete the table below to identify the effects of each type of inflation.9 MARK /10

DEMAND-PULL INFLATION

COST-PUSH INFLATION

PRICE LEVEL

REAL OUTPUT

OUTPUT GAP

CURVE SHIFT

CURVE MOVEMENT




PRICE LEVEL The average price of goods and services in an economy.

INFLATIONA persistent rise in the price level within an economy over a period of time.

DEFLATIONA persistent fall in the price level within an economy over a period of time.

CONSUMER PRICES INDEX (CPI)

The UK government’s preferred price index for measuring the price level and inflation using a basket of everyday goods and services.

RETAIL PRICES INDEX (RPI)

An alternative price index that can be used to measure the price level and inflation by taking into account lots of price changes including housing costs.

FISCAL DRAGWhen real incomes decline because tax deductions rise as thresholds aren’t adjusted to reflect inflation.

MONEY ILLUSION

When rises in nominal wages lead individuals to believe they are better off when their real wages have actually declined.

INFLATION AND DEFLATION STUDY GUIDE


SUMMARY

INFLATION AND DEFLATIONANSWERS




SUMMARY


TYPES OF INFLATION IN THE ECONOMY

Identify the type of inflation as indicated by the diagram below.


An increase in the price level due to an increase in aggregate demand e.g. positive changes in C + I + G + X - M

Price

Lev

el

Real OutputY

1Y

2

P1

P2

AD1

AD2

2

1

SRAS

COST-PUSH INFLATION

An increase in the price level due to an increase in production costs e.g. taxes, wages, raw materials, components.

Price

Lev

el

Real OutputY

2Y

1

P1

P2

AD

SRAS1

SRAS2

2

1


Explain the difference between inflation and deflation.11 MARK AWARDED FOR EACH CORRECT POINT MADE

Inflation measures the rate at which prices across the economy are rising over time

Deflation measures the rate at which prices across the economy are falling over time

It is undesirable for an economy to have either high inflation or persistent deflation because it distorts the economy

Explain how inflation is calculated using the Consumer Prices Index (CPI).21 MARK AWARDED FOR EACH CORRECT POINT MADE

A basket of everyday goods are selected each year based on tastes

The prices of each of these goods are measured each month

The prices are taken from 100,000 different shops across the country

An index for each good is found to represent the price change each month

Weights are attached to each good type based on their overall importance

The final value of the CPI basket is found by adding together the weighted price index of each good

The CPI inflation rate is calculated by comparing the value of this index in each period to each other

Please see the lecture video for detailed explanations to question 1




SUMMARY






Identify two benefits and two costs of inflation in the economy.41 MARK AWARDED FOR EACH CORRECT POINT MADE

Benefits Costs

Encourages consumption Shoe leather costs

Incentivises production Menu costs

Reduces real wage costs Reduces the real value of money

Reduces the debt burden Hurts the competitiveness of an economy


Explain the concept of hyperinflation.31 MARK AWARDED FOR EACH CORRECT POINT MADE

Hyperinflation describes large and rapid increases in the price level which undermine the value of money and discourage economic activity

A country is often defined as experiencing hyperinflation if the inflation rate is rising by at least 50% each month

This form of inflation is often associated with political instability and war where countries lose control of their money supply

Explain how deflation can cause a drop in consumption.51 MARK AWARDED FOR EACH CORRECT POINT MADE

Deflation measures the rate at which prices across the economy are falling over time

If consumers see that pries across the economy are falling, they will expect them to continue to fall over time

Therefore, they will delay making purchases in expectation that prices will continue to fall


SUMMARY






SUMMARY


Explain how inflation affects borrowers across the economy.61 MARK AWARDED FOR EACH CORRECT POINT MADE

Inflation causes the value of money to fall across the economy as each unit of currency can buy you less

Periods of inflation reduce the real value of debt that people hold as it pushes up the price of everything

This means that borrowers benefit from periods of high inflation because, in real terms, they have to pay back less

Explain how inflation affects savers across the economy.71 MARK AWARDED FOR EACH CORRECT POINT MADE

Inflation causes the value of money to fall across the economy as each unit of currency can buy you less

Periods of inflation reduce the real value of any future money holdings that individuals may have such as savings

This means that savers are hurt by periods of high inflation because, in real terms, when they access their savings in the future it will be worth less

Explain how inflation makes it difficult for firms to control wages.81 MARK AWARDED FOR EACH CORRECT POINT MADE

Inflation causes the general cost of living to rise across the economy

To protect their real wages, workers try to bargain for higher wages to ensure that their earnings keep up with the rate of inflation

Firms have to contend with spiralling wage inflation and wage stickiness prevents them from being able to control their wage bill





SUMMARY


Compete the table below to identify the effects of each type of inflation.9


COST-PUSH INFLATION

PRICE LEVEL RISES RISES

REAL OUTPUT RISES FALLS

OUTPUT GAP POSITIVE NEGATIVE

CURVE SHIFT OUTWARDS AD SHIFT INWARDS SRAS SHIFT

CURVE MOVEMENT MOVEMENT UP SRAS CURVE

MOVEMENT UP THE AD CURVE



There are many competing theories of what are the primary causes of inflation in the economy. The first theory established was the Quantity Theory of Money (QTM) that stated that the money supply was the main cause of inflation. This was later debunked by Keynesian economists that believed that demand side changes were the biggest drivers of inflationary pressures.

THEORIES OF INFLATION STUDY GUIDETake control of your learning with our study guide for THEORIES OF INFLATION. This guide is designed to be used whilst you watch our videos to help reinforce the key knowledge requirements of the topics.


THEORIES OF INFLATION

QUANTITY THEORY OF MONEY

SUMMARY

FISHER’S EQUATION OF EXCHANGE

Watch

An inflation theory developed by Irving Fisher that states that the general price level of goods and services is directly proportional to the amount of money in circulation in the economy at any one point in time.

V & T ASSUMED TO BE CONSTANT

M

V

P

T

M V P T=

M RISES P RISES

Fill in the blanks to correctly identify each element of the Fisher Equation.



THEORIES OF INFLATIONQUESTIONS Watch

Explain, using a diagram, the findings of the Quantity Theory of Money.1 MARK /6

Price

Leve

l

Real Output



WatchTHEORIES OF INFLATIONQUESTIONS Watch

Explain the difference between rational and adaptive inflation expectations.2 MARK /3

Identify three data items that can affect the rational expectations of individuals.3 MARK /3




Explain, using a diagram, how lower inflation in the UK affects trade.4 MARK /6

Price

Leve

l

Real Output




Explain, using a diagram, how higher inflation in the UK affects trade.5 MARK /6

Price

Leve

l

Real Output



QUANTITY THEORY OF MONEY

THEORIES OF INFLATION STUDY GUIDE

There are many competing theories of what are the primary causes of inflation in the economy. The first theory established was the Quantity Theory of Money (QTM) that stated that money supply was the main cause of inflation. This was later debunked by Keynesian economists that believed that demand side changes contribute to inflationary changes.

SUMMARY

THEORIES OF INFLATIONANSWERS

FISHER’S EQUATION OF EXCHANGE

M MONEY SUPPLY

V VELOCITY OF CIRCULATION

P PRICE LEVEL

T TRANSACTIONS (VOLUME)

M V P T=

V & T ASSUMED TO BE CONSTANT

M RISES P RISES

An inflation theory developed by Irving Fisher that states that the general price level of goods and services is directly proportional to the amount of money in circulation in the economy at any one point in time.

Fill in the blanks to correctly identify each element of the Fisher Equation.





SUMMARY



If the money supply in the economy increases, this causes the AD curve to shift to the right as economic agents have more money available

The increase in the money supply applies upward pressure on prices to rise, which makes firms have to raise wages to keep up with the rising cost of living

This causes the SRAS curve to shift to the left and leaves the economy with a higher price level in the long-run

Explain, using a diagram, the findings of the Quantity Theory of Money.1

You do not need to include the arrows in your diagram to receive the marks

Price

Leve

l

Real Output

A

C

B

LRAS SRAS2 SRAS

1

AD1

AD2

Y2

Y1

P1

P2

P3





SUMMARY



Explain the difference between rational and adaptive inflation expectations.21 MARK AWARDED FOR EACH CORRECT POINT MADE

Adaptive inflation expectations are held by individuals that believe the future will be like the immediate past

Rational inflation expectations are held by individuals that predict the future by using all available information

Both methods are flawed, but rational expectations can be adjusted to reflect changing economic and market conditions

Identify three data items that can affect the rational expectations of individuals.31 MARK AWARDED FOR EACH CORRECT POINT MADE

Past inflation rates

Economic factors such as growth and unemployment

Fiscal policy position

Monetary policy position

Political environment

Exchange rate

Trade issues and barriers





SUMMARY



Lower inflation in the UK relative to the rest of the world makes UK exports more price competitive with the rest of world’s goods

At the same time, it makes foreign imports less competitive with UK products and consumers switch to domestic alternatives

The net effect is export demand rises, import demand falls and net exports expenditure rises. This causes an outwards shift in the AD curve

Explain, using a diagram, how lower inflation in the UK affects trade.4



Price

Leve

l

Real Output

B

A

LRAS SRAS

AD1

AD2

Y1

Y2

P1

P2






SUMMARY



Higher inflation in the UK relative to the rest of the world makes UK exports less price competitive with the rest of world’s goods

At the same time, it makes foreign imports more competitive with UK products and consumers switch to foreign product alternatives

The net effect is export demand falls, import demand rises and net exports expenditure falls. This causes an inwards shift in the AD curve

Explain, using a diagram, how higher inflation in the UK affects trade.5


Price

Leve

l

Real Output

P2

P1

SRAS

Y1

Y2

A

B

LRAS

AD1

AD2

The rate of employment in the economy provides a good indicator of how strong a position the economy is in. The ability of an economy to keep unemployment at the full employment level is one of the Government’s main macroeconomic objectives. This helps the economy grow and prevent long-term economic and social damage to the economy.

EMPLOYMENT AND UNEMPLOYMENT STUDY GUIDETake control of your learning with our study guide for EMPLOYMENT AND UNEMPLOYMENT. This guide is designed to be used whilst you watch our videos to help reinforce the key knowledge requirements of the topics.



EMPLOYMENT AND UNEMPLOYMENT


SUMMARY

LABOUR FORCE

EMPLOYMENT

UNEMPLOYMENT

ECONOMICALLY ACTIVE

UNEMPLOYMENT RATE

CLAIMANT COUNT

CYCLICAL UNEMPLOYMENT

STRUCTURAL UNEMPLOYMENT

FRICTIONAL UNEMPLOYMENT

SEASONAL UNEMPLOYMENT

Watch



EMPLOYMENT AND UNEMPLOYMENT STUDY GUIDETake control of your learning with our study guide for EMPLOYMENT AND UNEMPLOYMENT. This guide is designed to be used whilst you watch our videos to help reinforce the key knowledge requirements of the topics.


EMPLOYMENT AND UNEMPLOYMENTSUMMARY Watch

UNDERSTANDING UNEMPLOYMENT

UNEMPLOYMENT RATE (%)

NO. UNEMPLOYED

SIZE OF LABOUR FORCE

x100

RISE IN UNEMPLOYMENT

FALL IN UNEMPLOYMENT

Any Job Related Factor that Encourages Job Search

Any Job Related Factor that Discourages Job Search

SCHOOL/UNI LEAVERS

IMMIGRATION

RETURN FROM CAREER BREAK

RETURN FROM GAP YEAR

RETURN FROM RETIREMENT

RETIREMENTS

MORTALITIES

EMIGRATION

HEALTH FACTORS

CAREER BREAK



EMPLOYMENT AND UNEMPLOYMENTQUESTIONS Watch

Identify three reasons behind a fall in the size of the labour force.1 MARK /3

Identify three reasons behind a rise in the size of the labour force.2 MARK /3



EMPLOYMENT AND UNEMPLOYMENTQUESTIONS Watch

Identify three characteristics required for a person to be classified as unemployed.3 MARK /3

Explain the difference between the claimant count and the labour force survey as a measure of unemployment.4 MARK /3



WatchEMPLOYMENT AND UNEMPLOYMENTQUESTIONS Watch

Explain, using an AD-AS diagram, the concept of cyclical unemployment.5 MARK /6

Price

Leve

l

Real Output




Explain, using an AD-AS diagram, the concept of structural unemployment.6 MARK /6

Price

Leve

l

Real Output




Explain, using an AD-AS diagram, the concept of frictional/seasonal unemployment.7 MARK /6

Price

Leve

l

Real Output




LABOUR FORCEThe pool of employable labour available to firms within a country.

EMPLOYMENT People who currently occupy a job.

UNEMPLOYMENTPeople not in employment who have looked for a job in the last 4 weeks and are able to start work within the next 2 weeks.

ECONOMICALLY ACTIVE

People in employment and the unemployed i.e. people in work and those willing and able to work.

UNEMPLOYMENT RATE

The percentage of the labour force that are currently unemployed.

CLAIMANT COUNT The number of people receiving Job Seekers Allowance.


When AD is not sufficient to achieve output consistent with full employment. The level of demand and unemployment will vary in line with the economic cycle.


When production in a particular industry/region ceases due to long term changes in demand or production techniques.


Short periods of unemployment that occur because of a short gap between jobs.


When workers become unemployed due to a seasonal dip or cessation in production.

EMPLOYMENT AND UNEMPLOYMENT STUDY GUIDE


SUMMARY

EMPLOYMENT AND UNEMPLOYMENTANSWERS


UNDERSTANDING UNEMPLOYMENT



SUMMARY


UNEMPLOYMENT RATE (%)

NO. UNEMPLOYED

SIZE OF LABOUR FORCE

x100

RISE IN UNEMPLOYMENT

FALL IN UNEMPLOYMENT

Any Job Related Factor that Encourages Job Search

Any Job Related Factor that Discourages Job Search

SCHOOL/UNI LEAVERS

IMMIGRATION

RETURN FROM CAREER BREAK

RETURN FROM GAP YEAR

RETURN FROM RETIREMENT

RETIREMENTS

MORTALITIES

EMIGRATION

HEALTH FACTORS

CAREER BREAK


Identify three reasons behind a fall in the size of the labour force.1


Increase in the number of retirees

Increase in the mortality rate

Increase in the number of people that emigrate the country

Sickness or disability

Someone becoming a full-time carer for a family member

Someone becoming a full-time parent

Someone going on a long career break

Someone going on a gap year

Identify three reasons behind a rise in the size of the labour force.2


Increase in the number leaving school, college or university

Increase in the number of people that immigrate to the country

Increase in the number of people that recover from sickness or disability

Increase in the number of people that come back to work from a break

Increase in the number of people that come out of retirement

Increase in the number of people that come out of a domestic job such

as a carer or full-time parent




SUMMARY






SUMMARY



Identify three characteristics required for a person to be classified as unemployed.31 MARK AWARDED FOR EACH CORRECT POINT MADE

Working Age (16-65)

Out of a job

Looking to get back into work

Explain the difference between the claimant count and the labour force survey as a measure of unemployment.4


The claimant count measures unemployment based on the number of people that are currently claiming Job Seekers Allowance

The labour force survey is a household survey that provides the official measures of employment and unemployment by asking questions relating to the employment status of individuals

The claimant count provides a much narrower measure of unemployment compared to the labour force survey due to the number

of people that are excluded from being able to claim Jobseekers Allowance





SUMMARY



Cyclical or demand deficient unemployment occurs when there is a lack of demand in the economy to sustain the existing demand for workers across the economy

A fall in demand for goods and services causes a fall in AD and a fall in demand for labour because labour derives its demand for the demand for goods and services

Therefore, real output falls, a negative output gap is created and the level of unemployment rises

Explain, using an AD-AS diagram, the concept of cyclical unemployment.5

Price

Leve

l

Real Output

P2

P1

SRAS

Y1

Y2

A

B

LRAS

AD1

AD2





SUMMARY



Structural unemployment occurs when there is a long-term decline in an industry, making the skills of those workers redundant in the country

The decline of an industry causes jobs to be lost and output to fall and therefore this causes the full employment level to fall

This reflected by an inwards SRAS curve shift in the short-run and an inwards shift in the LRAS curve in the long-run

Explain, using an AD-AS diagram, the concept of structural unemployment.6


Price

Leve

l

Real OutputY1

Y2

P2

P1

A

B

AD

LRAS1

LRAS2

SRAS2

SRAS1





SUMMARY



Frictional/seasonal unemployment is a type of short-term unemployment brought about by a worker moving between jobs or a seasonal employment contract coming to an end respectively

The short-term fall in employment is reflected by an inwards shift in the SRAS curve to correspond to a reduction in the ability of firms to produce goods and services

As the employment fall is only short-natured, soon those workers will be back in employment and this will reflect an outwards shift in the SRAS curve back to its original position

Explain, using an AD-AS diagram, the concept of frictional/seasonal unemployment.7

Price

Leve

l

Real OutputY1

Y2

P1

P2

A

AD

LRAS SRAS2

SRAS1

B

Unemployment is caused by a number of different factors such as a change in economic conditions, firm production costs and global issues. Unemployment can lead to unintended consequences both in the short- and long-run. Policymakers devise economic policies to attempt to prevent short-term unemployment from a becoming a persistent problem.

CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENT STUDY GUIDETake control of your learning with our study guide for CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENT. This guide is designed to be used whilst you watch our videos to help reinforce the key knowledge requirements of the topics.



CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENT


SUMMARY

NATURAL RATE OF UNEMPLOYMENT

REAL WAGE UNEMPLOYMENT

EMPLOYMENT PATTERNS

HIDDEN UNEMPLOYMENT

DISCOURAGED WORKERS

MARGINALLY ATTACHED WORKERS

OVER-QUALIFIED WORKERS

UNDER-EMPLOYED WORKERS

LABOUR HOARDING



TYPES OF UNEMPLOYMENT


Unemployment caused by a downturn in the economy


Unemployment caused by peak business periods ending


Unemployment caused by workers moving between jobs


Unemployment caused by a long-term industry decline

Price

Lev

el

Real Output

P2

P1

YFE

Y2

2

1

LRAS SRAS

AD2

AD1

Price

Lev

el

Real Output

1

2

LRAS

AD1

SRAS

AD2

Y2

YFE1

= Y

3

P2

P1 =

P

3

Price

Lev

el

Real Output

P2

P1

YFE1

YFE2

LRAS2

LRAS1

SRAS2

SRAS1

AD

2

1

Price

Lev

el

Real Output

LRAS SRAS2

SRAS1

AD

2

1

P2

P1 =

P

3

Y2

YFE1

= Y

3

SUMMARY


CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENT STUDY GUIDETake control of your learning with our study guide for CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENT. This guide is designed to be used whilst you watch our videos to help reinforce the key knowledge requirements of the topics.

CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENTSUMMARY



CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENTQUESTIONS

Explain, using a diagram, the concept of the natural rate of unemployment.1 MARK /6

Real

Wage

Rat

e

Employment



Explain, using a diagram, the concept of real wage unemployment.2 MARK /6

Real

Wage

Rat

e

Employment




Identify three influences on employment patterns in the UK.3 MARK /3

Explain one policy solution to cyclical unemployment.4 MARK /3

Explain two policy solutions to real wage unemployment.5 MARK /6




WatchWatch

Identify three policy solutions to structural unemployment.6 MARK /3

Identify three consequences of high unemployment.7 MARK /3






The level of unemployment that is associated with non-accelerating inflation.

REAL WAGE UNEMPLOYMENT

The level of unemployment when the real wage rate exceeds the market clearing rate.

EMPLOYMENT PATTERNS

Changes over time in the make up and structure of the labour force.

HIDDEN UNEMPLOYMENT

Unemployed or under utilised labour resources that are not reflected in official unemployment figures.

DISCOURAGED WORKERS

Workers that give up seeking employment after a long period of unemployment.

MARGINALLY ATTACHED WORKERS

Workers that are available for work but have not looked in the last 4 weeks.

OVER-QUALIFIED WORKERS

Employed workers who possess skills beyond the requirements of a job.

UNDER-EMPLOYED WORKERS

A worker that wants to work more hours than they are currently employed to work.

LABOUR HOARDING Workers that are employed but are not fully occupied.


SUMMARY

CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENTANSWERS

CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENT STUDY GUIDE


TYPES OF UNEMPLOYMENT


SUMMARY


Unemployment caused by a downturn in the economy


Unemployment caused by peak business periods ending


Unemployment caused by workers moving between jobs


Unemployment caused by a long-term industry decline

Price

Lev

el

Real Output

P2

P1

YFE

Y2

2

1

LRAS SRAS

AD2

AD1

Price

Lev

el

Real Output

1

2

LRAS

AD1

SRAS

AD2

Y2

YFE1

= Y

3

P2

P1 =

P

3

Price

Lev

el

Real Output

P2

P1

YFE1

YFE2

LRAS2

LRAS1

SRAS2

SRAS1

AD

2

1

Price

Lev

el

Real Output

LRAS SRAS2

SRAS1

AD

2

1

P2

P1 =

P

3

Y2

YFE1

= Y

3






SUMMARY


ADL = Aggregate Demand for Labour ASL = Aggregate Supply of Labour

The natural rate of unemployment is the level of unemployment that exists when the labour market is in equilibrium

This means that at a given wage rate there is a difference between the number of people that want to be employed in the labour force and the number that are actually employed

Economists are not worried about this rate as the size of the labour force always exceeds the number of jobs available in the market at a given wage rate and

therefore there will always be some workers not willing or able to work

Explain, using a diagram, the concept of the natural rate of unemployment.1

Real

Wage

Rat

e

Employment

W1

UNR

ELF

E

ADL

ASL

Labour Force






SUMMARY


ADL = Aggregate Demand for Labour ASL = Aggregate Supply of Labour

Real wage unemployment is unemployment that is caused by the wage rate rising above the market prevailing wage rate

This causes a disequilibrium in the labour market because there are more workers willing to supply their labour at W2, but less firms willing to take on workers at that wage rate

The difference between the two curve positions at the new higher wage rate represents the level of real wage unemployment in the market

Explain, using a diagram, the concept of real wage unemployment.2

Real

Wage

Rat

e

Employment

W1

W2

ES

ED

E1

ADL

ASL

Real Wage Unemployment





SUMMARY


Identify three influences on employment patterns in the UK.31 MARK AWARDED FOR EACH CORRECT POINT MADE

Consumer preferences State employment

Technology Social changes

Trade Government policy

Population and migration Political structure/ideology


Explain one policy solution to cyclical unemployment.43 MARKS AWARDED FOR ANY POLICY EXPLANATION

Expansionary Fiscal Policy

Increase in government expenditure or reduction in taxes

Causes AD curve to shift right due to expenditure increasing

Expansionary Monetary Policy

Increase in the money supply to push interest rates down

Cheaper borrowing causes consumption and investment to increase (outwards AD shift)







SUMMARY

Explain two policy solutions to real wage unemployment.53 MARKS AWARDED FOR EACH POLICY EXPLANATION

Reduce trade union power

Creates less frictions in the labour market

Prevents a disequilibrium from building up in the labour market

Reduce national minimum wage

Brings the prevailing wage rate back towards equilibrium

Reduces/eliminates the gap between the labour curves

Reduce welfare benefits

Makes the concept of work more attractive for workers at lower rates

More workers available to work will bring wages down in the market

Identify three policy solutions to structural unemployment.63 MARKS AWARDED FOR EACH POLICY EXPLANATION

Education Worker relocation subsidies

Re-training programs Apprenticeship schemes

Training subsidies Improving labour market flexibility




SUMMARY




Identify three consequences of high unemployment.71 MARK AWARDED FOR EACH UNEMPLOYMENT CONSEQUENCE

Loss of income

Motivation problems

Mental health problems

Skill erosion

Poverty

Homelessness

Increase in crime

Reduced output

Increased welfare costs

Reduced tax revenue

Cost of social problems




Economic activity is driven by international trade and the interactions between countries around the world. The UK economy records the value and volume of international transactions between itself and the rest of the world on its balance of payments accounts. This account provides economists with an indicator of our trade balance and how we are financing a whole host of projects domestically and internationally.

BALANCE OF PAYMENTS STUDY GUIDETake control of your learning with our study guide for BALANCE OF PAYMENTS. This guide is designed to be used whilst you watch our videos to help reinforce the key knowledge requirements of the topics.



BALANCE OF PAYMENTS


SUMMARY

BALANCE OF PAYMENTS

CURRENT ACCOUNT

FINANCIAL ACCOUNT

EXPORTS

IMPORTS

THE BALANCE OF PAYMENTS COMPONENTS

Watch

CURRENT ACCOUNT

GOODS & SERVICES

INVESTMENT INCOME

TRANSFERS (AID)

FINANCIAL ACCOUNT

FINANCIAL ASSETS

STOCKS & BONDS

CURRENCY RESERVES

Account must balance when all the INFLOWS AND OUTFLOWS have been weighed against each other

CURRENT ACCOUNT DEFICIT FINANCIAL ACCOUNT SURPLUS

CURRENT ACCOUNT SURPLUS FINANCIAL ACCOUNT DEFICIT



BALANCE OF PAYMENTSQUESTIONS Watch

Explain how exports act as an injection of income into an economy. 1 MARK /3

Explain how imports act as a leakage of income from an economy. 2 MARK /3



WatchBALANCE OF PAYMENTSQUESTIONS Watch

Explain what it means if a country has a current account deficit.3 MARK /3

Explain what it means if a country has a current account surplus.4 MARK /3




Below is an example of the credits and debits recorded on the current account of the balance of payments for a country over three years. Fill in the gaps in the tableto calculate the current account balance for the country in each of the three years.

5 MARK /4

CURRENT ACCOUNT FIGURES ($m)

ITEM 2018 2019 2020

EXPORTS OF GOODS 1,150,789 1,321,834 1,437,864

IMPORTS OF GOODS 1,834,521 1,652,942 1,857,213

DIVISIBLE TRADE BALANCE

EXPORTS OF SERVICES 322,674 421,849 543,843

IMPORTS OF SERVICES 313,584 375,697 432,834

INDIVISIBLE TRADE BALANCE

INVESTMENT RECEIPTS

INVESTMENT PAYMENTS 711,428 653,290 612,854

NET INVESTMENT INCOME 34,554 47,981 38,585

TRANSFERS RECEIVED 32,475 28,489 21,374

TRANSFERS SENT

NET TRANSFERS




Identify three reasons why running a current account deficit is not problematic for a country.6 MARK /3

Explain how a country finances a current account deficit.7 MARK /3




Explain, using a diagram, what happens to the trade balance of a country if there is an increase in government spending.8 MARK /6

Price

Leve

l

Real Output




Explain using a diagram, what happens to the trade balance of a country if there is an increase in the value of the currency9 MARK /6

Price

Leve

l

Real Output




Explain, using a diagram, what happens to the trade balance of a country if there is an increase in productivity.10 MARK /6

Price

Leve

l

Real Output




Identify three solutions to reducing the current account deficit of a country.11 MARK /3

Explain how the Marshall-Lerner condition can be used to help reduce a current account deficit.12 MARK /3




In reference to the J-curve effect, describe why there are time delays associated with reducing a deficit on the ccurrent account of the balance of payments.

13 MARK /10




BALANCE OF PAYMENTS

A financial document that measures a country’s economic activities with all other countries over a period of time.

CURRENT ACCOUNT

An account within the Balance of Payments that records flows of goods and services, investment income and transfers into and out of a country.

FINANCIAL ACCOUNT

An account within the Balance of Payments that records all the flows of capital into and out of a country.

EXPORTSGoods and services produced domestically that are sold to foreign countries.

IMPORTSGoods and services produced by foreign countries that are purchased by another economy.

BALANCE OF PAYMENTS STUDY GUIDE


SUMMARY

BALANCE OF PAYMENTSANSWERS


THE BALANCE OF PAYMENTS COMPONENTS


SUMMARY



CURRENT ACCOUNT

GOODS & SERVICES

INVESTMENT INCOME

TRANSFERS (AID)

FINANCIAL ACCOUNT

FINANCIAL ASSETS

STOCKS & BONDS

CURRENCY RESERVES

Account must balance when all the INFLOWS AND OUTFLOWS have been weighed against each other

CURRENT ACCOUNT DEFICIT FINANCIAL ACCOUNT SURPLUS

CURRENT ACCOUNT SURPLUS FINANCIAL ACCOUNT DEFICIT



SUMMARY


Explain how exports act as an injection of income into an economy.1


Exports are goods and services that we sell to foreign countries

By selling goods this results in money flowing in to the economy

and adds to AD in the economy

This acts as an injection of income into the circular flow of income

Explain what it means if a country has a current account deficit.3


The current account records the flows of goods and services, investment income

and transfers into and out of a country

If a country records a current account deficit it means that the value of the

account debits (leakages) are greater than the account credits (injections)

As the current account is one of two account on a country’s balance of

payments, the deficit must be offset by a surplus on the financial account

Explain how imports act as a leakage of income from an economy. 2


Imports are goods and services that we buy from foreign countries

By buying goods this results in money flowing out of the economy

and removes demand from the economy

This acts as a leakage of income from the circular flow of income

Explain what it means if a country has a current account surplus.4


The current account records the flows of goods and services, investment income

and transfers into and out of a country

If a country records a current account surplus it means that the value of the

account debits (leakages) are less than the account credits (injections)

As the current account is one of two account on a country’s balance of payments, the surplus must be offset

by a deficit on the financial account






SUMMARY



Below is an example of the credits and debits recorded on the current account of the balance of payments for a country over three years. Fill in the gaps in the table to calculate the current account balance for the country in each of the three years.

5

CURRENT ACCOUNT FIGURES ($m)

ITEM 2018 2019 2020

EXPORTS OF GOODS 1,150,789 1,321,834 1,437,864

IMPORTS OF GOODS 1,834,521 1,652,942 1,857,213

DIVISIBLE TRADE BALANCE -683,732 -331,108 -419,349

EXPORTS OF SERVICES 322,674 421,849 543,843

IMPORTS OF SERVICES 313,584 375,697 432,834

INDIVISIBLE TRADE BALANCE 9,090 46,152 111,009

INVESTMENT RECEIPTS 745,982 701,271 651,439

INVESTMENT PAYMENTS 711,428 653,290 612,854

NET INVESTMENT INCOME 34,554 47,981 38,585

TRANSFERS RECEIVED 32,475 28,489 21,374

TRANSFERS SENT 143,037 128,301 109,246

NET TRANSFERS -750,650 -336,787 -357,627



SUMMARY



Identify three reasons why running a current account deficit is not problematic for a country.6


Current account deficit caused by a strong domestic economy i.e. high consumption on imports

A deficit financed by long-term investments is a sustainable deficit

Investments can lead to productivity and efficiency benefits elsewhere

Deficit will always be constrained by natural movements in currency markets

Explain how a country finances a current account deficit.71 MARK AWARDED FOR EACH CORRECT POINT MADE

The balance of payments accounts of any country must balance which means any deficit on the current account must be financed by a surplus on the financial account

A surplus on the financial account means a country is a net recipient of investment and capital from the rest of the world

The country uses this money to be able to finance its purchases on the current account




SUMMARY





An increase in government spending causes an increase in AD due to government expenditure being one of the components of AD

This causes an increase in demand for imports as it may stimulate increases in consumption through the multiplier effect

This will cause a deterioration in the country’s trade balance

Explain, using a diagram, what happens to the trade balance of a country if there is an increase in government spending.8


Price

Leve

l

Real Output

P2

P1

AD1

LRAS SRAS

A

B

AD2

Y1

Y2



SUMMARY





An increase in the value of the domestic currency makes imports cheaper and exports more expensive

This causes the demand for imports to rise and the demand for exports to fall causing net exports to fall and the AD curve to shift inwards

This will cause a deterioration in the country’s trade balance, but this effect could be reduced by the fact that inflation in the economy is likely to be lower

Explain, using a diagram, what happens to the trade balance of a country if there is an increase in the value of the currency.9

Price

Leve

l

Real Output

P2

P1

SRAS

Y1

Y2

A

B

LRAS

AD1

AD2


SUMMARY





An increase in productivity will cause the LRAS curve to shift to the right

This puts downward pressure on prices in the economy

Lower prices provides a country’s exports with a competitive boost and this improves the country’s trade balance

Explain, using a diagram, what happens to the trade balance of a country if there is an increase in productivity.10

Price

Leve

l

Real Output

P2

P1

Y1

Y2

LRAS1

LRAS2

AD1

A

B


SUMMARY






Identify three solutions to reducing the current account deficit of a country.111 MARK AWARDED FOR EACH CORRECT POINT MADE

Reduction in government expenditure Introduction in education and training programs

Increase in government taxation Tax incentives for research and development

Increase in the base rate Encourage and incentivise FDI

Reduction in the money supply Trade protection policies

Encourage and incentivise investment Encouraging businesses to export

Explain how the Marshall-Lerner condition can be used to help reduce a current account deficit.12


The Marshall-Lerner condition states that a devaluation of a country’s currency will lead to an improvement in its balance of trade with the rest of the world only if the sum of the price elasticities of its exports and imports is greater than one

This will ensure that the revenue brought in from increasing exports will not be offset by expenditure on imports

If the sum of the elasticities is less than 1 the effects will offset each other and a deficit would be expected to widen from a devaluation




SUMMARY



In reference to the J-curve effect, describe why there are time delays associated with reducing a deficit on the current of the balance of payments.13


The current account is an account within the Balance of Payments that records the flows of goods and services, investment income and transfers into and out of a country

A deficit on the current account of the balance of payments is when a country is a net importer of goods, services, transfers and investment income

One policy solution to reducing a deficit on the current account is to devalue the local currency to make exports more competitive

This can be done according to the Marshall-Lerner condition

(Marshall-Lerner Condition) em + ex > 1

Countries wish to use a devaluation to arrest a current account deficit if it is unsustainable

However, the effects of a devaluation on the current account are not instant due to time lags associated with switching expenditure

The current account deficit initially widens after a currency devaluation as individuals carry on importing the same quantity despite the rise in price

Over time, individuals start to react to price changes and start to reduce their expenditure on imports causing the deficit to shrink

If the devaluation is sustained, the deficit will eventually turn into a surplus, but inflationary pressures will constrain the size of the current account surplus



The conflict between achieving stable inflation and low unemployment provides a significant policy headache for governments and policymakers. The long-standing theory of the Phillips Curve attempts to visualise this trade-off using real world data. The Phillips Curve can also be extended to show other concepts such as wage stickiness and cost-push inflation.

THE PHILLIPS CURVE STUDY GUIDETake control of your learning with our study guide for THE PHILLIPS CURVE. This guide is designed to be used whilst you watch our videos to help reinforce the key knowledge requirements of the topics.



THE PHILLIPS CURVE


SUMMARY

PHILLIPS CURVE

RATE OF INFLATION

UNEMPLOYMENT RATE


MONEY ILLUSION

ADAPTIVE EXPECTATIONS

SHORT-RUN PHILLIPS CURVE

Watch

Inflat

ion R

ate(

%)

Unemployment Rate (%)

1958 A. W. PHILLIPS STATISTICAL FINDINGS

Collected years of data on money wage rates and the unemployment

rate in the US. This was later adapted from to prices from wages.

INFLATION

UNEMPLOYMENT



THE PHILLIPS CURVEQUESTIONS Watch

Explain what relationship the Philips Curve depicts between inflation and unemployment.1 MARK /6



WatchTHE PHILLIPS CURVEQUESTIONS Watch

Explain the results of the Phillips Curve using an AD-AS diagram.2 MARK /6

Price

Leve

l

Real Output




Using a diagram, explain how the long-run Phillips curve is formed by the short-run Phillips curve.3 MARK /7

Price

Leve

l

Real Output




Identify three limitations of the Phillips Curve.4 MARK /3




PHILLIPS CURVEA curve which shows the relationship between the unemployment rate and the inflation rate.

RATE OF INFLATION

The rate at which prices across the economy are rising over time.

UNEMPLOYMENT RATE

The percentage of people in the labour force who are out of a job but are actively seeking to find a new job.


The lowest the level of unemployment can go without introducing non-accelerating inflation.

MONEY ILLUSION

Individuals that view their wealth and income in nominal terms, rather than real terms (adjusted for inflation)

ADAPTIVE EXPECTATIONS

Individuals who base their expectations on inflation based on what has happened in the past.

THE PHILLIPS CURVE STUDY GUIDE


SUMMARY

THE PHILLIPS CURVEANSWERS

SHORT-RUN PHILLIPS CURVE

1958 A. W. PHILLIPS STATISTICAL FINDINGS

Collected years of data on money wage rates and the unemployment

rate in the US. This was later adapted from to prices from wages.

INFLATION

UNEMPLOYMENT

Inflat

ion R

ate(

%)

Unemployment Rate (%)


Explain what relationship the Phillips Curve depicts between inflation and unemployment.1


The Phillips Curve depicts a negative relationship between the inflation rate and the unemployment rate

This explains why the Phillips Curve is downwards sloping

This is because during periods of low unemployment, wages are pushed up and this feeds through into higher prices for consumers

During periods of high unemployment, wages are pushed down and this feeds into lower prices for consumers

This provides the government with an exploitable policy trade-off where it can position itself to achieve one of the macroeconomic objectives but not both

This relationship only holds in the short-run as unemployment returns back to its full employment level



SUMMARY






SUMMARY


The AD curve shifts outwards creating a positive output gap and a rise in real output

This causes a movement up the SRAS curve and the price level rises

A rise in real output creates a rise in the demand for labour which boosts employment

Explain the results of the Phillips Curve using an AD-AS diagram.

THERE ARE TWO APPROACHES TO TACKLING THIS QUESTION

2

The AD curve shifts inwards creating a negative output gap and a fall in real output

This causes a movement down the SRAS curve and the price level falls

A fall in real output creates a fall in the demand for labour which reduces employment

RISE IN AD FALL IN AD

Price

Lev

el

Real Output

P2

P1

AD1

LRAS SRAS

A

B

AD2

Y1

Y2

Price

Lev

el

Real Output

P2

P1

SRAS

Y1

Y2

A

B

LRAS

AD1

AD2





SUMMARY





The long-run Phillips curve (LRPC) is fixed vertical at the natural rate of unemployment

This reflects the fact that any movement to a lower unemployment rate cannot be sustained in the long-run without a shift in productivity and a shift in the LRPC

This means the economy will always move back to the natural rate of unemployment but just at a higher price level

The LRPC just traces out all of the short-run Phillips curve there are at different price levels

Using a diagram, explain how the long-run Phillips curve is formed by the short-run Phillips curve.

AWARD ONE MARK FOR CORRECT SHAPE OF THE LRPC

3

Inflat

ion R

ate (

%)

Unemployment Rate (%)A

CB

ED

SRPC3

SRPC2

SRPC1

LRPC

U1

UNR

P1

P2





SUMMARY



Identify three limitations of the Phillips Curve.4


Outcomes in practice are inconsistent

Evidence of a trade off over short periods but no recent evidence of a sustained trade off

Outcome is sensitive to measurement basis

Original curve was based on wage inflation not price inflation

Individuals, businesses and governments are constantly trying to find ways of boosting productivity. This can refer to the productivity of the use of someone’s time to the ability to convert as much output from the available inputs in the economy. Solving the productivity puzzle and improving productivity can help overcome the central economic problem and the scarcity of resources in the economy.

PRODUCTIVITY STUDY GUIDETake control of your learning with our study guide for PRODUCTIVITY. This guide is designed to be used whilst you watch our videos to help reinforce the key knowledge requirements of the topics.



PRODUCTIVITY


SUMMARY

PRODUCTIVITY

OUTPUT PER WORKER

OUTPUT PER HOUR

FACTORS AFFECTING PRODUCTIVITY

Watch

Level of competition in markets affects

incentives for businesses to invest

and innovate.

COMPETITION

Interest rates affect the cost of borrowing

which influences decisions to invest.

INTEREST RATES

Foreign Direct Investment can lead

to improvements in infrastructure

or capital.

FDI

The spending decisions that

governments make and where they

channel that spending.

GOVERNMENT POLICY

The number of new ideas and creations brought forward by

businesses.

INNOVATION

The level of regulation that businesses must abide by in their industry.

REGULATION

Structural makeup of the economy can

encourage more productive activities.

STRUCTURAL CHANGES

The quality of education that

children receive in schools, colleges, universities and

work placements.

EDUCATION

Quantity and quality of technology and capital employed across industry to

help workers.

CAPITAL

Programs that help workers change

their skills set and move into a different

industry with adequate training.

RE-TRAINING



PRODUCTIVITYQUESTIONS Watch

Below is table that records the number of hours worked and the gross value added in three different periods for an economy:1

PERIOD HOURS WORKED GROSS VALUE ADDED

A 15 Billion £0.8 trillion

B 30 Billion £1.5 trillion

C 40 Billion £2.4 trillion

Using the information in the table, calculate which period was the most productive. MARK /3



WatchPRODUCTIVITYQUESTIONS Watch

Explain, using a diagram, the impact of a productivity increase on the economy.2 MARK /6

Price

Leve

l

Real Output



WatchPRODUCTIVITYQUESTIONS Watch

Identify three different ways of measuring labour productivity.3 MARK /3

Explain how an increase in an economy’s productivity can boost its competitiveness. 4 MARK /3




PRODUCTIVITY The amount of output that is produced by a unit of input.

OUTPUT PER WORKER

The amount that each worker produces over a given period of time.

OUTPUT PER HOUR The amount that each worker produces in an hour.

PRODUCTIVITY STUDY GUIDE


SUMMARY

PRODUCTIVITYANSWERS

FACTORS AFFECTING PRODUCTIVITY

Level of competition in markets affects

incentives for businesses to invest

and innovate.

COMPETITION

Interest rates affect the cost of borrowing

which influences decisions to invest.

INTEREST RATES

Foreign Direct Investment can lead

to improvements in infrastructure

or capital.

FDI

The spending decisions that

governments make and where they

channel that spending.

GOVERNMENT POLICY

The number of new ideas and creations brought forward by

businesses.

INNOVATION

The level of regulation that businesses must abide by in their industry.

REGULATION

Structural makeup of the economy can

encourage more productive activities.

STRUCTURAL CHANGES

The quality of education that

children receive in schools, colleges, universities and

work placements.

EDUCATION

Quantity and quality of technology and capital employed across industry to

help workers.

CAPITAL

Programs that help workers change

their skills set and move into a different

industry with adequate training.

RE-TRAINING



SUMMARY

PRODUCTIVITYANSWERS


Below is table that records the number of hours worked and the gross value added in three different periods for an economy:1

PERIOD HOURS WORKED GROSS VALUE ADDED

A 15 Billion £0.8 trillion

B 30 Billion £1.5 trillion

C 40 Billion £2.4 trillion

Using the information in the table, calculate which period was the most productive.


MARK ALLOCATIONS SHOWN BELOW

Productivity = ×1000 (1 Mark) Gross Value Added

Hours Worked

Here we have to judge how productive the periods were by using gross value added per hour. To calculate that in each period, we divide gross value added by the number of hours worked.

However, we need to multiply each answer by 1000 as the gross value added figures are in trillions.

Period A = (£0.8tn/15bn) x 1000 = £53.3bn (1 Mark)Period B = (£1.5tn/30bn) x 1000 = £50bn (1 Mark)Period C = (£2.4tn/40bn) x 1000 = £60bn (1 Mark)

Therefore, period C was the most productive according to the gross valued added per hour measure (2 Marks)




SUMMARY

PRODUCTIVITYANSWERS



An improvement in the productivity of an economy causes an increase in the productive capacity of the economy

This causes the LRAS curve to shift to the right to a higher level of full employment and a lower price level

The fall in prices brings the economy a competitive boost to the country’s exports

Explain, using a diagram, the impact of a productivity increase on the economy.2

Price

Leve

l

Real Output

P2

P1

Y1

Y2

LRAS1

LRAS2

AD

A

B




SUMMARY


Explain how an increase in an economy’s productivity can boost its competitiveness. 4


An improvement in the productivity of an economy causes an increase in the productive capacity of the economy

This causes the price level in an economy to fall

The fall in prices brings the economy a competitive boost to the country’s exports

Identify three different ways of measuring labour productivity.3


Output per worker

Output per hour worked

Output per person




economics study resources

Documents