PAPER 2 ECONOMICS EVALUATE

Created by

Anisa Mandava

Cards (65)

Factors affecting levels of economic growth
1. Investment
2. Changes in technology
3. Education and Training
4. Labour productivity
5. Size of the workforce
6. Natural resources
7. Government investment and infrastructure
Benefits of economic growth
1. Rise in living standards
2. A reduction in poverty
3. Rise in the welfare of the population (healthcare)
4. Fall in unemployment
Costs of economic growth
1. Environmental costs
2. Congestion
3. Loss of renewable resources
4. Lower quality of life
5. Inequalities of income and wealth
6. Inflation
Types of unemployment
Frictional, structural, cyclical, seasonal
Benefits of unemployment
1. Easier to recruit
2. Dynamic economy
3. International competitiveness
4. Lower inflation
5. Necessary frictional unemployment
Costs of unemployment for individuals
1. Lower standard of living
2. Lower income
3. De-skilling
4. Tax increases
Costs of unemployment for the government
1. Budget deficit
2. Cycle of increasing unemployment
3. Lower output than potential
Costs of unemployment for regions
1. Inequality of issues
2. Regional standard of living
Causes of uneven distribution of income
1. Wage differences
2. Benefits reliance
3. Age
4. Gender
5. Assets are distributed unevenly
Causes of uneven distribution of wealth
1. Inheritance
2. Level of a savings
Costs of uneven distribution of income
1. Poverty
2. Housing
3. Health
4. Education
5. Social problems
6. Lower economic growth
Benefits of uneven distribution of income
1. Incentives
2. Trickle down effect
Causes of demand pull inflation
1. High levels of economic growth
2. Country close to its productive capacity
3. Total demand rises faster than the total supply
4. Rising government spending
5. Rise in investment from firms
Causes of cost push inflation
1. Rise in the costs of production
2. Fall in the exchange rate
3. Fall in productivity
4. Increase in trade union power
Consequences of inflation for consumers
1. Loss of consumer confidence
2. Shoe-leather costs
3. Fall in real income
4. Uneven income distribution
5. Erodes consumer's debt
Consequences of inflation for producers
1. Increased production costs
2. Menu costs
3. Labour market disputes
4. Lower exports
5. Producers as creditors lose money
6. Erosion of debt for debtors
7. Loss of business confidence
Consequences of inflation for the government
1. Government as an employer
2. Government as a benefits provider
3. More tax revenue
4. Government as a debtor
Purpose of government spending
1) Social Protection
2) Education
3) Healthcare
4) Defence, Law and Order
5) Debt Interest
Definition of fiscal policy
A policy that aims to control the economy through the use of government spending and taxation
Types of direct taxes
1. Income tax
2. National insurance contributions [NIC]
3. Capital gains tax
4. Inheritance tax
5. Corporation tax
Types of indirect taxes
1. VAT
2. Excise duties
3. Customs duties
Effects of a rise in income tax and NIC
1) Workers disposable income falls so they may decide not to work leading to a fall in supply in the labour market
2) Lower income leads to a fall in demand for goods and services
3) Lower aggregate demand leads to lower output and economic growth and thus more unemployment.
4) Lower demand leads to lower inflation
Effects of a fall in corporation tax
1) Firms keep more profits so invest more leading to better quality G/S
2) Firms may demand labour so the labour market expands
3) Investment leads to economic growth and more employment
4) Inventions make exports more competitive leading to improved balance of payments
Effect of a rise in VAT on televisions
1) Fall in demand for TVs
2) Consumers switch to buying goods with lower VAT depending on the elasticity of demand for TVs
3) Employment in the industry will fall. Could be offset by whatever is bought instead of TVs
Effect of a rise in excise duty on a good with negative externalities
1) Fall in demand for product depending on PED
2) Could lead to switching (petrol to electric car)
3) Could improve the environment
4) Could reduce imports eg. fall in demand for petrol
Effect of increased government spending
1) Economic growth as greater aggregate demand
2) Increased employment as government is a bigger employer
3) Increased inflation
4) Worsening in the balance of payments if there are more imports
The benefits of fiscal policy
1. Reduced unemployment through reduced taxes/ increased spending
2. Economic growth increase
3. Acts much faster than monetary policy
The costs of fiscal policy
1. Consumers may save rather than spend their extra income so the economy does not grow as much as expected
2. Firms and consumers might spend the extra money on imports making the current account on the balance of payments worse
3. Inflation may rise if supply cannot keep up with demand in either the factor or product markets
Consequences of redistribution of income (fiscal policy)
1. Reduces inequalities of income
2. More services available to the poor
3. People may not seek work
4. Reduces incentives
5. People leave the country
6. Lack of investment
7. Lower savings
8. Tax evasion
Effects of lower interest rates (monetary policy) on growth
1) Spending and borrowing by consumers increases because borrowing is cheaper so disposable income rise. Spending incurs a lower opportunity cost. Rising consumption leads to more demand for G/S
2) Borrowing for investment by firms increases
3) UK exchange rate falls as lower interest rates leads to a fall in demand for pounds
4) Fall in exchange rate means imports are dearer and exports cheaper so there is a better balance of payments
Effects of lower interest rates (monetary policy) on employment
1) More demand leads to more people being employed to provide G/S
2) More spending on capital goods by firms so suppliers employ more people
3)
Effect of lower interest rates (monetary policy) on price stability
1) Borrowing and spending increases so inflation rises
2) More firm spending leads to demand pull inflation
Effect of lower interest rates (monetary policy) on consumer spending
1) Fall in the opportunity cost of spending
2) An increase in spending
3) Retired people who rely on income from savings may now spend less as their income falls
4) Those with mortgages pay less interest so have more money to spend elsewhere
Effect of lower interest rates (monetary policy) on borrowing
1) Consumers borrow more to buy high price or big ticket items
2) If consumers lack confidence in the economy a cut in interest rate may not lead to more borrowing
3) More people can afford to buy larger or more houses
Benefits of imports and exports for consumers
1. Producers need to compete against a wider range of producers internationally so may lower prices for consumers
2. Goods and services' quality would improve through greater levels of R&D
3. Greater choice
Benefits of imports and exports for producers
1. More customers
2. FOP can be bought globally at lower average costs
3. Greater efficiency due to greater competition
Why current account deficit is very important
1. If the deficit is caused by problems in the economy it can be a real problem
2. If it is something that takes a long time to change like low productivity the deficit may be more permanent
3. If it is very large portion of GDP, it has larger consequences
Why a current account deficit is not necessarily harmful
1. If it is temporary
2. If it reduces inflation within the domestic economy
3. Over time it leads to a fall in the exchange rate which can increase the competitiveness of UK exports in the long run
4. If it is a small percentage of the GDP
Why a current account surplus is very important
1. It reflects rising total demand for domestic goods
2. Decreases debt of a country
Why a current account surplus is harmful
1. It causes inflation
2. It could hide the artificial causes of surpluses like protectionist policies te leading to less competitive exports
3. Could lead to a rise in exchange rate