2.1 Flashcards
GDP
The value of goods and services produced in the economy over a period of time
Real GDP
The value of goods and services produced in the economy over a period of time taking into account inflation
Nominal value
Expressed in monetary terms
Doesn’t take into account inflation
Real value
Takes into account inflation
Total national income
The value of all goods and services produced in a country
Per capita income
total income divided by the number of people in the country
Volume
The quantity of goods/services produced in a country
Value
The monetary worth of the goods/services produced in a country
Gross National Product (GNP)
The value of all goods and services produced by domestic business both at home and abroad - includes overseas assets
Gross National Income (GNI)
A countries total level of income
Purchasing Power Partity
Looks at the relative value of different currencies
Inflation
The rate of change in the average price level over time
Or
The sustained increase in the cost of living / fall in purchasing power
How economic growth is measured in the short-run
The actual annual percentage change in RNO
How economic growth is measured in the long-run
An increase in the potential productive capacity of the economy.
The limitations of using GDP to compare living standards
- Accuracy of statistics e.g. constantly changing population.
- Shadow economy not measured
- Transactions without a monetary value
- Negative externalities are not taken into account
- Economic growth can increase inequality.
Happiness economics
Looks at how content individuals are with their life. Measuring peoples happiness alongside economic growth
Two measurements of inflation
The consumer price index (CPI)
The retail price index (RPI)
How the UK government measure inflation using CPI & RPI
Both measures are based upon a basket of goods. The price change is measured and used to calculate inflation. Basket of goods is constantly updated due to dynamic trends.
Limitations of measuring inflation Using CPI
- Few people fit the average basket of goods and services.
- CPI excludes mortgage payments and interest.
- Does not recognise improvements in products causing price rises.
The difference between CPI and RPI
CPI excludes mortgage repayments and interest.
Demand pull inflation
Excess demand causes market forces to push prices up.
Causes of demand pull inflation
- Reduced taxation
- Lower interest rates
- Rise in consumer spending
- Improved availability of credit
- Weak exchange rate
- Fast growth of other countries
- Rise in consumer confidence
- Certainty
Cost-push inflation
When firms increase prices due to higher costs.
Firms may be able to absorb costs but some will pass it on to the consumer
Causes of cost-push inflation
- Wage increase
- High raw material costs
- Higher taxes
- Higher import prices / stronger currency
- Natural disaster affecting supply
The money supply
A measure of the amount or stock of money in the economy.
Narrow money (M0)
Notes and coins in circulation and some other liquid assets.
Broad money (M4)
A wider definition of narrow money. Also includes bank account deposits and other liquid assets.
How the government increases money supply
- Print more notes through the Bank of England.
- Quantitative easing to create more money electronically
- Reduce deposit holdings of banks so they lend more money.
- BofE buy bonds off firms
Quantitative Easing
Increase in the supply of money by central banks in order to purchase firms bonds and inject money into the circular flow.
Deflation
A decrease in the general price level.
Means price is increasing at a slower rate
Disinflation
When the inflation rate is positive but falling.
Prices rise at a slower rate.
Cause of deflation
Occurs during periods of very low or stagnant growth. Demand is usually low.
Problems of disinflation
Consumers tend to delay purchases to see if prices drop more. Less demand / confidence in investments.
How a price change in commodities affects inflation
Commodities are essential for production, and demand is price inelastic. This means the increase in price will feed through to domestic inflation
How changes in other economies can affect domestic inflation
Growing demand for global goods leads to demand pull inflation.
The effects of inflation
- If wages remain constant inflation erodes the value of money and workers are worse off and can buy less.
- High inflation leads to consumer demand increasing as they want to pay before prices increase.
- Firms pass on costs to consumers
- Interest rates used to control the price level.
- Workers try negotiate higher wages
Unemployment
The number of people looking for work but cannot find a job at that point in time.
What is the level of unemployment?
The number of people who are unemployed.
What is the rate of unemployment?
The number of people unemployed as a percentage
unemployed / labour force X 100
Two measures of unemployment
- Claimant Count: The number of people claiming Job Seekers Allowance.
- Labour force survey: Quarterly survey of around 60,000 households.
Limitations of the Claimant Count
- Not everyone eligible signs up
- Self-employed workers can be temporarily unemployed.
- 60><18 do not join
- Some people claiming Job Seekers Allowance aren’t actively seeking work.
Benefits and limitations of the Labour Force Survey
Benefits:
- Internationally recognised
- Can analyse data
- Picks up trends in sectors
- Accepted to be more accurate
Drawbacks:
- Costly
- Subject to sampling errors
Underemployment
When workers cannot find a job that is suitable for their qualification and experience.
Structural unemployment
Occurs when long term shifts in the structure of the economy (what is produced) impact the job market.
This can cause skilled workers to become unemployed and need to retrain for new jobs.
Globalisation caused this to increase.
Frictional unemployment
Unemployment that occurs when workers move between jobs.
Is short-term.
Assumed there will always be some frictional unemployment.
Seasonal unemployment
When workers are unemployed at different times of the year due to trends/busy periods.
Seasonal unemployment can distort unemployment figures.
Cyclical unemployment
Occurs when there is a negative output gap. Less employment due to the economic cycle.
Real wage inflexibility
When real wage rates are above equilibrium wage rates.
Cause excess supply of labour.
This is made possible due to trade unions.
Significance of migration for unemployment/employment
Increases the number of workers in a country. Increases supply of skilled and non-skilled workers. Reduces skills shortages.
Effects of unemployment on firms
- Reduced demand
- Reduced productivity
- Reduced profitability
- Less incentive to invest
- Reduced morale / productivity for remaining workers due to uncertainty
Effects of unemployment on consumers
- Lower living standards
- Social costs in poverty
- Financial costs - more money spent on bills
- De-skilling
- Reduced chance of finding work.
Balance of Payments
A record of a country’s trade/transactions with the rest of the world.
The three sections of the balance of payments
*The current account
(Trade in goods/services, Investments incomes, transfers)
Financial account
Capital account
What is a surplus?
When the sum of exports of goods, services, investment incomes and transfers is greater than imports.
What is a deficit?
When the sum of exports of goods, services, investment incomes and transfers is less than imports.
How is trade in goods or services measured?
X-M (Exports - Imports)
Investment income
Generating income from overseas assets. Profits and dividends sent back to domestic country. Debt can also be obtained from this.
Transfers
Payments made or received by the government to or from other countries
