The UK Macroeconomy

Question 1

Define economic growth

Answer 1

Economic growth is an increase in real GDP in an economy in a year caused by an increase in AD or an increase in LRAS.

Question 2

Name Four main Economic Objectives

Answer 2

Low and stable inflation
Real Economic Growth
Low Unemployment
Balance of payments

Question 3

Name three secondary objectives

Answer 3

Income distribution (equality)
Environmental externalities
Balancing budget

Question 4

Define GDP per capita

Answer 4

It is a country’s economic output divided by its population. It’s a good representation of a country’s standard of living

Question 5

Define GDP

Answer 5

GDP is the value of all final goods and services in an economy in a year. It gives us a measure of growth and living standards (since it measures incomes)

Question 6

Name 5 weaknesses with GDP when comparing countries

Answer 6

• Risk of double counting (especially with output method as we include output of primary sector then include it again when manufactured in secondary sector, this inflates final figure of GDP)
• informal activity (businesses that operate who aren’t registered, GDP is lower than should be)
• likely errors (large info collected in small space of time, this is why we see 2,3 or 4 revisions to GDP quarterly figures)
• negative externalities (cost of air pollution, deforestation, visual pollution not included, standard of living will be less than GDP suggests)
• Income distribution is ignored

Question 7

How is GDP per capita calculated?

Answer 7

GDP divided by population

Question 8

what are the negatives of GDP per capita as a measure of growth?

Answer 8

• the same problems as GDP
• remittances ( domestic workers who leave the country to work abroad to earn higher incomes, that income is sent back to home country, GDP will not take this)
• influence of FDI (foreign direct investment is when foreign firms operate in some country so their produced goods count towards GDP but most profit will be repatriated so doesn’t increase living standards)

Question 9

Define GNI

Answer 9

The value of goods and services produced by a
country over a period of time plus net overseas interest payments and dividends. FDI will not be accounted but remittances will.

Question 10

what are the weaknesses for GNI?

Answer 10

• environmental costs of production.

Question 11

define green GDP

Answer 11

green GDP accounts for the environmental costs of production. it is GDP-environmental costs.

Question 12

what are the weaknesses for green GDP?

Answer 12

putting a monetary value on environmental costs is difficult and normative/subjective and can cause GDP to fall drastically.

Question 13

what is Purchasing Power Parity (PPP)?

Answer 13

this is an additional exchange rate adjustment that equalizes the price of internationally traded goods across countries.

Question 14

what are the advantages of PPP?

Answer 14

• the PPP exchange rate remains fairly constant year round so it can be easily compared.
• exchange rates will often get closer to the PPP as time passes
• knowing the PPP will allow you tot track and predict exchange rate relationships
• PPP can help examine the relative living conditions of different countries.

Question 15

define unemployment

Answer 15

the unemployed consist of those of working age who are willing and able to work, actively seeking work but do not have a job.

Question 16

Measures for Unemployment (2)

Answer 16

Claimant Count

Labour Force Survey

Question 17

what is the labour force survey?

Answer 17

Monthly survey
60,000 households
conducted by ONS
looked for work past 4 weeks, ready to start in 2 weeks

Question 18

what are the weaknesses of the labour force survey?

Answer 18

• sampling errors (60,000 households out of 4m, not very representative, current margin of error in the UK is +-3%)
• costs (expensive to conduct so sampling size is low)
• under employed (in the UK, to be counted fully employed you need to work 1 hour, those looking to work longer are considered fully employed)

Question 19

what is the claimant count?

Answer 19

a measure of total amount of people who are claiming unemployment benefits.

Question 20

Why is the LFS usually higher than the Claimant Count?

Answer 20

Not all members of a household will claim benefits, while some will still unemployed
- People may be unemployed but not eligible for benefits

Question 21

define inflation

Answer 21

inflation is a persistent increase in the general price level over a period of time which erode the purchasing power of money.