economics study resources
TRANSCRIPT
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.
© EzyEducation Ltd 2021. All rights reserved.
MACROECONOMIC OBJECTIVES
KEY TERMS AND DEFINITIONS
SUMMARY
MACROECONOMIC OBJECTIVES
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
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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
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WatchMACROECONOMIC OBJECTIVESQUESTIONS Watch
Explain, using a diagram, why there is a conflict between growth and inflation. 3 MARK /6
Price
Leve
l
Real Output
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WatchMACROECONOMIC OBJECTIVESQUESTIONS Watch
Explain, using a diagram, why there is a conflict between unemployment and inflation.4 MARK /6
Price
Leve
l
Real Output
© EzyEducation Ltd 2021. All rights reserved.
WatchMACROECONOMIC OBJECTIVESQUESTIONS Watch
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
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KEY TERMS AND DEFINITIONS
MACROECONOMIC OBJECTIVES
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
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.
SUMMARY
MACROECONOMIC OBJECTIVESANSWERS
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MACROECONOMIC OBJECTIVES STUDY GUIDE
KEY UK MACROECONOMIC OBJECTIVES
The UK government sets realistic and achievable macroeconomic objectives.
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.
SUMMARY
MACROECONOMIC OBJECTIVESANSWERS
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.
© EzyEducation Ltd 2021. All rights reserved.
MACROECONOMIC OBJECTIVES STUDY GUIDE
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.
SUMMARY
MACROECONOMIC OBJECTIVESANSWERS
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
© EzyEducation Ltd 2021. All rights reserved.
MACROECONOMIC OBJECTIVES STUDY GUIDE
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.
SUMMARY
MACROECONOMIC OBJECTIVESANSWERS
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
© EzyEducation Ltd 2021. All rights reserved.
MACROECONOMIC OBJECTIVES STUDY GUIDE
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.
SUMMARY
MACROECONOMIC OBJECTIVESANSWERS
3 MARKS FOR DIAGRAM + 3 MARKS FOR EXPLANATION
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
MACROECONOMIC OBJECTIVES STUDY GUIDE
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.
SUMMARY
MACROECONOMIC OBJECTIVESANSWERS
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
1 MARK AWARDED FOR EACH CORRECT POINT MADE
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
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.
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.
Watch the course video(s) and fill in the definitions of the key terms.
© EzyEducation Ltd 2021. All rights reserved.
ECONOMIC GROWTH
KEY TERMS AND DEFINITIONS
SUMMARY Watch
GDP
ECONOMIC ACTIVITY
ECONOMIC GROWTH
RECESSION
BOOM
GDP PER CAPITA
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.
Fill in the blanks to complete the explanation below.
© EzyEducation Ltd 2021. All rights reserved.
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.
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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
© EzyEducation Ltd 2021. All rights reserved.
WatchECONOMIC GROWTHQUESTIONS Watch
Explain, using a diagram, how an economy can grow sustainably.3 MARK /6
Price
Leve
l
Real Output
© EzyEducation Ltd 2021. All rights reserved.
WatchECONOMIC GROWTHQUESTIONS Watch
Explain how a traditional economic policy (fiscal, monetary or supply side policy) can cause economic growth to rise.4 MARK /6
WatchECONOMIC GROWTHQUESTIONS Watch
Evaluate the costs and benefits of higher economic growth for an economy. 5 MARK /10
© EzyEducation Ltd 2021. All rights reserved.
© EzyEducation Ltd 2021. All rights reserved.
KEY TERMS AND DEFINITIONS
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
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.
SUMMARY
ECONOMIC GROWTHANSWERS
© EzyEducation Ltd 2021. All rights reserved.
ECONOMIC GROWTH STUDY GUIDE
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.
SUMMARY
ECONOMIC GROWTHANSWERS
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
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2013
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2013
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2017
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2018
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ECONOMIC GROWTH STUDY GUIDE
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.
SUMMARY
PURCHASING POWER PARITYANSWERS
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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
ECONOMIC GROWTH STUDY GUIDE
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.
SUMMARY
ECONOMIC GROWTHANSWERS
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3 MARKS FOR DIAGRAM + 3 MARKS FOR EXPLANATION
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
ECONOMIC GROWTH STUDY GUIDE
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.
SUMMARY
ECONOMIC GROWTHANSWERS
© EzyEducation Ltd 2021. All rights reserved.
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
Please see the lecture video for detailed explanations to questions 4-5
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.
ECONOMIC GROWTH STUDY GUIDE
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.
SUMMARY
ECONOMIC GROWTHANSWERS
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.
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.
Watch the course video(s) and fill in the definitions of the key terms.
© EzyEducation Ltd 2021. All rights reserved.
INFLATION AND DEFLATION
KEY TERMS AND DEFINITIONS
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
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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
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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
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WatchINFLATION AND DEFLATIONQUESTIONS Watch
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
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WatchINFLATION AND DEFLATIONQUESTIONS Watch
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
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KEY TERMS AND DEFINITIONS
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
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.
SUMMARY
INFLATION AND DEFLATIONANSWERS
© EzyEducation Ltd 2021. All rights reserved.
INFLATION AND DEFLATION STUDY GUIDE
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.
SUMMARY
INFLATION AND DEFLATIONANSWERS
TYPES OF INFLATION IN THE ECONOMY
Identify the type of inflation as indicated by the diagram below.
DEMAND-PULL INFLATION
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
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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
Please see the lecture video for detailed explanations to question 2
INFLATION AND DEFLATION STUDY GUIDE
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.
SUMMARY
INFLATION AND DEFLATIONANSWERS
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INFLATION AND DEFLATION STUDY GUIDE
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
Please see the lecture video for detailed explanations to questions 3-8
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
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.
SUMMARY
INFLATION AND DEFLATIONANSWERS
© EzyEducation Ltd 2021. All rights reserved.
INFLATION AND DEFLATION STUDY GUIDE
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.
SUMMARY
INFLATION AND DEFLATIONANSWERS
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
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.
INFLATION AND DEFLATION STUDY GUIDE
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.
SUMMARY
INFLATION AND DEFLATIONANSWERS
Compete the table below to identify the effects of each type of inflation.9
DEMAND-PULL INFLATION
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
Please see the lecture video for detailed explanations to question 9
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.
© EzyEducation Ltd 2021. All rights reserved.
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.
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THEORIES OF INFLATIONQUESTIONS Watch
Explain, using a diagram, the findings of the Quantity Theory of Money.1 MARK /6
Price
Leve
l
Real Output
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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
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WatchTHEORIES OF INFLATIONQUESTIONS Watch
Explain, using a diagram, how lower inflation in the UK affects trade.4 MARK /6
Price
Leve
l
Real Output
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WatchTHEORIES OF INFLATIONQUESTIONS Watch
Explain, using a diagram, how higher inflation in the UK affects trade.5 MARK /6
Price
Leve
l
Real Output
© EzyEducation Ltd 2021. All rights reserved.
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.
© EzyEducation Ltd 2021. All rights reserved.
THEORIES OF INFLATION STUDY GUIDE
Please see the lecture video for detailed explanations to question 1
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
3 MARKS FOR DIAGRAM + 3 MARKS FOR EXPLANATION
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
© EzyEducation Ltd 2021. All rights reserved.
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
Please see the lecture video for detailed explanations to questions 2-3
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
© EzyEducation Ltd 2021. All rights reserved.
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
3 MARKS FOR DIAGRAM + 3 MARKS FOR EXPLANATION
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
You do not need to include the arrows in your diagram to receive the marks
Please see the lecture video for detailed explanations to questions 4-5
Price
Leve
l
Real Output
B
A
LRAS SRAS
AD1
AD2
Y1
Y2
P1
P2
THEORIES OF INFLATION STUDY GUIDE
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.
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
3 MARKS FOR DIAGRAM + 3 MARKS FOR EXPLANATION
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
You do not need to include the arrows in your diagram to receive the marks
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.
Watch the course video(s) and fill in the definitions of the key terms.
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EMPLOYMENT AND UNEMPLOYMENT
KEY TERMS AND DEFINITIONS
SUMMARY
LABOUR FORCE
EMPLOYMENT
UNEMPLOYMENT
ECONOMICALLY ACTIVE
UNEMPLOYMENT RATE
CLAIMANT COUNT
CYCLICAL UNEMPLOYMENT
STRUCTURAL UNEMPLOYMENT
FRICTIONAL UNEMPLOYMENT
SEASONAL UNEMPLOYMENT
Watch
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.
© EzyEducation Ltd 2021. All rights reserved.
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
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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
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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
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WatchEMPLOYMENT AND UNEMPLOYMENTQUESTIONS Watch
Explain, using an AD-AS diagram, the concept of cyclical unemployment.5 MARK /6
Price
Leve
l
Real Output
© EzyEducation Ltd 2021. All rights reserved.
WatchEMPLOYMENT AND UNEMPLOYMENTQUESTIONS Watch
Explain, using an AD-AS diagram, the concept of structural unemployment.6 MARK /6
Price
Leve
l
Real Output
© EzyEducation Ltd 2021. All rights reserved.
WatchEMPLOYMENT AND UNEMPLOYMENTQUESTIONS Watch
Explain, using an AD-AS diagram, the concept of frictional/seasonal unemployment.7 MARK /6
Price
Leve
l
Real Output
© EzyEducation Ltd 2021. All rights reserved.
KEY TERMS AND DEFINITIONS
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.
CYCLICAL UNEMPLOYMENT
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.
STRUCTURAL UNEMPLOYMENT
When production in a particular industry/region ceases due to long term changes in demand or production techniques.
FRICTIONAL UNEMPLOYMENT
Short periods of unemployment that occur because of a short gap between jobs.
SEASONAL UNEMPLOYMENT
When workers become unemployed due to a seasonal dip or cessation in production.
EMPLOYMENT AND UNEMPLOYMENT STUDY GUIDE
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.
SUMMARY
EMPLOYMENT AND UNEMPLOYMENTANSWERS
© EzyEducation Ltd 2021. All rights reserved.
UNDERSTANDING UNEMPLOYMENT
EMPLOYMENT AND UNEMPLOYMENT STUDY GUIDE
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.
SUMMARY
EMPLOYMENT AND UNEMPLOYMENTANSWERS
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
© EzyEducation Ltd 2021. All rights reserved.
Identify three reasons behind a fall in the size of the labour force.1
1 MARK AWARDED FOR EACH CORRECT POINT MADE
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
1 MARK AWARDED FOR EACH CORRECT POINT MADE
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
Please see the lecture video for detailed explanations to questions 1-2
EMPLOYMENT AND UNEMPLOYMENT STUDY GUIDE
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.
SUMMARY
EMPLOYMENT AND UNEMPLOYMENTANSWERS
© EzyEducation Ltd 2021. All rights reserved.
EMPLOYMENT AND UNEMPLOYMENT STUDY GUIDE
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.
SUMMARY
EMPLOYMENT AND UNEMPLOYMENTANSWERS
Please see the lecture video for detailed explanations to questions 3-4
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
1 MARK AWARDED FOR EACH CORRECT POINT MADE
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
© EzyEducation Ltd 2021. All rights reserved.
EMPLOYMENT AND UNEMPLOYMENT STUDY GUIDE
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.
SUMMARY
EMPLOYMENT AND UNEMPLOYMENTANSWERS
3 MARKS FOR DIAGRAM + 3 MARKS FOR EXPLANATION
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
Please see the lecture video for detailed explanations to questions 5-7
EMPLOYMENT AND UNEMPLOYMENT STUDY GUIDE
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.
SUMMARY
EMPLOYMENT AND UNEMPLOYMENTANSWERS
3 MARKS FOR DIAGRAM + 3 MARKS FOR EXPLANATION
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
© EzyEducation Ltd 2021. All rights reserved.
Price
Leve
l
Real OutputY1
Y2
P2
P1
A
B
AD
LRAS1
LRAS2
SRAS2
SRAS1
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.
EMPLOYMENT AND UNEMPLOYMENT STUDY GUIDE
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.
SUMMARY
EMPLOYMENT AND UNEMPLOYMENTANSWERS
3 MARKS FOR DIAGRAM + 3 MARKS FOR EXPLANATION
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.
Watch the course video(s) and fill in the definitions of the key terms.
© EzyEducation Ltd 2021. All rights reserved.
CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENT
KEY TERMS AND DEFINITIONS
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
© EzyEducation Ltd 2021. All rights reserved.
TYPES OF UNEMPLOYMENT
CYCLICAL UNEMPLOYMENT
Unemployment caused by a downturn in the economy
SEASONAL UNEMPLOYMENT
Unemployment caused by peak business periods ending
FRICTIONAL UNEMPLOYMENT
Unemployment caused by workers moving between jobs
STRUCTURAL UNEMPLOYMENT
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
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 UNEMPLOYMENTSUMMARY
© EzyEducation Ltd 2021. All rights reserved.
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
© EzyEducation Ltd 2021. All rights reserved.
Explain, using a diagram, the concept of real wage unemployment.2 MARK /6
Real
Wage
Rat
e
Employment
CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENTQUESTIONS
© EzyEducation Ltd 2021. All rights reserved.
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
CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENTQUESTIONS
© EzyEducation Ltd 2021. All rights reserved.
WatchWatch
Identify three policy solutions to structural unemployment.6 MARK /3
Identify three consequences of high unemployment.7 MARK /3
CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENTQUESTIONS
© EzyEducation Ltd 2021. All rights reserved.
KEY TERMS AND DEFINITIONS
NATURAL RATE OF UNEMPLOYMENT
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.
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.
SUMMARY
CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENTANSWERS
CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENT STUDY GUIDE
© EzyEducation Ltd 2021. All rights reserved.
TYPES OF UNEMPLOYMENT
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.
SUMMARY
CYCLICAL UNEMPLOYMENT
Unemployment caused by a downturn in the economy
SEASONAL UNEMPLOYMENT
Unemployment caused by peak business periods ending
FRICTIONAL UNEMPLOYMENT
Unemployment caused by workers moving between jobs
STRUCTURAL UNEMPLOYMENT
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
CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENTANSWERS
CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENT STUDY GUIDE
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Please see the lecture video for detailed explanations to questions 1-2
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.
SUMMARY
3 MARKS FOR DIAGRAM + 3 MARKS FOR EXPLANATION
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
CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENTANSWERS
CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENT STUDY GUIDE
© EzyEducation Ltd 2021. All rights reserved.
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.
SUMMARY
3 MARKS FOR DIAGRAM + 3 MARKS FOR EXPLANATION
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
CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENTANSWERS
CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENT STUDY GUIDE
© EzyEducation Ltd 2021. All rights reserved.
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.
SUMMARY
Please see the lecture video for detailed explanations to question 3
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
Please see the lecture video for detailed explanations to questions 4-6
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)
CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENTANSWERS
CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENT STUDY GUIDE
© EzyEducation Ltd 2021. All rights reserved.
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.
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
CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENTANSWERS
CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENT STUDY GUIDE
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.
SUMMARY
Please see the lecture video for detailed explanations to question 7
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.
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
CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENT STUDY GUIDE
CAUSES, EFFECTS & SOLUTIONS OF UNEMPLOYMENTANSWERS
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.
Watch the course video(s) and fill in the definitions of the key terms.
© EzyEducation Ltd 2021. All rights reserved.
BALANCE OF PAYMENTS
KEY TERMS AND DEFINITIONS
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
© EzyEducation Ltd 2021. All rights reserved.
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
© EzyEducation Ltd 2021. All rights reserved.
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
© EzyEducation Ltd 2021. All rights reserved.
WatchBALANCE OF PAYMENTSQUESTIONS Watch
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
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WatchBALANCE OF PAYMENTSQUESTIONS Watch
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
© EzyEducation Ltd 2021. All rights reserved.
WatchBALANCE OF PAYMENTSQUESTIONS Watch
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
© EzyEducation Ltd 2021. All rights reserved.
WatchBALANCE OF PAYMENTSQUESTIONS Watch
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
© EzyEducation Ltd 2021. All rights reserved.
WatchBALANCE OF PAYMENTSQUESTIONS Watch
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
© EzyEducation Ltd 2021. All rights reserved.
WatchBALANCE OF PAYMENTSQUESTIONS Watch
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
© EzyEducation Ltd 2021. All rights reserved.
WatchBALANCE OF PAYMENTSQUESTIONS Watch
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
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KEY TERMS AND DEFINITIONS
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
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.
SUMMARY
BALANCE OF PAYMENTSANSWERS
© EzyEducation Ltd 2021. All rights reserved.
THE BALANCE OF PAYMENTS COMPONENTS
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.
SUMMARY
BALANCE OF PAYMENTSANSWERS
BALANCE OF PAYMENTS STUDY GUIDE
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
© EzyEducation Ltd 2021. All rights reserved.
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.
SUMMARY
BALANCE OF PAYMENTSANSWERS
Explain how exports act as an injection of income into an economy.1
1 MARK AWARDED FOR EACH CORRECT POINT MADE
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
1 MARK AWARDED FOR EACH CORRECT POINT MADE
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
1 MARK AWARDED FOR EACH CORRECT POINT MADE
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
1 MARK AWARDED FOR EACH CORRECT POINT MADE
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
Please see the lecture video for detailed explanations to questions 1-5
BALANCE OF PAYMENTS STUDY GUIDE
© EzyEducation Ltd 2021. All rights reserved.
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.
SUMMARY
BALANCE OF PAYMENTSANSWERS
BALANCE OF PAYMENTS STUDY GUIDE
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
© EzyEducation Ltd 2021. All rights reserved.
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.
SUMMARY
BALANCE OF PAYMENTSANSWERS
BALANCE OF PAYMENTS STUDY GUIDE
Identify three reasons why running a current account deficit is not problematic for a country.6
1 MARK AWARDED FOR EACH CORRECT POINT MADE
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
Please see the lecture video for detailed explanations to questions 6-7
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.
SUMMARY
BALANCE OF PAYMENTSANSWERS
BALANCE OF PAYMENTS STUDY GUIDE
Please see the lecture video for detailed explanations to questions 8-10
3 MARKS FOR DIAGRAM + 3 MARKS FOR EXPLANATION
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
© EzyEducation Ltd 2021. All rights reserved.
Price
Leve
l
Real Output
P2
P1
AD1
LRAS SRAS
A
B
AD2
Y1
Y2
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.
SUMMARY
BALANCE OF PAYMENTSANSWERS
BALANCE OF PAYMENTS STUDY GUIDE
© EzyEducation Ltd 2021. All rights reserved.
3 MARKS FOR DIAGRAM + 3 MARKS FOR EXPLANATION
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
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.
SUMMARY
BALANCE OF PAYMENTSANSWERS
BALANCE OF PAYMENTS STUDY GUIDE
© EzyEducation Ltd 2021. All rights reserved.
3 MARKS FOR DIAGRAM + 3 MARKS FOR EXPLANATION
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
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.
SUMMARY
BALANCE OF PAYMENTSANSWERS
BALANCE OF PAYMENTS STUDY GUIDE
© EzyEducation Ltd 2021. All rights reserved.
Please see the lecture video for detailed explanations to question 11
Please see the lecture video for detailed explanations to questions 12-13
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
1 MARK AWARDED FOR EACH CORRECT POINT MADE
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
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.
SUMMARY
BALANCE OF PAYMENTSANSWERS
BALANCE OF PAYMENTS STUDY GUIDE
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
1 MARK AWARDED FOR EACH CORRECT POINT MADE
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
Unit 7, Dartmouth Buildings, Fort Fareham Industrial Estate, New Gate Lane, Fareham PO14 1AHT 01489 861 310 or 07729 776 281 E [email protected]
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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.
Watch the course video(s) and fill in the definitions of the key terms.
© EzyEducation Ltd 2021. All rights reserved.
THE PHILLIPS CURVE
KEY TERMS AND DEFINITIONS
SUMMARY
PHILLIPS CURVE
RATE OF INFLATION
UNEMPLOYMENT RATE
NATURAL RATE OF UNEMPLOYMENT
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
© EzyEducation Ltd 2021. All rights reserved.
THE PHILLIPS CURVEQUESTIONS Watch
Explain what relationship the Philips Curve depicts between inflation and unemployment.1 MARK /6
© EzyEducation Ltd 2021. All rights reserved.
WatchTHE PHILLIPS CURVEQUESTIONS Watch
Explain the results of the Phillips Curve using an AD-AS diagram.2 MARK /6
Price
Leve
l
Real Output
© EzyEducation Ltd 2021. All rights reserved.
WatchTHE PHILLIPS CURVEQUESTIONS Watch
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
© EzyEducation Ltd 2021. All rights reserved.
WatchTHE PHILLIPS CURVEQUESTIONS Watch
Identify three limitations of the Phillips Curve.4 MARK /3
© EzyEducation Ltd 2021. All rights reserved.
KEY TERMS AND DEFINITIONS
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.
NATURAL RATE OF UNEMPLOYMENT
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
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.
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 (%)
© EzyEducation Ltd 2021. All rights reserved.
Explain what relationship the Phillips Curve depicts between inflation and unemployment.1
1 MARK AWARDED FOR EACH CORRECT POINT MADE
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
Please see the lecture video for detailed explanations to questions 1-2
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.
SUMMARY
THE PHILLIPS CURVEANSWERS
THE PHILLIPS CURVE STUDY GUIDE
© EzyEducation Ltd 2021. All rights reserved.
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.
SUMMARY
THE PHILLIPS CURVEANSWERS
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
3 MARKS FOR DIAGRAM + 3 MARKS FOR EXPLANATION
THE PHILLIPS CURVE STUDY GUIDE
© EzyEducation Ltd 2021. All rights reserved.
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.
SUMMARY
THE PHILLIPS CURVEANSWERS
THE PHILLIPS CURVE STUDY GUIDE
Please see the lecture video for detailed explanations to questions 3-4
3 MARKS FOR DIAGRAM + 3 MARKS FOR EXPLANATION
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
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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.
SUMMARY
THE PHILLIPS CURVEANSWERS
THE PHILLIPS CURVE STUDY GUIDE
Identify three limitations of the Phillips Curve.4
1 MARK AWARDED FOR EACH CORRECT POINT MADE
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.
Watch the course video(s) and fill in the definitions of the key terms.
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PRODUCTIVITY
KEY TERMS AND DEFINITIONS
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
© EzyEducation Ltd 2021. All rights reserved.
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
© EzyEducation Ltd 2021. All rights reserved.
WatchPRODUCTIVITYQUESTIONS Watch
Explain, using a diagram, the impact of a productivity increase on the economy.2 MARK /6
Price
Leve
l
Real Output
© EzyEducation Ltd 2021. All rights reserved.
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
© EzyEducation Ltd 2021. All rights reserved.
KEY TERMS AND DEFINITIONS
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
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.
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
© EzyEducation Ltd 2021. All rights reserved.
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.
SUMMARY
PRODUCTIVITYANSWERS
PRODUCTIVITY STUDY GUIDE
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.
Please see the lecture video for detailed explanations to questions 1-2
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)
© EzyEducation Ltd 2021. All rights reserved.
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.
SUMMARY
PRODUCTIVITYANSWERS
PRODUCTIVITY STUDY GUIDE
3 MARKS FOR DIAGRAM + 3 MARKS FOR EXPLANATION
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
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.
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.
SUMMARY
THE PHILLIPS CURVEANSWERS
Explain how an increase in an economy’s productivity can boost its competitiveness. 4
1 MARK AWARDED FOR EACH CORRECT POINT MADE
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
1 MARK AWARDED FOR EACH CORRECT POINT MADE
Output per worker
Output per hour worked
Output per person
PRODUCTIVITY STUDY GUIDE
Please see the lecture video for detailed explanations to questions 3-4