The Macroeconomic Objectives (Edexcel IGCSE Economics): Flashcards

Sustainable economic growth is less likely to cause excessive demand-pull inflation.

A stable current account balance of payments primarily considers the value of trade in a nation's exports and imports.

The economic (business) cycle describes the upturns and downturns in the level of a country's economic activity (GDP) over time.

A recession occurs when an economy experiences two consecutive quarters (6 months) or more of negative GDP growth.

A slump is an extended period of negative GDP growth, usually with high unemployment and business failure.

A boom is a period when an economy experiences an extended period of increasing rates of GDP growth, with high incomes, high inflation and low unemployment.

During a recession, business and consumer confidence tend to be low, and business profits fall.

During the growth stage, rising production levels lead to a rise in employment levels, so unemployment falls.

Economic growth raises employment and incomes, and higher tax revenue can fund health and education and redistribute income, improving standards of living.

Growth in productive potential is shown by an outward shift of the entire PPC.

True.

As incomes and consumer demand fall during a recession, deflation may set in.

True.

Rising growth increases negative externalities of production and consumption, depleting resources more rapidly.

During the growth stage, rising disposable incomes lead to increased demand for products.

An outward shift of the PPC is caused by an increase in the quality or quantity of the available factors of production.

Inflation is the sustained increase in the average price level of goods and services in an economy.

Deflation occurs when there is a fall in the average price level of goods and services, meaning the percentage change in prices falls below zero.

Disinflation occurs when the average price level is still rising, but at a lower rate than before.

The consumer price index (CPI) is a measure of inflation based on the changing price of a 'household basket' of over 700 goods and services.

Each year some goods and services exit the basket and new ones are added to reflect changing spending habits.

A low and stable rate of inflation lets firms confidently plan for future investment and offers price stability to consumers.

Goods are weighted according to the proportion of household spending on them, so items bought more often, like food, carry a greater weight.

If the CPI rises from 100 to 107, the inflation rate is 7%.

False.

Prices are still rising, just more slowly; a falling inflation rate is called disinflation.

True.

The inflation rate is calculated using an index with 100 as the base year.

Each month, prices in the CPI basket are collected from hundreds of locations across the country.

The CPI basket is compiled using a household expenditure survey to determine its contents.

Demand-pull inflation is caused by excess demand in the economy, which pushes prices up as suppliers raise them to balance the demand-supply gap.

Cost-push inflation is caused by increases in the costs of production, which firms pass on to consumers as higher prices.

Menu costs are the costs firms face from having to update their menus or price cards when inflation forces price changes.

Shoe leather costs are the hidden costs or waste of resources during high inflation, such as people spending more time searching for a better deal.

If prices rise faster than incomes, real purchasing power falls, so workers can afford less with the same income.

Cost-push inflation is caused by rising costs of production, such as increases in raw materials, labour or interest rates.

A rise in oil prices increases the cost of production for goods relying on oil, causing cost-push inflation.

Inflation erodes the international competitiveness of exports, as they become relatively more expensive, which may slow economic growth.

A lower base rate increases borrowing, raising consumption and investment, which can lead to demand-pull inflation.

False.

Excess demand causes demand-pull inflation; cost-push inflation is caused by rising costs of production.

True.

Generally, when inflation increases unemployment decreases, and vice versa.

The aim is to have a low and stable rate of inflation of approximately 2%.

Lower taxes raise disposable income, which can create excess demand and demand-pull inflation.

Unemployment occurs when a person is not working but is actively seeking work.

Employment refers to the economic use of labour as a factor of production.

The labour force consists of all workers actively working plus the unemployed who are seeking work.

Structural unemployment occurs when there is a mismatch between jobs and skills in the economy.

Frictional unemployment occurs when workers are between jobs, and is usually short-term.

Unemployment is measured in many countries using the International Labour Organisation (ILO) Survey.

Cyclical unemployment is caused by a fall in total (aggregate) demand in the economy.

The unemployment rate = (number actively seeking ÷ total labour force) × 100.

With 600,000 unemployed, the unemployment rate is 25% (600,000 ÷ 2,400,000 × 100).

True.

Seasonal unemployment happens as certain seasons end, for example fruit pickers or ski instructors.

False.

Pensioners and school children are in the non-labour force, as they are economically inactive.

The ILO survey is sent to a random sample of households every quarter.

Voluntary unemployment occurs when workers choose to be unemployed, for example while waiting to find a job with higher wages.

Consumer and business confidence is the level of optimism that consumers and businesses have regarding their expected financial situation.

High unemployment reduces consumer incomes, so demand for goods and services falls and firms reduce output.

Governments receive less tax revenue and have higher expenditures on welfare payments.

Poverty rises as incomes fall, so some workers struggle to afford basic necessities such as food, shelter and clothing.

Greece's unemployment reached 27%, with youth unemployment peaking at 60%.

Consumers save more because they have less job security.

Businesses expect to receive less sales revenue, so they delay their investment plans.

As the economy contracts, there is a more inefficient use of available resources.

True.

Inequalities rise as some individuals struggle to access healthcare and education, and crime rates may increase.

True.

Unemployment can cause wider societal problems, such as an increase in crime rates.

During a recession, high poverty rates can also lead to rising levels of homelessness.

As inequality rises, some individuals struggle to access healthcare and education.

The Balance of Payments is a record of all the financial transactions that occur between a country and the rest of the world.

A current account deficit occurs when the value of outflows is greater than the value of inflows, usually when imports exceed exports.

A current account surplus occurs when the value of inflows is greater than the value of outflows, usually when exports exceed imports.

The current account mainly records the financial transactions related to exports and imports of goods and services.

Visible exports and imports are trade in goods.

Imports represent a leakage of money from the economy.

Export-led economic growth would help a deficit country's current account become positive.

If a country develops a reputation for poor quality, its exports fall and imports rise, causing a deficit.

Germany's €209.4 billion surplus reflected strong exports of cars, machinery and engineering.

True.

A weaker currency makes exports cheaper and imports dearer, so exports rise and imports fall, improving the current account.

False.

Rising income and wealth increase the value of imports, which pushes the balance towards a deficit.

Services are also referred to as invisible exports and imports.

In 2023, China had a trade surplus of $823.2 billion, driven by competitively priced electronics.

The exchange rate is the relative price of one currency expressed in terms of another currency.

A currency appreciation occurs when the value of a currency rises, making exports relatively more expensive and imports less expensive.

A currency depreciation occurs when the value of a currency falls, making exports relatively more attractive and imports less attractive.

An appreciation often leads to a worsening of the current account balance.

A depreciation makes exports relatively cheaper, so exports rise and the current account improves.

With falling demand for locally produced goods, fewer workers are required, so unemployment rises.

Exports are a key component of real GDP, so a fall in exports can significantly reduce economic growth.

The J-curve shows there is a time lag before a currency depreciation improves the current account balance.

True.

An appreciation raises the currency's value, making imports less expensive and exports dearer.

False.

The J-curve shows the current account initially worsens before it improves.

A currency depreciation makes a nation's imports more expensive.

A current account deficit driven by rising imports is often financed through higher levels of borrowing.

In the short run, the combined price elasticity of demand for exports and imports is inelastic (less than one), so the trade balance worsens.

An external cost is a cost of production that falls on third parties or the environment, rather than on the business itself.

Visual pollution is business activity that makes a landscape look like an eyesore, such as litter, mine dumps or chimney smoke.

Noise pollution is excessive noise that causes stress or hearing loss, from sources such as loud machinery, factories, traffic, bars or restaurants.

Water pollution is the contamination of rivers, lakes and oceans with harmful substances such as pesticides, fertilisers or chemicals.

Burning fossil fuels releases greenhouse gases into the atmosphere, increasing air pollution.

Heathrow airport is used as an example, where noise from arriving and departing flights impacts local residents.

Pesticide use in banana farming in Ecuador has been linked to water pollution, posing risks to river quality.

Air pollution in China has been linked to respiratory and cardiovascular illnesses.

True.

Governments are doing more and more to set macroeconomic targets based around environmental protection.

True.

Plastic bags littering streets, rivers and natural environments are an example of visual pollution.

Business activity can create external costs of production when providing a good or service.

Types of pollution that create external costs to the environment include visual, air, noise and water pollution.

A plastic tax is a charge firms must pay whenever they import plastic packaging into the country, aimed at reducing plastic use.

A pollution permit is a licence allowing a firm to emit a set amount of pollution, which can be bought or sold to create an incentive to cut emissions.

A public good, such as a park, is a free open space that people can use without paying, so it is not a source of income for the government.

Over 5 trillion plastic bags are produced around the world each year.

Over 700,000 people are impacted by the noise from flights at Heathrow airport.

Coal powered plants emitted 15.22 billion metric tonnes of carbon dioxide in 2022.

Governments use regulation and fines on surface and ground water quality to reduce contamination from fertilisers and pesticides.

The Canadian government provides 48 national parks to conserve land, protect ecosystems and provide recreational activities.

Heathrow uses a limit on flights between 11:30pm and 6:00am, alongside variable landing charges linked to noise and noise insulation around the perimeter.

False.

Governments use a combination of policies, such as regulation, fines, taxation and subsidies, to protect the environment.

True.

The land could be used for alternative purposes such as housing, schools or hospitals, so providing parks has an opportunity cost.

Plastic can take 500-1000 years to break down.

Higher variable landing charges give airlines an incentive to invest in noise-reducing planes.

Equality describes situations where economic outcomes are similar for different people or different social groups.

Absolute poverty is a situation where individuals cannot afford the basic necessities for a healthy and safe existence, such as shelter, water, nutrition, clothing and healthcare.

Relative poverty is a situation where household income is a certain percentage less than the median household income in the economy.

In 2022, the World Bank defined absolute poverty as living on less than $2.15 a day, the international poverty line.

Households living with less than 50% of the median household income are considered to be in relative poverty.

Absolute poverty is more prevalent in developing countries than in developed ones.

Under capitalism, inequality is inevitable because workers with higher skills receive higher wages while low-skilled workers receive little to no wage.

Reasons include meeting basic needs, improving standards of living and addressing ethical considerations.

True.

Relative poverty is the main form of poverty in developed countries, while absolute poverty is more common in developing ones.

True.

Under a progressive tax system, lower income earners pay a lower tax rate than higher income earners.

According to the United Nations, an estimated 600 million people will experience hunger and malnutrition by 2030.

Inequality in the distribution of income is one cause of absolute and relative poverty.

A progressive tax is one where, as income rises, a larger percentage of income is paid in tax, redistributing income from higher to lower earners.

A regressive tax is one where, as income rises, a smaller percentage of income is paid in tax; all indirect taxes are regressive.

Benefit payments are transfers usually given to the poorest and most vulnerable, such as unemployment, disability, pension and child benefits.

The three main methods are progressive taxation, benefit payments and investment in education and healthcare.

No. Most countries use a mix of progressive (direct) and regressive (indirect) taxes.

Investment in education and healthcare is a supply-side policy that increases the potential output of the country.

Denmark is used as an example, transferring income to low income households through unemployment benefits and housing assistance.

Healthcare investment leads to a healthier, more productive workforce, raising output and incomes.

True.

Progressive taxes on capital gains and dividends can deter investment, which may slow economic growth.

False.

The aim is a more fair or equitable distribution of income, not a completely equal one.

True.

High benefit payments can act as a disincentive to work, with some households becoming dependent on them.

Investment in education and healthcare shifts the production possibility frontier outwards.

A blend of policies is the most effective way to tackle poverty and inequality.