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Edexcel IGCSE Economics - Paper 2 > GDP and Inflation > Flashcards

GDP and Inflation Flashcards

1
Q

What are the 4 main macroeconomic objectives?

A

Sustainable economic growth
Low and steady inflation
Low unemployment
Healthy current account balance

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2
Q

What are the 2 additional macroeconomic objectives?

A

Protection of the environment

Redistribution of income

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3
Q

What identity is used to calculate the national income of an economy?

A

Income ≡ Expenditure ≡ Output

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4
Q

Define ‘GDP (Gross Domestic Product)’.

A

The total value of goods and services produced in an economy in a year

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5
Q

Define ‘economic growth’.

A

The rise in an economy’s national income over a period of time (usually a year)

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6
Q

What are the 3 benefits of using GDP as a measure of growth?

A

Relatively simple measure
Allows for comparison between countries - widely adopted
Allows for comparison between years to assess growth rate

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7
Q

What are the 8 limitations of using GDP as a measure of growth?

A 
Value of home-produced goods
Inflation
Black market
Environmental damage/improvement
Population
Income inequality
Cost of living 
Statistical errors
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8
Q

How is the black market a limitation of using GDP as a measure for economic growth?

A

It involves the unrecorded transaction of goods, leading to the GDP being underestimated

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9
Q

How is the value of home-produced goods a limitation of GDP as a measure of growth?

A

Goods that are produced at home and aren’t sold (eg. home-grown food, homemade clothes) aren’t recorded, leading to the GDP being underestimated

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10
Q

Define ‘real GDP’.

A

The total value of goods and services produced in an economy in a year adjusted for inflation

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11
Q

How does economic growth occur?

A

When there is an increase in the quality or quantity of the factors of production

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12
Q

Define ‘the economic cycle’.

A

The overall state of the economy as it goes through four stages in a cyclical pattern

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13
Q

What are the 5 stages of the economic cycle?

A 
Growth
Boom
Downturn
Recession
Recovery
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14
Q

What are the 4 features of the ‘Growth/Recovery’ stage of the economic cycle?

A

GDP starts to rise
Business/consumer confidence increases
Unemployment falls due to increase in demand
Prices start to rise

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15
Q

What are the 4 features of the ‘Boom’ stage of the economic cycle?

A

Peak of the cycle
Economy is doing well
Jobs are created as demand rises
New firms enter the market

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16
Q

What are the 4 features of the ‘Downturn’ stage of the economic cycle?

A

Economy still growing but slower
Demand for G&S begins to fall
Unemployment starts to rise
Firms stop expanding due to falling profits

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17
Q

What are the 4 features of the ‘Recession’ stage of the economic cycle?

A

Bottom of the cycle
Economy isn’t doing well - GDP begins to fall
Unemployment rises sharply due to fall in demand
Bankruptcies are common

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18
Q

What are the 7 benefits of economic growth?

A

Increased tax revenue for government

Increased investment fuelled by higher profits

New jobs created

Higher real incomes

Increased funds for infrastructure

Greater consumer confidence

Higher standards of living

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19
Q

Define ‘standard of living’.

A

The degree of wealth and material comfort available to a person or community

20
Q

What are the 6 disadvantages of economic growth?

A

Risk of demand-pull inflation

Risk of environmental damage

Rising inequality

Over-exploitation of scarce finite resources

Opportunity cost of increased capital investment

Social problems arising from consumer society

21
Q

Define ‘aggregrate demand’.

A

The total demand for all the goods and services in an economy at a given price level

22
Q

What is the equation for aggregate demand?

A

AD = C + I + G + (X - M)

Aggregate Demand = Consumption + Investment + Government Spending + (Exports - Imports)

23
Q

What 3 factors does the benefit of economic growth depend on?

A

How much growth is occurring
Role of the government
State of the economy

24
Q

Define ‘inflation’.

A

The general and persistent rise in the prices of goods and services over a period of time

25
Q

Define ‘CPI (Consumer Price Index)’.

A

Measure of the general price level which includes house prices and council tax

26
Q

Define ‘purchasing power’.

A

The ability to buy goods and services at the same income level

27
Q

In 4 steps, how is the consumer price index measured?

A
  1. Government records prices of 720 G&S purchased by a sample of 180,000 families every month
  2. Weights added to prices to account for proportion of expenditure
  3. Average monthly price worked out
  4. Price compared to base year price to set inflation rate
28
Q

What are the 4 types of inflation?

A

Deflation - fall in prices
Low and steady (1-3%)
High inflation (> 8%)
Hyperinflation (>15-20%)

29
Q

What are the 3 possible causes of inflation?

A

Demand-pull inflation
Cost-push inflation
Money supply inflation

30
Q

How does demand-pull inflation occur?

A

When any component of AD increases, causing AD to shift out, GDP to increase and prices to go up

31
Q

How does cost-pull inflation occur?

A

When the costs of production for all firms are rising, causing prices to be pushed up by firms

32
Q

How does money supply inflation occur?

A

When there is too much ‘printed’ money chasing too few goods, demand outstrips supply

33
Q

What are the 2 effects of inflation on consumers?

A

Less purchasing power

Reduced supply of labour

34
Q

What is the effect of inflation on firms?

A

They have to sacrifice profit margins due to increasing costs of production

35
Q

What are the 2 effects of inflation on the government?

A

Spending increases as funding for public/merit goods increases
Decreased tax revenue due to corporation tax decreasing

36
Q

How does inflation affect savers/pensioners?

A

Saved money is worth less - workers will have to save larger amounts for longer

37
Q

How does inflation affect borrowers?

A

They BENEFIT - they have to return less money back to lenders

38
Q

How does inflation affect lenders?

A

They’re worse off if inflation is more than anticipated - interest rates set accordingly

39
Q

Define ‘interest rate’.

A

A price paid to lenders for borrowed money - the price of money

40
Q

Define ‘menu cost’.

A

The administrative cost of firms replacing signage/labels as prices increase

41
Q

Define ‘shoe leather cost’.

A

Cost of funding new suppliers of raw materials as prices continually increase

42
Q

How does inflation affect exporters?

A

Their goods become less attractive and internationally competitive so demand for them decreases

43
Q

How does inflation affect importers?

A

Their goods appear more attractive so they see a rise in demand

44
Q

What 5 factors does the impact of inflation depend on?

A

The level of interest rates

If inflation is anticipated or not

Country’s reliance on exports/imports for growth

Level of inflation

Cost-pull inflation being worse than demand-pull inflation

45
Q

Define ‘depression’.

A

A period of temporary economic decline where trade and industrial activity reduce

46
Q

Define ‘recession’.

A

Bottom of the economic cycle where GDP starts to fall with significant increases in unemployment

47
Q

Define ‘government revenue’.

A

Money received by a government from taxes and non-tax sources to enable it to spend

Edexcel IGCSE Economics - Paper 2 (9 decks)

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