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Economics - Edexcel A > Macro - Theme 2 > Flashcards

Macro - Theme 2 Flashcards

1
Q

What is ‘Economic Growth’?

A

Rate of increase of actual real GDP OR an increase in the productive capacity of an economy

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2
Q

What is GDP?

A

It is the total value of goods and services in a country in a fiscal year. It is the standard measure of output and allows us to compare countries. It is an indicator of living standards.

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3
Q

What is the difference between Real and Nominal GDP?

A
  1. Real GDP - takes into account the effects of inflation. To work out real GDP, Q x P (price of good in year before inflation changed the price)
  2. Nominal GDP - does not take into account the effects of inflation. To work out Nominal GDP, Q x P (price of good in the given year)
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4
Q

What is the difference between Total GDP and GDP per Capita?

A
  1. Total GDP - represents the overall GDP for the country
  2. GDP per Capita - Total GDP/Population
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5
Q

What is GNI?

A

1.The value of goods and services produced by a country over a period of time plus net overseas interest payments and dividends.
2. This means that it adds what a country earns from overseas investments and
subtracts what foreigners earn in a country and send back home from the GDP.

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6
Q

What is GNP?

A
  1. It is the value of all the goods produced by citizens of a country, whether they live in the country or not
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7
Q

What are Purchasing Power Parities?

A
  1. Adjusting GDP or other variables to reflect how much the local currency actually buys you, or the purchasing power of a country.
  2. Useful because it takes into account standards of living (how much has to be spent to maintain living standards) and so will help us to better compare living standards
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8
Q

What are the problems of using GDP to compare standards of living?

A
  1. Inaccuracy of data - some countries may be inefficient at collecting or calculating data. There may be ‘black’ markets where people work without declaring income to avoid paying tax, therefore GDP can be underestimated.
  2. GDP does not take into account home-produced services - people may farm to produce their own crops and consume it without trading, so GDP is underestimated. Also true considering the works of housewives/husbands aren’t recorded.
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9
Q

What is GNI?

A
  1. An alternative to measuring GDP
  2. Reflects the quality of life or non-monetary based measures of the well-being of society
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10
Q

What is ‘inflation’?

A

A rise in the overall or average price level. Target of 2% per year.

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11
Q

What is ‘deflation’?

A

When the overall or average price level falls. Would be expressed as a negative number: -2%

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12
Q

What is ‘disinflation’?

A

When the rate of inflation falls but is still positive.

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13
Q

How to measure ‘index’?

A

(new figure/base figure) x 100

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14
Q

What is CPI?

A
  1. Consumer Price Index
  2. A measure of the average level of prices in the UK, based on a representative ‘basket’ used by the Government and BoE.
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15
Q

What are the limitations of CPI?

A
  1. It is impossible for the figure to take into account every single good that is sold in the country and therefore CPI is not totally representative.
  2. Does not include housing prices which has tended to rise more than the price of other goods, so data may be lower than it should be
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16
Q

What is RPI?

A
  1. Retail Price Index
  2. Similar to CPI, but some differences:
    - includes housing costs
    - CPI is lower than RPI
    -RPI excludes the top 4% of income earners and low income pensioners as they are not ‘average’ households
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17
Q

What are the causes of inflation?

A
  1. Demand-pull: Inflation caused by a rise in AD.
  2. Cost-push: Inflation caused by rising costs of FOP. Rising costs get passed on to consumers by firms, raising overall price level.
  3. Growth of the money supply: When there is too much money in the economy. If people have access to money and want to spend it, but there is no increase in output of goods/services then prices will rise.
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18
Q

What are the effects of inflation on consumers?

A
  1. Reduced purchasing power: if people’s incomes don’t rise with inflation, their purchasing power decreases as the affordability of goods and services decreases. Can cause a fall in living standards.
  2. Savers lose - their money is worth less
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19
Q

What are the effects of inflation on firms?

A
  1. If inflation is higher in UK than in other countries, the demand for exports will decrease as other goods from other countries become more price competitive. Also affects balance of payments
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20
Q

What are the effects of inflation on workers?

A
  1. If they do not receive yearly pay rises, they’ll be worse off and their standards of living will fall
  2. Deflation could lead to workers losing their jobs as there is a lack of demand
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21
Q

What are the effects of inflation on governments?

A
  1. Government revenue can falls if it fails to change excise taxes.
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22
Q

What are the measures of ‘Unemployment’?

A
  1. Claimant Count: Number of people claiming benefits of unemployment. E.g. Jobseeker’s Allowance
  2. Labour Force Survey (ILO): An interview based survey on about 60,000 households. Includes all people over 16 and is a better measure than claimant account.
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23
Q

What is ‘unemployment’?

A

Those who are actively seeking and able to work but are out of work.

24
Q

What is ‘employment’?

A

Those who are actively working.

25
Q

What is ‘economically active’?

A

Includes employed and unemployed.

26
Q

What is ‘under-employment’?

A
  1. When someone does not have as much work as they would ideally like or working in a job that does not use their skill level.
  2. Usually those in part-time or zero hour contracts
27
Q

What are the types of unemployment?

A
  1. Frictional: caused by people moving between one job to another. Not a serious problem as it is short term.
  2. Structural: the mismatch between the skills households are willing and able to offer firms and the skills firms actually demand. Serious problem as it is long-term due to a decline in demand in an industry which leads to unemployment. Geographical immobility of labour makes it harder for workers to seek work in areas demanding their skill set.
  3. Seasonal - unemployment at different points of the year.
  4. Cyclical - Unemployment caused by the economic cycle (when there is a general lack of demand for goods and services in the economy)
  5. Real Wage - unemployment caused by real wages being above their market clearing level, leading to excess supply.
28
Q

How does migration affect levels of employment?

A
  1. An increase in net inward migration usually leads to increased jobs: due to the circular flow of income, more people in the country means more people spending, leads to a rise in AD so firms will hire more workers to meet rising demand. Also depends on how much money immigrant workers send back home.
  2. Also leads to lower wages, particularly for lower paid/skilled jobs: as supply of labour increases, this shifts the price equilibrium to the left, reducing it.
29
Q

What is ‘balance of payments’?

A
  1. Record of all financial transactions between residents of a country and the rest of the world. Exports, imports and flows of money.
30
Q

What is the ‘Current Account’?

A

Value of imports and exports of goods and services.

31
Q

What is the balance of trade?

A

X - M

current account surplus: X > M
current account deficit: M > X

32
Q

What is AD?

A
  1. Total value of planned spending in an economy over a period of time. AD = C + I + G + (X - M)
33
Q

Why is the AD curve downward sloping?

A
  1. Income Effect: as incomes don’t rise as quickly as prices, they can afford to buy less, leading to a contraction in demand.
34
Q

What is ‘disposable income’?

A

The money consumers have left to spend.

35
Q

What is MPC?

A
  1. Marginal Propensity to Consume
  2. Measures how much an increase in income affects consumption
  3. MPC = change in consumption / change in income
36
Q

What is APC?

A
  1. Average Propensity to Consume
  2. Average amount spent on consumption out of total income
  3. APC = total consumption / total income
37
Q

What influences consumer spending?

A
  1. Interest rates: higher interest rates means cost of borrowing is higher so less likely to spend and more likely to save.
  2. Consumer confidence: for e.g. if consumers expect inflation to rise in the future, more likely to spend now while goods are cheaper so consumption increases.
38
Q

What is ‘Investment’?

A
  1. spending by firms on capital goods, used to increase their future production
39
Q

What factors affect level of investment?

A
  1. Technological change: improvements in technology will speed up production processes, which will increase the level of profitability, meaning the investment has better prospect of success.
  2. Interest rates: if interest rates are high, cost of borrowing is more expensive and firms cannot afford to borrow money to invest in capital.
40
Q

What is AS?

A
  1. Aggregate Supply
  2. The volume of goods and services produced within an economy at a given price level
41
Q

What are the factors influencing SRAS?

A
  1. Changes in cost of raw materials: increase in costs of raw materials increases costs of production. SRAS curve will shift left.
  2. Changes in tax rates: cost for firms (such as VAT or corporate tax) so will cause SRAS curve to shift left.
42
Q

What are the factors influencing LRAS?

A
  1. Technological advances
  2. Education and skill levels in the economy
  3. Changes in relative productivity
43
Q

What is the circular flow of income model made up of?

A
  1. Injections - inflow of money. Such as: Investment, Gov Spending, or Exports. (I, G and X)
  2. Withdrawals/Leakages - outflow of money. Such as: Savings, Taxes or Imports (S, T, M)
44
Q

What is the ‘Multiplier Effect’?

A
  1. Measures the number of times an injection into the circular flow is multiplied to become an even bigger increases in national output/income.
  2. Multiplier = 1 / (1 - MPC)
45
Q

What are the causes of Economic Growth?

A
  1. Needs to be an increase in QQFOP (quality and quantity of FOPs)
46
Q

What is ‘actual growth’?

A

The percentage change in GDP.

47
Q

What is ‘potential growth’?

A

The change in productive potential of the economy over time, so LRAS or PPF curve shifts.

48
Q

What are positive and negative output gaps?

A
  1. Positive output gap: when actual GDP growth (AD) is higher than trend rate
  2. Negative output gap: when actual GDP growth (AD) is growing more slowly than trend rate. Usually connected with falling inflation rates and rising unemployment.
49
Q

What is a ‘boom’ and its characteristics?

A
  • When actual GDP rises for two consecutive quarters in a fiscal year.
  1. National Income is high
  2. Economy likely to be working above PPF
  3. Positive output gap
  4. C and I are high
  5. Tax revenues are high
  6. Wages are increasing
  7. High inflationary pressure
  8. High employment
50
Q

What is a ‘recession’ and its characteristics?

A
  • When actual GDP falls for two consecutive quarters in a fiscal year. Where economy is a bottom of economic cycle, it is a slump/trough/depression/recession
  1. High unemployment
  2. Low inflationary pressure, may even be deflation
51
Q

What are the macroeconomic objectives?

A
  1. Economic growth
  2. Low unemployment - target around 3%
  3. Low and stable inflation - target around 2%
  4. Balance of payments equilibrium

Other objectives:
5. Protection of the environment
6. Greater income equality
7. Balanced government budget

52
Q

What are demand-side policies and some examples?

A

-Policies designed to increase consumer demand.

  1. Monetary policy: Where Central Bank or other authority attempts to control the levels of AD by adjusting interest rates or amount of money in the economy
  2. Fiscal policy: policies that change the level of public taxation, borrowing or spending in order to manage AD.
53
Q

What is Expansionary Fiscal Policy?

A
  1. Tax cuts/ Increase in spending to boost AD
54
Q

What is Contractionary Fiscal Policy?

A
  1. Tax increases / Cuts in spending to reduce AD
55
Q
A

Economics - Edexcel A (5 decks)

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