A-Level Economics A: THEME 2 GENERAL KNOWLEDGE Flashcards
2.1.1 Economic growth
What is economic growth?
Economic growth is an increase in the long term productive potential of the country which means there is an increase in the number of goods and services that a country produces.
2.1.1 Economic growth
What is the standard measure of economic output?
Gross Domestic Product: The standard measure of output. It is the total value of goods and services produced in a country within a year.
2.1.1 Economic growth
What are the other measures of national income?
- Gross National Income (GNI)
- Gross National Product (GNP)
2.1.1 Economic growth
What is Gross National Income (GNI)?
Gross National Income (GNI) is the total amount of money earned by a nation’s people and businesses.
The number includes the nation’s gross domestic product (GDP) plus the income it receives from overseas sources.
2.1.1 Economic growth
What is Gross National Product (GNP)?
- The value of goods and services over a period of time through labour or property supplied by citizens of a country both domestically (GDP) and overseas.
- This means it is the value of all the goods produced by citizens of a country, whether they live in the country or not, whilst GDP is the value of all goods produced inside the country, whether they were produced by citizens of the country or not.
2.1.1 Economic growth
What is the Purchasing Power Parity (PPP)?
PPPs measure the total amount of goods and services that a single unit of a country’s currency can buy in another country.
2.1.1 Economic growth
What are the problems of using GDP to compare standards of living?
- Inaccuracy of data
- Inequalities
- Quality of goods and services
- Comparing different currencies
- Spending
2.1.1 Economic growth
How can national income statistics make GDP inaccurate?
- There is a black market in which people work without declaring their income to avoid tax or continue claiming benefits, and so GDP is underestimated because these incomes aren’t taken into account.
- It also doesn’t take into consideration home-produced services. Farmers sometimes consume their own crops without trading and so GDP is underestimated.
2.1.1 Economic growth
How can inequalities make GDP inaccurate?
An increase in GDP may be due to the growth in income of one group of people. Therefore growth in national income may not increase living standards everywhere.
2.1.1 Economic growth
How does the UK measure national wellbeing?
- Worthwhileness
- Happiness
- Anxiety
- Life satisfaction
2.1.1 Economic growth
In 2012-16, what rose and fell in the UK?
- Life satisfaction, happiness, and worth have continued to rise.
- Anxiety levels fell. This could be due to employment or global security.
2.1.1 Economic growth
What does psychological research suggest about real incomes and subjective happiness?
- Happiness and income are positively related at low incomes.
- But higher levels of income aren’t associated with increase in happiness.
- This is known as the Easterlin Paradox.
2.2.2 Consumption (C)
What is disposable income?
Disposable income is the amount of money that people have left after paying their income taxes.
2.2.2 Consumption (C)
What does an increase in disposable income lead to?
- An increase in disposable income will lead to an increase in consumer spending unless consumers save all of this rise (which they almost never do).
- Research in the USA found that a large proportion of the 2001 Bush tax cuts was spent by consumers, rather than saved.
2.2.2 Consumption (C)
What are savings?
Savings is the part of disposable income that is not spent.
2.2.2 Consumption (C)
What does a rise in the savings ratio imply?
- The savings ratio is the ratio of savings to income (S/Y).
- If the savings ratio rises, it is likely that consumption will fall. This is because: savings + consumption = disposable income.
2.2.2 Consumption (C)
What are the determinants of consumer spending?
- The interest rate (return) being received on savings. If the interest rate rises, then saving is more attractive, so consumers will spend less and save more.
- Wealth effects happen if asset prices rise and consumers feel as though they have more money. They may spend more if share prices or property prices rise.
- Inflation expectations (if prices are going to rise in the future, people may spend now and save less now).
- Level of income (people with higher incomes tend to save more – they have a higher marginal propensity to save, that is for every extra pound people get, they save more as they get richer).
2.2.3 Investment (I)
What is investment?
Investment is spending that improves or grows the capital stock of an economy. It is funded with savings, so if investment rises, it is very likely that saving has also risen.
2.2.3 Investment (I)
How is investment influenced by the rate of economic growth?
- Investment is usually measured as a % of GDP. If GDP is high and rising, then the investment is likely to rise too.
- A high rate of economic growth also signals economic strength. This can give businesses confidence in the future and they will invest to increase their productive capacity, expecting increases in demand to continue in the future.
2.2.3 Investment (I)
How is investment influenced by animal spirits?
Keynes referred to ‘animal spirits’, explaining why firms will be overoptimistic and invest excessively in good times, before reducing investment too much when consumer spending is lower and business confidence is weaker.
2.2.3 Investment (I)
How is investment influenced by export demand?
- Exports are a component of aggregate demand.
- If international demand for a firm’s goods or a nation’s goods rose, then it is likely that they would invest to increase the capacity of their production.
2.2.3 Investment (I)
How is investment influenced by interest rates?
- Companies often have to borrow money to invest.
- Apple’s new campus, Apple Park cost $5bn. If it had to borrow that money, an interest rate of 10% p.a. would lead to $500m of annual debt repayments. If the interest rate was 1%, it would lead to $50m of annual debt repayments.
2.2.3 Investment (I)
How is investment influenced by access to credit?
- Higher access to credit makes it more likely that firms will be able to borrow to invest.
- In the 2008 financial crisis, many businesses said that they were unable to borrow from banks. Banks reduced their lending because they had made such large losses in the financial crisis.
2.2.3 Investment (I)
How is investment influenced by government and regulation?
- Governments can subsidise or encourage investment in certain industries.
- Usually, investment support is concentrated in a few industries, like Renewable Energy, Artificial Intelligence or Healthcare.
2.4.1 National income
What does the circular flow of income suggest?
This model provides an illustration of the flow of money around an economy. Firms pay households for their factors of production (labour, land and capital) and households pay firms for goods and services.
2.4.1 National income
What do households own?
- Households own the factors of production that firms need to produce goods and services, so firms pay households to use them.
- Labour is paid for in wages.
- Land is paid for in rent.
- Capital is paid for in interest.
2.4.1 National income
What is income?
Income is a flow of money, often measured on a monthly or annual basis.
2.4.1 National income
What is wealth?
Wealth is the sum of all assets, including pensions, money in the bank, financial investments, and the value of a home.
2.4.1 National income
What are the factors influencing the distribution of wealth?
- Taxation policy: regressive policies will tend to increase the income and wealth gap between different groups in a country. Progressive taxation policies will reduce the gap.
- The differences in wage between low and high skilled labour.
- The level of discrimination against different groups of workers.
- Regional differences in earnings.
- Unsalaried individuals depending on state benefits.
2.4.2 Injections and withdrawals
What are withdrawals?
Withdrawals refer to flows of money leaving the circular flow of income.
2.4.2 Injections and withdrawals
What are the three types of withdrawals?
- Savings
- Taxes
- Imports
2.4.2 Injections and withdrawals
What are injections?
Injections refer to flows of money into the circular flow of income.
2.4.2 Injections and withdrawals
What are the three types of injections?
- Exports
- Investment
- Government Spending
2.4.2 Injections and withdrawals
What happens if injections exceed withdrawals?
If injections exceed withdrawals, then the circular flow of income will expand. And so national income will rise.
2.4.2 Injections and withdrawals
What happens if leakages exceed injections?
If leakages exceed injections, then the circular flow of income will shrink. And so national income will fall.
2.4.2 Injections and withdrawals
What happens if the government decides upon expansionary fiscal policy on the circular flow of income?
If the government decides upon expansionary fiscal policy and increases government spending, this raises injections.