Theme 2

Question 1

How do we calculate GDP?

Answer 1

Consumer spending + Investment + government spending + (exports-imports)

Question 2

Definition of GDP?

Answer 2

The total value of all final goods and services produced within the borders of a country in a given time period

Question 3

Definition of wealth?

Answer 3

Value of capital assets owned

Question 4

Definition of income?

Answer 4

Amount made in a certain period

Question 5

What are some possible macroeconomic objectives?

Answer 5

-economic growth
- low unemployment
-low and stable rate of inflation
- balance of payments equilibrium on current account
-balanced government budget
-protection of the environment
-greater income equality

Question 6

What are the indicators of strong economic performance?

Answer 6

Trade
Inflation
Growth
Employment
Redistribution of income
Stability

Question 7

Describe the objective for growth in the economy

Answer 7

Strong (high percentage) sustained (has continued for a reasonable amount of time, and is sustainable, e.g low rates of inflation and causes little to no damage to the environment

Question 8

Describe the objective for employment in the economy

Answer 8

Low unemployment, high employment

Question 9

Describe the objective for trade in the economy

Answer 9

Perfect balance between imports and exports

Question 10

What is a trade deficit?

Answer 10

When the value of imports outweighs the value of exports

Question 11

What is a trade surplus?

Answer 11

When the value of exports outweighs the value of imports

Question 12

What is the goal for inflation in the economy?

Answer 12

2(+/-1)%

Question 13

What is the goal for redistribution of income in the economy?

Answer 13

Fair- however this is a normative statement

Question 14

What are the examples of leakages in the economy?

Answer 14

Savings
Tax
M imports

Question 15

What are examples of injections into the economy?

Answer 15

X exports
Investments
Government spending

Question 16

What happens if there are more investments than withdrawals

Answer 16

Economic growth

Question 17

What happens if there are more withdrawals than investments?

Answer 17

The economy will shrink

Question 18

What happens if injections and leakages are equal?

Answer 18

Macroeconomic equilibrium

Question 19

What are the three methods of measuring GDP?

Answer 19

Income method: all factor incomes earned in a year
Expenditure method: Consumer spending, investment, government spending and (exports- imports)
Output method: all the value of the final products produced in an economy in a year

Question 20

What is the purpose of using index numbers?

Answer 20

To make ugly numbers less ugly
To allow for quick and easy data comparisons

Question 21

How to calculate an index value?

Answer 21

The base year always has a value of 100

Index number= raw number/ base year raw number X 100

Question 22

What are the reasons why consumption may increase?

Answer 22

Rates of interest
Consumer confidence
Asset prices
Household debt
Level of real disposable income

Question 23

Explain level of real disposable income as a factor affecting consumption?

Answer 23

This means the amount of money we have left after taxes, adjusted to be relative to consumption - higher = more consumption
May change if income taxes are cut or if income tax re allowance is higher

Question 24

Explain interest rates as a factor affecting consumption?

Answer 24

If interest rates are lower, cost of borrowing decreases, incentive to borrow increases, people are more likely to spend on expensive items such as houses or cars
If interest rates are lower, incentive to save is lower so by default consumption increases

Question 25

Explain consumer confidence as a factor affecting consumption?

Answer 25

Consumer confidence could be affected by expectations about job prospects, for example, those who are expecting a promotion would be more likely to spend Unemployment affects consumer confidence because if it is high, people will be more uncertain they are able to keep their jobs, so consumer confidence will decrease If consumer confidence is higher, consumption will be higher

Question 26

Explain asset prices as a factor affecting consumption

Answer 26

Asset prices, such as houses, shares and bonds, affects how wealthy people feel. If people feel wealthier, consumption will increase

Question 27

Describe household debt as a factor affecting consumption?

Answer 27

If household debt is higher, those who are in debt will have very low consumption, and those who aren’t willing have more uncertainty about the future so will still be less likely to consume

Question 28

What are some concepts to include in essays about consumption?

Answer 28

Multiplayer effect MPC (marginal propensity to consume) willingness to spend extra money

Question 29

What are the determinants of saving?

Answer 29

Level of real disposable income Interest rates Consumer confidence Range/ trustworthiness of financial institutions Tax incentives Age structure of population

Question 30

How does levels of disposable income affect saving?

Answer 30

Big argument for developing countries, those who are low income are unable to save a large percentage of their income, as income increases savings generally increase with them

Question 31

How does range/trustworthiness of banks affect savings?

Answer 31

Big argument for developing countries If people do not have a bank near them or the bank is corrupt, they are unlikely to want to save any money Do people have education to understand the benefits of saving/ how to save

Question 32

How does age structure of the population affect saving?

Answer 32

Middle aged people are more likely to save for retirement/ children’s futures, young people and people over 60 usually have a lower marginal propensity to save

Question 33

How do interest rates affect saving?

Answer 33

If interest rates are higher then incentive to save will be higher

Question 34

How does consumer confidence affect savings?

Answer 34

If unemployment is high or job prospects are low then people will have more uncertainty about the future so are more likely to save money

Question 35

How do tax incentives affect consumer confidence?

Answer 35

For example ISA’s (individual savings account), you can earn returns on savings which are tax free up to a certain point, this will increase incentive to save

Question 36

What are the determinants of investment?

Answer 36

Interest rates Business confidence Corporation tax Spare capacity Level of competition Price of capital