2.1 Whiteboard tasks

Question 1

What are the 4 components of AD?

Answer 1

Consumption
Investment
Government Spending
Exports-Imports

Question 2

What are the 18 components of Aggregate Demand?

Answer 2

Consumption:
-Disposable Income
-Interest Rates
-Wealth Effects
-Consumer Confidence

Investment:
-Interest Rates
-Animal Spirits
-Economic Growth Rate
-Business Expectations
-Access to Credit
-Government Influence
-Demand for Exports

Government Spending:
-Trade Cycle Stage
-Fiscal Policy

Exports-Imports:
-Protectionism
-Domestic Real Income
-Foreign Real Income
-Exchange Rates
-Non-price factors

Question 3

Define GDP

Answer 3

GDP (Gross Domestic Product) is the amount of finished goods and services produced in a year

Question 4

Define Real GDP

Answer 4

Value of finished goods and services produced in a year adjusted for inflation

Question 5

Define GDP per Capita

Answer 5

country’s economic output is broken down to output per person

Question 6

Define GNI

Answer 6

GNI (Gross National Income) is the total income earned by a country’s people and businesses including overseas money.

Question 7

What’s the equation to work out GNI?

Answer 7

GDP+ Net factor incomes abroad

Question 8

What are the benefits of economic growth?

Answer 8

-Higher Disposable Income
-Lower Unemployment
-Higher Profit for firms
-More tax revenue for govt
-Increased material wellbeing

Question 9

What are the drawbacks for economic growth?

Answer 9

-Inflation
-Income Inequality
-Negative Externalities
-Current Account Deficit

Question 10

What does measuring GDP and GNI ignore?

Answer 10

-Unpaid work
-Size of population
-Distribution of Income
-Improving Quality of products
-Improving quality of life

Question 11

Define GNHI

Answer 11

GNHI (Gross National Happiness Index) measures the quality of life of a country on other things that aren’t income. These factors are:
-Health
-Education
-Diversity and Resilience
-Living Standards
-Sense of community
-Work-life balance

Question 12

What is the Easterlin Paradox?

Answer 12

Higher income does no necessarily improve “happiness”. After a certain point, higher GDP per capita does not equate to higher quality of life.

Question 13

Define Inflation?

Answer 13

The rate of increase in the price level in an economy

Question 14

Define Deflation

Answer 14

A fall in the rate of inflation. The inflation rate can fall below zero.

Question 15

Define Disinflation

Answer 15

A fall in the price level

Question 16

What are the three measurements of inflation?

Answer 16

-CPI (Consumer Price Index)
-CPIH (Consumer Price Index + Housing Costs)
-RPI (Retail Price Index)

Question 17

What’s CPI?

Answer 17

Measures the overall change in consumer prices based on a representative basket of goods and services over time.

Question 18

What’s the CPHI?

Answer 18

Measure of inflation which is identical to the CPI as it has a representative basket of goods and services over time but it includes housing costs.

Question 19

What’s the RPI?

Answer 19

Measure of inflation that tracks the average prices of basket of goods and services purchased by households. Measures the change in costs.

Question 20

What are the two causes of inflation?

Answer 20

Cost-Push Inflation
Demand-Pull Inflation

Question 21

What’s Cost-Push Inflation?

Answer 21

Cost of production is increasing will cause an increase in the price level. Higher production costs will be passed onto consumers in the form of higher prices.

Question 22

What’s Demand-Pull Inflation?

Answer 22

Increased AD when the economy is at full capacity will increase the price level. This will cause excess demand and prices will be forced up.

Question 23

In times of high inflation, what could the Government or Bank of England do to reduce inflationary pressure.

Answer 23

-Policies to reduce AD so that it shifts to the left and reduces inflationary pressure
-Policies to reduce costs of production like price caps, government subsidies or tax breaks
-Policies to improve the factors of production like education and training, improving infrastructure and de-regulation

Question 24

What are the two ways of measuring unemployment?

Answer 24

Claimant Count- Number of people claiming Job Seekers Allowance or Universal Credit
Labor Force Survey- A survey of UK households. It asks working age people if they have been out of work in the last 4 weeks and if they’re ready to go in the next 2 weeks

Question 25

What is Frictional Unemployment?

Answer 25

People taking time off as they switch from one job to another. Its not severe as its short-term and this is why the government targets 4% unemployment and not 0%.

Question 26

What’s seasonal unemployment?

Answer 26

People working in seasonal roles become unemployed after the season ends. Its more serious than frictional unemployment but its still short-term as workers can seek employment in other roles during low seasons.

Question 27

What’s Cyclical Unemployment?

Answer 27

Unemployment rising during economic downturns as AD falls. Its severe during long recessions and certain industries struggle more than other so certain workers are hit harder. Some of these industries are retail or services as they aren’t needed.

Question 28

What’s real-wage inflexibility?

Answer 28

Wages sticking at higher costs causing unemployment as so not as many staff will be hired and so workers struggle to find jobs. Higher wages=less employees as only really low paid wages=more unemployment. This is very severe

Question 29

What’s structural unemployment?

Answer 29

Unemployed due to a lack of skills or mobility to find a job. This occurs when industries die out. Workers then need to go back to education or to the bottom of the ladder to find work which is a long process and so is severe.

Question 30

What is Geographic immobility of labour?

Answer 30

Being unable to unwilling to move to a place with more opportunities

Question 31

What is Occupational Immobility of labour?

Answer 31

Lack of skills to find a job

Question 32

How could the government reduce structural unemployment?

Answer 32

-Improve education
-Improving Apprenticeships
-Affordable living schemes
-Improved public transport
-Company tax breaks for trainees

Question 33

What are the 5 economic agents?

Answer 33

Consumers
Firms
Workers
Government
Society

Question 34

How does unemployment affect each of the economic agents?

Answer 34

Consumers- Less goods and services meaning lower living standards
Firms-Lower unemployment means less demand
Workers-Lower income so lower living standards
Government-Lower Tax Revenue and increased welfare payments
Society-Low outlook on the economy meaning social unrest

Question 35

What are the four components of the Current Account?

Answer 35

Trade in Goods- X-M of goods
Trade in Services- X-M of Services
Income- Wages, Rent, Dividends +profit earned by UK entities overseas-Overseas entities in the UK
Current Transfers-Remittances or Aid sent into the UK-sent out from the UK

Question 36

What Cyclical Factors cause a CA deficit?

Answer 36

Increasing Domestic Demand
Decreasing Foreign Demand
Over-Valued Exchange Rates

Question 37

What Structural Factors cause a CA deficit?

Answer 37

Low international Competitiveness
High Relative Inflation
Low-Cost Competition

Question 38

What are ways to reduce a CA deficit?

Answer 38

Reduce Expenditure = reduce AD
Expenditure switching (buy British)
Supply-side policies

Question 39

What are the capital and financial accounts of the balance of payments?

Answer 39

Capital Account- Records transfers of capital assets
Financial Account- Measures net flow of financial claims

Together, they reflect capital market regulations and investment

Question 40

What does an appreciation and depreciation of the pound do to AD?

Answer 40

An appreciation of the pound means that AD will decrease.
A depreciation of the pound means that AD will increase.