Edexcel A Economics - Theme 2 Flashcards
What is economic growth?
Economic growth is a sustained rise in the value of the GDP, an increase in national output.
What is real GDP?
Real GDP is the value of GDP adjusted for inflation.
What is nominal GDP?
Nominal GDP is the value of GDP without being adjusted for inflation.
What is total GDP?
The combined monetary value of all goods and services produced within
a country’s borders during a specific time period
What is GDP per captia?
The value of total GDP divided by the population of the country.
What is gross national product? (GNP)
The market value of all products produced in
an year by one country.
It includes income earned overseas minus incomes earned by overseas residents.
What is gross national income? (GNI)
The total value of all income in a country, plus product taxes (subtract subsidies), plus receipts of primary income from abroad.
What is PPP?
Purchasing Power Parity
How much the exchange rate needs adjusting so that an exchange between countries is equivalent.
How is PPP calculated?
A basket of the same goods is collected in each country and the costs of the basket of goods are compared.
What are the limitations of using GDP to compare living standards over time?
GDP gives no indication of distribution of income.
GDP may need to be adjusted in terms of purchasing power, so that international price differences can be calculated.
There are large hidden economies, black markets.
GDP gives no indication of welfare.
What is the national happiness index?
It is calculated in the UK by the ONS
The UK economy grew by 5% in GDP per capita between 2007 and 2014, but showed no change in life satisfaction.
However, generally, the higher the GDP per capita, the higher the average life
satisfaction score.
What is inflation?
Inflation is the sustained rise in general price level over time.
What is deflation?
Deflation is the sustained fall in general price level over time.
What is disinflation?
Disinflation is the falling rate of inflation. When price levels are still rising but at a slower rate.
How is inflation calculated using CPI?
Consumer Price Index (CPI)
This measures purchasing power with the Family Expenditure Survey.
The survey finds out what consumers spend their income on. A basket of goods is created.
The goods are weighted according to how much income is spent on each item.
What are the limitations to CPI?
The basket of goods is only representative to the average household. Not accurate to people who don’t own cars as 14% of their income is not spent on motoring.
Different demographics have different spending patterns.
CPI is slow to respond to new goods and services.
Hard to make historical comparisons due to technology.
What is RPI?
Retail price index
This is an alternative measure of inflation.
RPI includes housing cots, such as payments on mortgage interest and council tax.
What is CPIH?
This is CPI including a measure of owner occupiers’ housing costs (OOH), a measure of inflation.
What is demand pull inflation?
When aggregate
demand is growing unsustainably, there is pressure on resources. Producers increase their prices and earn more profits. It usually occurs when resources
are fully employed.
What are the main triggers of demand pull inflation?
Depreciation of the exchange rate.
Fiscal stimulus, lower taxes
Lower intrest rates
High growth in the UK
What is cost push inflation?
Occurs when
firms face rising costs
When does cost push inflation occur?
Raw material become more expensive.
Labour becomes more expensive.
Expectations of inflation.
Indirect taxes.
Depreciation in the exchange rate causes imports to become more expensive.
Monopolies
How does growth of the money supply cause inflation.
The Bank of England printed more money, there would be more money flowing in the economy. It is only inflationary if the
money supply increases at a faster rate than real output
What is hyperinflation?
Hyperinflation is when the prices of goods and services rise more than 50 percent a month.
What is quantitative easing and how does it simulate the economy?
If interest rates are already very low, it is not
possible to lower them much more.
Central bank creates money electronically.
The money is used by the central bank to buy (financial assets) government bonds from financial institutions.
Price of government bonds increases and yield decreases.
Financial institution either loan this money out or invest in riskier corporate bonds.
The price of corporate bonds increase and yield decrease, reducing the cost of borrowing money.
Access to credit improves and willingness to lend increases
This stimulates borrowing, spending and investment (AD)
What is the effect of inflation on consumers?
Low and fixed income consumers are affected the most, due to regressive effect.
Purchasing power decreases.
If consumes have loans, the value of repayment would be lower
What is the effect of inflation on firms?
Lower interest rates lead to create borrowing and investment.
Workers might demand high wages, which could increase the costs of production if interest rates are high.
Less international competitive is inflation is high.
Unpredictable inflation lowers business confidence.
What is the effect of inflation on the government?
The government will have to increase the value of the state pension and welfare payments, because the cost of living is increasing.
What is the effect of inflation on the workers?
Real incomes fall with inflation.
If firms face higher costs, there could be more redundancies when
firms try and cut their costs.
What is unemployment?
The unemployed are those able and willing to work, but are not employed. They are actively seeking work and usually looking to start within the next two weeks.
What are the two measures of unemployment in the UK?
The Claimant Count
The International Labour Organisation (ILO) and UK Labour Force Survey (LFS)
What is the Claimant Count
This counts the number of people claiming unemployment related benefits (JSA) and are actively looking for work.
Evaluate the Claimant Count
Not every unemployed person is eligible for, or bothers claiming JSA.
Those with partners on high incomes.
Normally an underestimate.
What is the ILO and LDS?
The International Labour Organisation (ILO) and the UK Labour Force Survey (LFS)
It directly asks people if they meet the following
criteria:
1. Been out of work for 4 weeks
2. Able and willing to start working within 2 weeks
3. Workers should be available for 1 hour per week.
What is underemployed?
The underemployed are those who have a job, but their labour is not used to its full productive potential.
What is the effect of unemployment on consumers?
Less disposable income and their standard of living may fall as a result.
Psychological consequences of losing a job,
What is the effect of unemployment on firms?
Firms have a larger supply of labour to employ from. This causes wages to fall, which would help
firms reduce their costs.
Consumers have
less disposable income, consumer spending falls so firms may lose
profits.
Producers which sell inferior goods might see a rise in sales.
What is the effect of unemployment on workers?
There is a waste of workers’ resources. They
could also lose their existing skills if they are not fully utilised.
What is the effect of unemployment on the government?
Government may have to
spend more on JSA (opportunity cost)
Receive less revenue from income tax
What is the effect of unemployment on society?
An opportunity cost to society, since workers could have
produced goods and services if they were employed.
Increased crime and vandalism.
What is inactivity of workers?
Those who are unemployed but not actively looking
for jobs.
If the number of the economically inactive increases, the
size of the labour force may decrease, which means the productive potential
of the economy could fall.
What are the 4 causes on unemployment?
Structural
Frictional
Seasonal
Cyclical
What is structural unemployment?
Long term decline in demand for the goods and services in the industry.
Labour is replaced by capital.
Worsened by geographical and occupational immobility of labour.
Globalisation also contributes to structural unemployment. Labour is outsourced to cheaper countries with lower labour costs.
What is frictional unemployment?
The time between leaving a job and looking for another job
What is seasonal unemployment?
Occurs during certain point in the year. Tourist industry.
What is cyclical unemployment?
Caused by a lack of demand for goods and services, and it usually occurs during periods of economic decline or recessions.
What is real wage inflexibility?
Wages above the market equilibrium may cause unemployment.
However, cutting wages during times of weak consumer spending would cause further falls in consumer spending, and there would be even lower economic
growth,
What are the affects of migration on employment and unemployment?
Migrants are usually of working age, so the supply of labour at all wage rates tends
to increase with more migration.
Increase job competition.
Bring high quality skills.
What is the balance of payments?
A record of all financial transactions made between consumers, firms and the
government from one country with other countries.
What is an export?
Exports are goods and services sold to foreign countries, and are positive in the balance of payments. This is because they are an inflow of money.
What is an import?
Imports are goods and services bought from foreign countries, and they are negative on the balance of payments. They are an outflow of money.
What is the balance of payment made up of?
The current account
The capital account
The financial account
What is the current account?
The current account on the balance of payments is the balance of trade in goods
and services. It includes:
- Trade in goods
- Trade in Services
- Income
- Transfers
What is the current account?
The current account if the value of financial flows within an economy. It includes:
- Trade in goods
- Trade in Services
- Income
- Transfer payments
What are the UKs main macroeconomic objectives?
Full employment
Low, stable inflation
A sustainable current account on the balance of payments
Sustainable economic growth
What is the interconnectedness of economies though international trade?
The sum of all countries’ trade balances should be zero, since what one
country exports will be imported by another country.
International trade has meant countries have become interdependent.
What is AD?
Aggregate demand is the total demand in the economy.
It measures spending on goods and services by consumers, firms, the government and overseas consumers
and firms.
What is the equation for AD?
AD = C + I + G + (X - M)
Draw the AD curve
Changes in the price level cause movements along the demand curve.
Why is the AD curve downward sloping?
Higher prices lead to a fall in the value of real incomes.
If there was high inflation in the UK so that the average price level was high,
foreign goods would seem relatively cheaper. Therefore, there would be
more imports, so the deficit on the current account might increase, and AD
would fall.
High inflation generally means the interest rates will be higher.
What are the reasons for a shift right in AD?
Consumers and firms have higher confidence levels, so they invest and spend
more, because they feel as though they will get a higher return on them.
Monetary Policy Committee lowers interest rates
Lower taxes
An increase in government spending will boost AD.
Depreciation in a currency means M is more expensive, and X is cheaper, so
AD increases.
Wealth effect.
Greater availability of credit
What is consumer spending?
How much consumers spend on goods and services. This is the
largest component of AD
What is disposable income?
Disposable income is the amount of income consumers have left over after taxes and social
security charges have been removed.
What is MPC?
MPC = Marginal propensity to consume
A consumer’s marginal propensity to consume is the proportion of each
additional pound of household income that used for consumption of goods and services.
What is MPS?
MPS = Marginal propensity to save
A consumer’s marginal propensity to save is the proportion of each
additional pound of household income that is used for saving.