topic 2.1

Question 1

When does Economic growth occur

Answer 1

When there is a rise in the value of Gross Domestic Product (GDP).

Question 2

Explain GDP and its link to Economic Growth

Answer 2

GDP measures the quantity of goods and services produced in an economy. In other words, a rise in economic growth means there has been an increase in national output.

Question 3

What’s beneficial to economic growth

Answer 3

Economic growth leads to higher living standards and more employment opportunities.

Question 4

What is Real GDP

Answer 4

Real GDP is the value of GDP adjusted for inflation

Question 5

What is Nominal GDP

Answer 5

Nominal GDP is the value of GDP without being adjusted for inflation

Question 6

What is Total GDP

Answer 6

Total GDP is the combined monetary value of all goods and services produced within a country’s borders during a specific time period.

Question 7

Explain GDP per capita and why it is useful

Answer 7

GDP per capita is the value of total GDP divided by the population of the country.
This is useful for comparing the relative performance of countries

Question 8

Explain what is meant by Volume of GDP

Answer 8

Volume of GDP is GDP adjusted for inflation. It is the size of the basket of goods and the real level of GDP.

Question 9

Explain what is meant by Value of GDP

Answer 9

Value of GDP is the monetary value of GDP at prices of the day. It is the nominal figure and can be calculated by volume times current price level.

Question 10

What is Gross National Product (GDP)

Answer 10

Gross National Product (GNP) is the market value of all products produced in an annum by the labour and property supplied by the citizens of one country.

Question 11

What is Gross National Income (GNI)

Answer 11

Gross National Income (GNI) is the sum of value added by all producers who reside in a nation, plus net overseas interest payments and dividends.

Question 12

What’s the difference between GDP and GNP

Answer 12

GNP includes GDP plus income earned from overseas assets minus income earned by overseas residents. GDP is within a country’s borders, whilst GNP includes products produced by citizens of a country, whether inside the border or not.

Question 13

What’s the difference between GDP and GNI

Answer 13

GNI includes what a country earns from overseas and removes any money that is sent back home by foreigners in that country.

Question 14

What is Purchasing Power Parity (PPP)

Answer 14

A theory that estimates how much the exchange rate needs adjusting so that an exchange between countries is equivalent, according to each currency’s purchasing power

Question 15

What are the 4 limitations of using GDP to compare living standards

Answer 15

1) GDP does not give any indication of the distribution of income.

2) GDP may need to be recalculated in terms of purchasing power, so that it can account for international price differences.

3) There are also large hidden economies, such as the black market, which are not accounted for in GDP.

4) GDP gives no indication of welfare.

Question 16

Define Inflation

Answer 16

Inflation is the sustained rise in the general price level over time.

Question 17

Define Deflation

Answer 17

Deflation is the sustained decrease in the general price level over time

Question 18

Define Disinflation

Answer 18

Disinflation is the falling rate of inflation.

Question 19

Explain how the Consumer Prices Index (CPI) works

Answer 19

The family Expenditure survey finds out what consumers spend their income on.
This is called the basket of goods.
The goods are weighted according to how much the income is spent on each item

Question 20

What’s the UK’s goal for inflation

Answer 20

The objective is for inflation to be at 2%, or 1% either side of this

Question 21

What are the 4 limitations of CPI

Answer 21

1) The basket of goods is only representative of the average household

2) Different demographics have different spending patterns.

3) CPI is slow to respond to new goods and services, even though it is updated regularly.

4) It is hard to make historical comparisons, since technology twenty years ago was of a vastly different quality, and arguably a different product altogether, than now.

Question 22

What are the 2 methods of calculation inflation in the UK?

Answer 22

Retail Price Index (RPI)
Consumer Prices Index (CPI)

Question 23

Explain how the Retail Price Index (RPI) is different to CPI

Answer 23

Unlike CPI, RPI includes housing costs, such as payments on mortgage interest and council tax. This is why RPI tends to have a higher value than CPI.
RPI excludes the top 4% of earners and low income pensioners.
CPI takes into account the fact that when prices rise people will switch to product that has gone up by less, whilst RPI does not.

Question 24

What are the 3 causes of inflation

Answer 24

1) Demand pull inflation
2) Cost push Inflation
3) Growth of the money supply

Question 25

Explain Demand pull inflation

Answer 25

From the demand side of the economy - It is when aggregate demand is growing unsustainably and causes pressure on resources resulting in producers to increase their prices and earn more profits.

Question 26

What are the 4 triggers for Demand pull inflation

Answer 26

1) A depreciation in the exchange rate, which causes imports to become more expensive, whilst exports become cheaper. This causes AD to rise.

2) Fiscal stimulus in the form of lower taxes or more government
spending. This means consumers have more disposable income, so
consumer spending increases.

3) Lower interest rates makes saving less attractive and borrowing more attractive, so consumer spending increases.

4) High growth in UK export markets means UK exports increase and AD increases.

Question 27

Explain Cost push inflation

Answer 27

From the supply side of the economy - it occurs when firms face rising costs

Question 28

What are the 6 triggers for cost push inflation

Answer 28

1) Raw materials become more expensive

2) Labour becomes more expensive

3) Expectations of inflation - if consumers expect prices to rise, they
may ask for higher wages to make up for this, and this could trigger
more inflation

4) Indirect taxes could increase the cost of goods, if producers choose to pass the costs onto the consumer.

5) Depreciation in the exchange rate, which causes imports to become more expensive, which pushes up the price of raw materials.

6) Monopolies, using their dominant market position to exploit consumers with high prices.

Question 29

Explain Growth of the money supply’s effect on inflation using the Bank of England as an example

Answer 29

If the Bank of England printed more money, there would be more money flowing in the economy. Extreme increases in the money supply usually cause hyperinflation. It is only inflationary if the
money supply increases at a faster rate than real output.

Question 30

Explain the 2 effects of inflation on Consumers ( 1 good, 1 bad)

Answer 30

1) Those on low and fixed incomes are hit hardest by inflation, due to its regressive effect, because the cost of necessities such as food and water becomes expensive. The purchasing power of money falls, which affects those with high incomes the least.

2) If consumers have loans, the value of the repayment will be lower,
because the amount owed does not increase with inflation, so the
real value of debt decreases.

Question 31

Explain the 4 effects of inflation on Firms (all bad)

Answer 31

1) With high inflation, interest rates are likely to be higher, so the cost of investing will be higher and firms are less likely to invest.

2) Workers might demand higher wages, which could increase the costs of production for firms.

3) Firms may be less price competitive on a global scale if inflation is high.

4) Unpredictable inflation will reduce business confidence, since they
are not aware of what their costs will be. This could mean there is less investment.

Question 32

Explain the effect of inflation on The Government

Answer 32

The government will have to increase the value of the state pension
and welfare payments because the cost of living is increasing.

Question 33

Explain the 2 effects of inflation on Workers

Answer 33

1) Real incomes fall with inflation, so workers will have less disposable income

2) If firms face higher costs, there could be more redundancies when firms try and cut their costs

Question 34

Why is it hard to measure unemployment (2 reasons)

Answer 34

1) Some of those in employment might claim unemployment related benefits
2) Some of the unemployed might not reveal this in a survey.

Question 35

What are the 2 main measures of unemployment in the UK

Answer 35

The Claimant Count
The International Labour Organisation (ILO) with the UK Labour Force Survey (LFS)

Question 36

Explain the Claimant Count method of looking at Unemployment

Answer 36

Counts the number of people claiming unemployment related benefits, such as job Seeker’s Allowance (JSA) - They have to prove they are actively looking for work

Question 37

Explain the International Labour Organisation (ILO) and the UK Labour Force Survey (LFS) method of looking at Unemployment

Answer 37

The LFS is taken on by the ILO. It directly asks people if they meet the following criteria:
Been out of work for 4 weeks
Able and willing to start working within 2 weeks
Workers should be available for 1 hour per week. Part time unemployment is included.

Question 38

Define unemployment

Answer 38

Unemployment is when an individual who is not employed and is seeking employment, cannot find work.

Question 39

What is underemployment

Answer 39

Underemployment is a measure of the total number of people in an economy who are unwillingly working in low-skill and low-paying jobs or only part-time because they cannot get full-time jobs that use their skills.

Question 40

Explain the 2 effects of employment and unemployment on Consumers

Answer 40

1) If consumers are unemployed, they have less disposable income and their standard of living may fall as a result.

2) There are also psychological consequences of losing a job, which
could affect the mental health of workers.

Question 41

Explain the 3 effects of employment and unemployment on Firms

Answer 41

1) With a higher rate of unemployment, firms have a larger supply of
labour to employ from. This causes wages to fall, which would help
firms reduce their costs.

2) With higher rates of unemployment, since consumers have
less disposable income, consumer spending falls so firms may lose
profits. It might cost firms to retrain workers, especially if they have been out of work for a long time.

3) Producers which sell inferior goods might see a rise in sales.

Question 42

Explain the 3 effects of employment and unemployment on Workers

Answer 42

1) With unemployment, there is a waste of workers’ resources.

2) They could lose their existing skills if they are not fully utilized

3) Those in jobs are likely to see a fall in their wages as supply of labour increases.

Question 43

Explain the 2 effects of employment and unemployment on The government

Answer 43

1) If the unemployment rate increases, the government may have to
spend more on JSA, which incurs an opportunity cost because the
money could have been invested elsewhere.

2) The government would also receive less revenue from income tax,
and from indirect taxes on expenditure, since the unemployed have
less disposable income to spend.

Question 44

Explain the effect of employment and unemployment on Society

Answer 44

There could be negative externalities in the form of crime and
vandalism, if the unemployment rate increases.

Question 45

What are the 5 causes of unemployment

Answer 45

1) Structural Unemployment

2) Frictional unemployment

3) Seasonal unemployment

4) Cyclical unemployment (Demand deficiency)

5) Real wage inflexibility

Question 46

Explain Structural Unemployment

Answer 46

Occurs with a long term decline in demand for the goods and services in an industry, which costs jobs

Question 47

Explain Frictional unemployment

Answer 47

This is the time between leaving a job and looking for another job. It is common for there to always be some frictional unemployment

Question 48

Explain Seasonal unemployment

Answer 48

Seasonal unemployment is when people who work in seasonal jobs become unemployed when demand for labour decreases

Question 49

Explain Cyclical unemployment (Demand deficiency)

Answer 49

Caused by a lack of demand for goods and services, and it usually occurs during periods of economic decline or recessions

Question 50

Explain Real wage inflexibility on unemployment

Answer 50

Wages above the market equilibrium may cause unemployment. Classical economists argue that by letting wages fall to the equilibrium level, there would be no unemployment.

Question 51

Explain the impacts of migration to the UK economy

Answer 51

1) Migrants are usually of working age and many are looking for a job, so the supply of labour at all wage rates tends to increase with more migration.

2) Migrants tend to bring high quality skills to the domestic workforce, which can increase productivity and increase the skillset of the labour market.

3) Migrant labour affects the wages of the lowest paid in the domestic labour market, by bringing them down.

Question 52

Explain the Balance of Payments

Answer 52

The Balance of Payments is a record of all financial transactions made between consumers, firms and the government from one country with other countries.
It states how much is spent on imports, and what the value of exports is.

Exports are goods and services sold to foreign countries, and are positive in the balance of payments. This is because they are an inflow of money.

Imports are goods and services bought from foreign countries, and they are negative on the balance of payments. They are an outflow of money.

Question 53

What are the 3 Balance of Payments accounts

Answer 53

The balance of payments is made up of:
- The current account
- The capital account
- The official financing account.
For the AS course, only the current account is focussed on.

Question 54

What is the current account

Answer 54

The current account on the balance of payments is the balance of trade in goods and services.

Question 55

What are the UK’s 4 macroeconomic objectives

Answer 55

1) low employment
2) Low, stable inflation
3) A sustainable current account on the balance of payments
4) Sustainable economic growth