Unit 2 - Macroeconomics

Question 1

national income

Answer 1

the value of goods and services produced in an economy in a year

Question 2

methods of calculating national income - expenditure method

Answer 2

adding up all the spending in the economy, usually measured over a specific time period i.e. a year

Question 3

methods of calculating national income - income method

Answer 3

adding up all the incomes received from the factors of production i.e. wages, interest, rent and profit, usually measured over a specific time period i.e. a year

Question 4

methods of calculating national income - output method

Answer 4

adding up the value of all final products produced in the economy, usually measured over a specific time period i.e. a year

Question 5

government aims - low and stable inflation

Answer 5

the Bank of England has a target of 2% inflation

Question 6

government aims - low unemployment

Answer 6

The government aims to reduce the number of unemployed. This helps reduce the burden on government spending.

Question 7

government aims - balance of payments equilibrium

Answer 7

The government tries to increase the value of exports from the UK. This means we will be selling more abroad.

Question 8

government aims- steady economic growth

Answer 8

The government wants the economy to expand at a steady rate. This will mean people become better off.

Question 9

the business cycle

Answer 9

Shows how the value of goods and services have changed in the economy year on year. It will show times of economic recovery, boom, recession and slump.

Question 10

boom characteristics

Answer 10

• high rates of economic growth
• growing inflation
• low levels of unemployment
• high value of imports
• high levels of tax revenue / low levels of government spending

Question 11

recession

Answer 11

this is where the economy experiences two quarters of negative economic growth

Question 12

recession characteristics

Answer 12

• falling inflation
• rising unemployment
• falling value of imports
• falling levels of tax revenue / higher levels of government spending

Question 13

inflation

Answer 13

a rise in the general level of prices in an economy in a year

Question 14

disinflation

Answer 14

a slowdown in the rate at which prices are rising in general (i.e. when prices rise less quickly than before)

Question 15

deflation

Answer 15

a fall in the general level of prices in an economy in a year

Question 16

calculating inflation (UK Office of National Statistics Method)

Answer 16

1) Complete the Living Costs and Food Survey to see what average families buy.
2) Create a basket of goods. The items change yearly and indicate trends in spending.
3) Give a weight to each item in the basket based on importance.
4) Gather prices from retailers across the country. ONS analysts go out and survey retailers as well as looking at prices online.
5) Check prices from last time
6) Calculate percentage change in prices using the following formula :
new price - old price
————————— x 100
old price
7) Add up all the percentage changes and calculate an average change ; this is inflation

Question 18

causes of inflation - demand pull

Answer 18

This is caused by excess demand for goods and services which tends to occur when the economy is close to capacity (firms are getting close to or are at the maximum production level). This means that in response to shortages, consumers will bid up prices.

Question 19

causes of inflation - cost push

Answer 19

This is caused by firms having an increase in their costs of production. In response to this and to protect profit margins, they will increase prices. Costs of production could increase due to falls in the exchange rate, government legislation (like an increase in the National Living Wage), rises in oil prices etc.

Question 20

impacts of inflation - individuals

Answer 20

• reduces the purchasing power of people’s incomes because inflation leads to a fall in the value of money
• people save less because they get less return on their savings
• people might borrow more because it is beneficial to borrow to buy now as prices will be significantly higher later
• firms might not be able to afford wage demands so will make workers unemployed, reducing living standards

Question 21

impacts of inflation - firms

Answer 21

• cost of production will rise reducing profits
• workers will demand higher wages, increasing cost of production or resulting in the workers striking if the firm cannot meet the demands
• reduces competitiveness in domestic markets because prices are rising more than prices of the same goods from foreign firms
• UK firms exporting will find that their goods and more expensive than those of foreign firms

Question 22

impacts of inflation - government

Answer 22

• high inflation can increase the value of imports and decrease the value of exports due to a fall in international competitiveness
• unemployment could rise because firms cannot afford the wage demands of employees and because demand for goods and services will fall due to falling real incomes
• inequality could rise because the price rises will represent a larger proportion of a low income earner’s wage

Question 23

unemployment

Answer 23

a person is unemployed if they are willing and able to work but cannot find a job

Question 24

level of unemployment

Answer 24

the number of people who are willing and able to work but cannot find a job

Question 25

rate of unemployment

Answer 25

the percentage of the workforce (16-66) who are willing and able to work but cannot find a job

Question 26

measures of unemployment - claimant count

Answer 26

This is the number of people who claim the Job Seekers Allowance component of Universal Credit. It is not an accurate measure of unemployment because not everyone who is unemployed claims benefits, some are not eligible to claim it and the government can change the eligibility criteria.

Question 27

measures of employment - labour force survey

Answer 27

This is a survey carried out every quarter. It asks 150,000 people their employment status and uses this as a representative sample of the population. This is an internationally recognised measure of unemployment.

Question 28

causes of unemployment - cyclical unemployment

Answer 28

a downturn in the trade cycle / less demand due to recession

Question 29

causes of unemployment - structural unemployment

Answer 29

A change in the make up of the economy / some industries no longer required

Question 30

causes of unemployment - regional unemployment

Answer 30

decline of an industry in a specific geographical area (e.g. what will happen to Aberdeen when oil in the North Sea runs out)

Question 31

causes of unemployment - seasonal unemployment

Answer 31

workers are unemployed due to the nature of their job at certain times of year (e.g. ski instructors and berry pickers)

Question 32

causes of unemployment - frictional unemployment

Answer 32

when workers are moving between jobs

Question 33

causes of unemployment - technological unemployment

Answer 33

workers have been replaced by machinery

Question 34

causes of inflation - monetary inflation

Answer 34

This is caused by an increase in the supply of money. For example, if the Bank of England print more money, consumers will start to buy more goods and services. However, if output does not increase, then prices will bid up because shortages will occur.

Question 35

consequences of unemployment - individuals

Answer 35

• unemployed people will have a fall in their standard of living because they will be reliant on unemployment benefits
• unemployed people may suffer from social exclusion leading to mental illness
• employed people will not easily be able to increase wages because there will be others who are looking for work

Question 36

consequences of unemployment - firms

Answer 36

• demand for their goods and services falls due to falling incomes
• surplus of labour therefore wage demands will be kept low

Question 37

consequences of unemployment - government

Answer 37

• economic growth falls because the output of goods and services will fall due to lack of demand
• increase in government spending on unemployment benefits, healthcare and possibly policing due to an increase in crime
• government receive less tax revenue due to a fall in income tax and VAT receipts
• value of imports will fall as less people can afford to buy goods from abroad

Question 38

economic growth

Answer 38

an increase in the productive capacity of the economy in a year

Question 39

how to increase economic growth

Answer 39

to increase economic growth, the government must increase the quantity of the factors of production or improve the quality of these

Question 40

measures to increase economic growth

Answer 40

• increasing immigration / increasing the retirement age, both increasing the size of the labour force
• investing in education, improving the quality of labour, making them more productive
• encouraging investment in research and development, improving the quality of capital such as machinery
• reclaiming land, providing more land to build on
• building new infrastructure, making it easier and faster to transport goods
• promote entrepreneurial activity, as entrepreneurs will start up new businesses and find new ways to produce products
• encourage competition - the government could introduce laws that allow for more competition and markets, forcing forms to produce more with their resources
• update management techniques meaning that the productivity of labour could rise, meaning that more is produced with the current factors of production

Question 41

standard of living

Answer 41

the level of wealth, material goods and necessities available

Question 42

factors affecting the standard of living

Answer 42

inflation, education, unemployment, economic growth and income (IEUEI palindromic acronym)

Question 43

Human Development Index (HDI)

Answer 43

seeks to measure standard of living by looking at a range of factors including income and education

Question 44

main areas of UK government taxation

Answer 44

income tax, national insurance and VAT