Unit 2.1 Flashcards
Macroeconomics
looks at whole economies or groups of economies such as the EU or the eurozone. Sometimes macroeconomics will look at the whole world ( global economy)
Economy
The state of a country/region in terms of the production and consumption of goods and services. The state of an economy is measured by GDP
GDP
Gross Domestic Product measures the total value of natural output of goods and services produced in a given time period. It estimates the size of and growth in the economy.
How is GDP calculated- Expenditure
-Consumption (C)
-Government Spending (G)
-Investment Spending (I)
-Changes in value of stocks
-Exports (X)
-(minus) Imports (M)
=GDP (aka Aggregate Demand)
AD=C+I+G+X-M
How is GDP calculated- Factor Incomes
- Income from wages and salaries
-Profits of private and public sector businesses
-Rental income from the ownership of land
(NOTE: Transfer payments such as welfare benefits are excluded from GDP)
How is GDP calculated- Value of output
-Value added from each of the main sectors.
These are:
-Primary (e.g. farming, forestry and mining)
-Construction
-Manufacturing
-Tertiary (e.g. tourism and healthcare)
- Quaternary ( e.g. Business Consultancy)
Manufacturing
Manufacturing is the business of producing tangible goods in factories such as new vehicles or smart phones. In March 2023, the manufacturing sector accounted for 95% of total uk economic output. It accounted for 8% of employment in the same period.
EXAMPLES OF SERVICE INDUSTRIES
- Services are part of the tertiary sector
- Examples include services such as accountancy, health and social care, hospitality, education, and tourism.
- Service industries accounted for 80% of total UK economic output
(Gross Value Added) and 82% of employment in 2022 - Many manufacturing jobs depend on the demand for and output in service industries - for example, factories that make coffee machines, train services that require manufacturing of new carriages, signalling and track.
EXAMPLES OF MANUFACTURING INDUSTRIES
Automotive: The UK has a significant automotive industry, with major car manufacturers such as Jaguar Land Rover, Mini, and Rolls-Royce
* Aerospace: The UK is home to major aerospace companies, including Airbus, BAE Systems, and Rolls-Royce.
* Chemical and pharmaceuticals: The UK has a large chemical industry, producing a range of products including plastics, paints, and detergents. The country is also home to major pharmaceutical companies, such as AstraZeneca and GlaxoSmithKline.
* Food and drink: The UK have a diverse food and drink industry, producing a range of products including beer, whisky, chocolate, and processed foods. A large percentage of food and drink production is exported.
Gross Value By sector UK
In the UK in 2022, Real Estate had a £270,093 Million Gross Value giving it the largest value along with Wholesale and Retail which had a £238,068 Million Gross Value
What economic information is used to measure the level of and changes in average living standards within an economy?
-Baseline indicator is real national income per capita (GDP or GNI)
-This is real GDP divided by the population = Income per head
-Real means that the income data has been adjusted for the effects of price inflation
-PPP – a purchasing power parity adjustment is made when comparing and contrasting standards of living across countries.
GDP per capita
Measures the average economic output per person in a country. It’s a useful metric for understanding the average standard of living or income level within a given nation. Per capita GDP provides a way to compare the economic performance of different countries while considering their population sizes. Per Capita GDP = Total GDP / Population.
GNI
Gross national income is an alternative to GDP as a measure of wealth. It calculates income instead of output.
GNI= GDP+ Net primary income+ Net secondary income
Qatar has high GNI
Net Primary income
This includes wages, salaries and other income earned by a country’s residents working abroad, as well as earnings from foreign investments such as dividends and interest.
Net secondary income
Refers to transfer of money between countries, such as remittances from foreign workers to their families in their home countries or international aid. Usually negative as leaving country
Countries with GNI higher than their GDP
-Countries with High Remittances e.g. Mexico, Guatemala
-Countries with Foreign Aid e.g. Gambia, South Sudan
-Countries with Expatriate communities
PPF in macro economics
A macro PPF is likely to be labelled consumer goods and capital goods, or goods and services.
Purchasing Power Parity
Purchasing power parity (PPP) is the idea that items should cost the same in different countries, based on the exchange rate at that time. PPP measures how many units of one country’s currency are needed to buy the same basket of goods and services as can be bought with a given amount of another currency.
In countries where the relative cost of living is high such as Norway and Switzerland, there will be a downward adjustment to a nation’s PPP-adjusted GNI per capita.
In nations where the relative cost of living is low such as India, the real purchasing power of $1,000 will be higher and this leads to these countries seeing their PPP-adjusted GNI per capita incomes rising in global league tables.
Big Mac Index
The Big Mac Index measures each currency against a common standard – the hamburger sold by McDonald’s all over the world - manufactured in a standardized size, composition and quality.
PPP is calculated by comparing the price of a basket of comparable goods and services in different countries
By converting the average national Big Mac prices to United States dollars, the same goods can be compared.
This can tell us something about whether a currency is under or overvalued in foreign exchange markets.
BigMac Index January 2023:
Switzerland- Over 7 dollars
Venezuela- Under 2 dollars
What is real national output (real GDP)
Real GDP stands for Real Gross Domestic Product.
It’s called “real” because it considers inflation, which can distort the value of goods and services produced in an economy over time.
Real GDP is adjusted for changes in prices, providing a more accurate measure of an economy’s actual growth.
Real GDP is usually expressed “at constant prices”
What is nominal (money) national output?
Nominal GDP measures the total value of all goods and services produced within a country’s borders during a specific time period, but it doesn’t account for the changes in prices that may occur during that time.
Nominal (or money) GDP is expressed at current prices.
Nominal GDP in a given time period = Quantity of Goods and Services Produced × Current Prices
Converting money GDP into real GDP
In one year, an economy had a nominal GDP of £12 billion
During that year, inflation was 6%.
Calculate the value of real GDP compared to the previous year:
Real value in current year = (Nominal value in current year / price index in current year) * 100
Real value in current year = (£12bn / 106) x 100
Real value in current year = £11.32 billion (at constant prices)
Improving standard of living
-Improving human capital
-Getting more people into properly-paid work
-A living wage can help to lift labour productivity
-Accessible and high-quality public services
-Better / affordable housing to rent & buy
-Wealth generated from successful businesses
MOVING BEYOND INCOME PER HEAD
Income per head is a guide to living standards but many economists argue that we should move beyond it as a simple indicator:
Look at disposable income rather than gross income (not least because the burden of taxes varies between nations)
Focusing on income per head can ignore deep-rooted inequality
Median disposable income might be a better measure of living standards for people in the middle of the income distribution
Income per capita is not always a reliable guide to well-being