Theme 2 - The UK economy - Performance and Policies (2.1 - Economic Growth)

Question 1

Define GDP [1]

(Per capita) [1]

Ref - 2.1.1 - Economic Growth

Answer 1

The total value of all goods and services produced in an economy per year. [1]

Divided by the population of an economy. [1]

Question 2

Define National Income [1]

Ref - 2.1.1 - Economic Growth

Answer 2

The value of a country’s final output of all new goods and services in a year. [1]

Question 3

What are the 3 main methods of calculating national income? [3]

Ref - 2.1.1 - Economic Growth

Answer 3

Expenditure Method [1]
Output Method [1]
Income Method [1]

Question 4

Briefly outline the expenditure method [2]

Ref - 2.1.1 - Economic Growth

Answer 4

This adds up all the annual expenditure [1] from C+I+G+(X-M) [1]

Question 5

Describe the difference between nominal and real GDP. [3]

Ref - 2.1.1 - Economic Growth

Answer 5

Nominal GDP shows values unadjusted for inflation effects. [1]

Real GDP shows values which have accounted for inflation, [1] therefore the value is more accurate. [1]

Question 6

Describe the difference between volume and value of a good or service. [2]

Ref - 2.1.1 - Economic Growth

Answer 6

The volume is how much of a good or service is being produced. [1]

The value is the percieved worth of a good or service. [1]

Question 7

Describe the difference between total GDP and GDP per capita. [2]

Ref - 2.1.1 - Economic Growth

Answer 7

Total GDP is the value of goods and services in an economy per year. [1]

GDP per capita is the same, but GDP is divided by the population of a country. [1]

Question 8

Describe the key difference between GDP and GNI [2]

Ref - 2.2.1 - Economic Growth

Answer 8

GDP only accounts for net income for goods and services produced within it’s borders. [1]

GNI takes into account net income from production overseas. [1]

Question 9

Give one reason why comparing economic growth between countries can be inaccurate. [2]

Ref - 2.1.1 - Economic Growth

Answer 9

A developing country may have faster rates of growth, [1] but this does not mean their GDP is higher than emerging or developed countries. [1]

Question 10

State how to convert nominal GDP into Real GDP [1]

Ref - 2.1.1 - Economic Growth

Answer 10

(Base Index/Current Index) x Nominal GDP [1]

Question 11

Define Subjective Happiness [1]

2.1.4 - National Happiness

Answer 11

Feelings of wellness and satisfaction that cannot be objectively measured. [1]

Question 12

State 3 factors that can influence subjective happiness. [3]

2.1.4 - National Happiness

Answer 12

Financial situation - e.g. being in low levels of debt. [1]
Job satifcation - Having an interesting/fulfilling job. [1]
Health - e.g. a lack of health concerns. [1]

Question 13

Describe what is meant by the Easterlin Paradox. [2]

2.1.4 - National Happiness

Answer 13

Initially as real income rise, subjective happiness increases [1]. But as real incomes rise further, subjective happiness may no longer increase. [1]

Question 14

Describe 2 reasons for the Easterlin Paradox. [4]

2.1.4 - National Happiness

Answer 14

Importance of non-financial factors [1] - Factors such as health, job satisfaction etc. [1]

Importance of habit [1] - Individuals get used to a higher purchasing power, therefore there is less happiness in more spending. [1]

Question 15

What are the 3 types of inflation? [3]

Ref - 2.1.2 - Inflation

Answer 15

Inflation - A general increase in the price level. [1]
Disinflation - A general decrease in the rate of inflation. [1]
Deflation - A fall in the price level below 0% [1]

Question 16

State 2 types of measures of inflation used. [2]

Ref - 2.1.2 - Inflation

Answer 16

• Retail Price Index [1]
• Consumer Price Index [1]

Question 17

How can CPI be measured? [2]

Ref - 2.1.2 - Inflation

Answer 17

CPI can be measured by using the “basket of goods” [1] which is a basket of 800 of the most common goods and services. [1]

Question 18

State 1 use for the RPI measure [2]

Ref - 2.1.2 - Inflation

Answer 18

Used by TU’s/employers to bargain higher wages [1] so that wage rates account for inflation. [1]

Question 19

What are the 2 main differences between CPI and RPI? [4]

Ref - 2.1.2 - Inflation

Answer 19

CPI mainly excludes anything relating to housing [1], such as mortgage repayments and house depreciation. [1] (bar CPIH)

RPI excludes high income households (top 4% of earners) [1] and pensioners claiming 75% of their income from the state. [1]

Question 20

Explain 2 limitations of using CPI as a measure of inflation. [4]

Ref - 2.1.2 - Inflation

Answer 20

CPI does not take into account the quality of goods [1] therefore quality can vary. [1]

CPI does not include housing costs [1] which may impact reliability as the cost of housing may increase. [1]
- (However, CPIH does take into account for housing, countering this argument.)

Question 21

What is the index number? [1]

Ref - 2.1.2 - Inflation

Answer 21

An economic measure which reflects price/quantity compared to the base year. [1]

Question 22

How would you calculate the index number? [1]

Therefore, how would you calculate inflation using the index number? [2]

Ref - 2.1.2 - Inflation

Answer 22

New Value/Old Value (x100) [1]

• Multiply index number by given percentage change. [1]
• Add up other weighted indexs. [1]

Question 23

What is demand-pull inflation and how is it caused? [2]

Ref - 2.1.2 - Inflation

Answer 23

• Increase in the general price level caused by higher aggregate demand. [1]
• Caused by an increase in C+I+G+(X-M) [1]

Question 24

What is cost-push inflation and how is it caused? [2]

Ref - 2.1.2 - Inflation

Answer 24

• Increase in the general price level, due to high costs of production. [1]
• Caused by an increase in costs of production (e.g. Labour costs, indirect taxation etc.) [1]

Question 25

Explain the concept of wage price spiral in relation to inflation due to the money supply. [3] | Ref - 2.1.2 - Inflation

Answer 25

Higher money supply causes higher inflation due to demand-pull inflation. [1] As inflation increases, workers demand higher wages, [1] so businesses raise their price, causing higher inflation. [1]

Question 26

Describe 1 effect of inflation on consumers. [3] | Ref - 2.1.2 - Inflation

Answer 26

- High inflation will reduce the value of real incomes. [1] - So borrowers benefits as real value of debt decreases. [1] - So savers will be hurt as the reward for saving is less. [1]

Question 27

Explain 1 effect of inflation on firms. [2] | Ref - 2.1.2 - Inflation

Answer 27

- Reduced international competitiveness as UK exports are more expensive. [1] - Therefore a firms profits from exports are reduced. [1]

Question 28

Explain 1 effect of inflation on workers. [3] | Ref - 2.1.2 - Inflation

Answer 28

Rising inflation will reduce the real value of workers wages [1], therefore their purchasing power decreases, [1] which may see a decrease in subjective happiness. [1]

Question 29

Explain 1 effect of inflation on the government. [2] | Ref - 2.1.2 - Inflation

Answer 29

Increasing inflation reduces the value of the national debt in real terms [1], therefore less money is owed by a country. [1]

Question 30

Describe 2 risks of deflation. [4] | Ref - 2.1.2 - Inflation

Answer 30

Lower consumer spending [1] as consumers keep waiting for lower prices, continually shifting AD in. [1] Higher unemployment [1] as lower prices causes lower revenue, so less ability to pay workers. [1]

Question 31

Describe the difference between good and bad deflation. [2] | Ref - 2.1.2 - Inflation

Answer 31

Good (Supply-side deflation) - Fall in price level due to lower CoP [1] Bad (Demand-side deflation) - Fall in price level due to falling demand. [1]

Question 32

Define employment and unemployment. [2] | Ref - 2.1.3 - Employment and Unemployment

Answer 32

Employment - Total number of people who are working for a salary. [1] Unemployment - People without a job who are able and willing to work for current wages. [1]

Question 33

Describe the meaning of the term underemployment [2]. | Ref - 2.1.3 - Employment and Unemployment

Answer 33

People who are currently employed in a job [1], however are not working to their full capacity/skill. [1]

Question 34

Describe the characteristics of the claimant count in measuring unemployment. [3] | Ref - 2.1.3 - Employment and Unemployment

Answer 34

Must be unemployed and: - Registered at the job centre, claiming JSA [1] - Over the age of 18 [1] - Able and willing to accept available work. [1]

Question 35

Describe the characteristics of the ILO in measuring unemployment. [3] | Ref - 2.1.3 - Employment and Unemployment

Answer 35

Must be unemployed and: - Aged 16-65 [1] - Been out of work for 4 weeks. [1] - Ready to start in 2 weeks. [1]

Question 36

Describe 2 reasons why unemployment measures may not be accurate. [4] | Ref - 2.1.3 - Employment and Unemployment

Answer 36

May underestimate the level of unemployment [1] - e.g excluding those who are frictionally unemployed. [1] May overestimate the level of unemployment [1] - e.g. those who are physically disabled (cannot work) still unemployed. [1]

Question 37

Explain 1 reason why the claimant count may be lower than the ILO. [3] | Ref - 2.1.3 - Employment and Unemployment

Answer 37

- Youth employment is not included in the measure. [1] 16-18 year olds looking for employment will not be included, [1] therefore the ILO may be higher, especially if there is a surge in youth employment. [1]

Question 38

State 1 reason why the claimant count may be higher than the ILO. [2] | Ref - 2.1.3 - Employment and Unemployment

Answer 38

People who are self employed may apply for JSA [1], as they are technically not working. [1]

Question 39

Describe the difference between levels and rates of employment. [2] | Ref - 2.1.3 - Employment and Unemployment

Answer 39

- Levels are the number of people who are in employment [1]. - Rates are the % of people employed, allowing for easier comparison between countries. [1]

Question 40

State at least 3 of the 5 types of unemployment in an economy. [3-5] | Ref - 2.1.3 - Employment and Unemployment

Answer 40

- Structural unemployment [1] - Seasonal unemployment [1] - Frictional unemployment [1] - Cyclical unemployment [1] - Real wage unemployment. [1]

Question 41

Define structural and seasonal unemployment. [2] | Ref - 2.1.3 - Employment and Unemployment

Answer 41

- Structural - When patterns of demand and supply in an economy determine unemployment. [1] - Seasonal - When workers are unemployed during certain times of the year. [1]

Question 42

Define frictional and cyclical unemployment. [2] | Ref - 2.1.3 - Employment and Unemployment

Answer 42

- Frictional - When workers are unemployed for short periods of time. [1] - Cyclical - When there is not enough demand in an economy for all workers to receive a job. [1]

Question 43

What is real wage unemployment? [2] | Ref - 2.1.3 - Employment and Unemployment

Answer 43

This is when real wages are set too high [1], therefore firms cannot afford to employ every worker. [1]

Question 44

Why are transferrable skills important in maintaining employment? [2] | Ref - 2.1.3 - Employment and Unemployment

Answer 44

A lack of skills may lead to structural unemployment [1] if there are no available jobs in their given sector. [1]

Question 45

Explain 1 impact of migration on employment. [3] | Ref - 2.1.3 - Employment and Unemployment

Answer 45

Increased supply of labour in the economy, [1] decreasing wages, increasing demand for labour [1], therefore more jobs are made in the economy. [1]

Question 46

Give one reason why migration may not have an impact on employment. [2] | Ref - 2.1.3 - Employment and Unemployment

Answer 46

Some migrants may be inactive [1], therefore they are not working, so there is no impact on employment. [1]

Question 47

Describe 1 effect of unemployment on consumers/workers. [2] | Ref - 2.1.3 - Employment and Unemployment

Answer 47

Less consumer choice [1], as their income has decreased, therefore purchasing power decreases. [1]

Question 48

Describe 1 effect of unemployment on firms. [3] | Ref - 2.1.3 - Employment and Unemployment

Answer 48

As more workers become unemployed, they may work for a lower wage [1], therefore reducing recruitment costs for firms, [1] while also increasing productivity. [1]

Question 49

Describe an effect of unemployment on the government. [1] | Ref - 2.1.3 - Employment and Unemployment

Answer 49

Increased government expenditure, as there is more spending on unemployment benefits [1], therefore posing an opportunity cost. [1]

Question 50

Define the balance of payments. [1] | Ref - 2.1.4 - Balance of Payments

Answer 50

A record of all transactions associated with imports and exports. [1]

Question 51

State the structure of the current account of the balance of payments. [4] | Ref - 2.1.4 - Balance of Payments

Answer 51

- Trade of goods (e.g. exports+imports) [1] - Trade of services [1] - Investment (primary) income (e.g. interest) [1] - Transfers (secondary) income (e.g.EU transactions) [1]

Question 52

Describe what is meant by the investment (primary) income. [2] | Ref - 2.1.4 - Balance of Payments

Answer 52

- Income made by UK businesses abroad flows back into the UK. [1] - Income made by foreign businesses in the UK flow out to the foreign country. [1]

Question 53

Describe what is meant by the transfer (secondary) income [2] | Ref - 2.1.4 - Balance of Payments

Answer 53

Inflow of secondary income may include aid [1], which is secondary income [1].

Question 54

What is the difference between a current account deficit and a surplus? [2] | Ref - 2.1.4 - Balance of Payments

Answer 54

Deficit - Money in the current account going out of a country > money coming in. [1] Surplus - Money in the current account going out of a country > money coming in. [1]

Question 55

State 2 factors which can cause a current account surplus. [2] | Ref - 2.1.4 - Balance of Payments

Answer 55

Low economic growth [1] A weak exchange rate [1]

Question 56

State 2 factors which can cause a current account deficit. [2] | Ref - 2.1.4 - Balance of Payments

Answer 56

A strong exchange rate [1] High economic growth [1]

Question 57

What are the 3 effects of an reduction in the current account deficit? [3] | Ref - 2.1.4 - Balance of Payments

Answer 57

- Increased economic growth [1] - Increased employment [1] - Demand-Pull inflation [1]

Question 58

Explain how an increasing current account deficit would impact employment. [3] | Ref - 2.1.4 - Balance of Payments

Answer 58

An increase would lead to less competitive exports [1], therefore reducing revenue for firms [1] so they are forced to lay off more workers, increasing unemployment. [1]

Question 59

Explain how the BoP can impact economic growth. [3] | Ref - 2.1.4 - Balance of Payments

Answer 59

A BoP deficit means that there are more withdrawals (imports) [1] than injections (exports) of the circular flow of income into the economy [1] , therefore economic growth slows down. [1]

Question 60

Define the term "credit crunch" [1] | Ref - 2.1.4 - Balance of Payments

Answer 60

When there is a sudden reduction in the availability of credit. [1]