macroeconomics year 1 basics

What is economic growth?

A rise in the value of Gross Domestic Product (GDP)

What does GDP measure?

The quantity of goods and services produced in an economy.

What are the benefits of economic growth?

Higher living standards and more employment opportunities.

What is real GDP?

The value of GDP adjusted for inflation.

How is real economic growth calculated?

By subtracting the inflation rate from the nominal economic growth rate.

What is nominal GDP?

The value of GDP without adjusting for inflation.

Why can nominal GDP be misleading?

Because it does not account for inflation.

What is total GDP?

The combined monetary value of all goods and services produced within a country's borders during a specific time period.

What is GDP per capita?

The value of total GDP divided by the country's population

What does volume of GDP represent?

GDP adjusted for inflation

What is the value of GDP?

The monetary value of GDP at current prices

What is Gross National Product (GNP)?

The market value of all products produced annually by labor and property supplied by citizens of one country.

How does GNP differ from GDP?

GNP includes income earned from overseas assets minus income earned by overseas residents.

What is Gross National Income (GNI)?

The sum of value added by all producers who reside in a nation

What is Purchasing Power Parity (PPP)?

A theory estimating how much the exchange rate needs adjusting for exchanges between countries to be equivalent in purchasing power.

What are some limitations of using GDP to compare living standards?

GDP does not indicate income distribution

What factors affect national well-being according to the UN happiness report?

Real GDP per capita

What did the UK national well-being report measure?

Life satisfaction

What is the relationship between real incomes and subjective happiness?

Higher GDP per capita generally correlates with higher average life satisfaction

What is inflation?

The sustained rise in the general price level over time

What is deflation?

The opposite of inflation

What is disinflation?

The falling rate of inflation

How is the inflation rate calculated in the UK?

Using the Consumer Prices Index (CPI)

What is the purpose of weighting goods in the Consumer Price Index (CPI)?

Goods are weighted according to income spent on each item

How often is the basket of goods for the CPI updated?

Annually

What is the UK government's target inflation rate?

2%

What are the key points to remember when answering an exam question on CPI?

A survey is used

What is one limitation of the CPI when measuring inflation?

The basket of goods is only representative of the average household.

How does the CPI respond to new goods and services?

CPI is slow to respond to new goods and services.

What is the Retail Price Index (RPI)?

An alternative measure of inflation that includes housing costs like mortgage interest and council tax.

How does RPI differ from CPI in terms of income groups?

RPI excludes the top 4% of earners and low-income pensioners.

What is a key difference between CPI and RPI regarding consumer behavior?

RPI does not account for consumers switching to cheaper products when prices rise

What is demand-pull inflation?

Inflation that occurs from the demand side of the economy

What are some main triggers of demand-pull inflation?

Depreciation in the exchange rate

What is cost-push inflation?

Inflation that occurs from the supply side of the economy when firms face rising costs.

What are some triggers of cost-push inflation?

Rising raw material costs

How can excessive growth in the money supply affect inflation?

It can cause hyperinflation if it increases faster than real output.

What is one effect of inflation on consumers?

Those on low and fixed incomes are hit hardest due to its regressive effect.

How does inflation impact borrowers?

Borrowers benefit as the real value of their debt decreases.

What is one effect of high inflation on firms?

It leads to higher interest rates

What must the government do in response to inflation?

Increase the value of state pensions and welfare payments.

What is the Claimant Count?

It counts people claiming unemployment-related benefits like Job Seeker's Allowance (JSA).

What is a limitation of the Claimant Count?

It underestimates unemployment because not all unemployed individuals are eligible or claim JSA.

What criteria does the International Labour Organisation (ILO) use to measure unemployment?

It asks if individuals have been out of work for 4 weeks

What is the distinction between unemployment and underemployment?

Unemployed individuals are actively seeking work but not employed

What does it mean to be underemployed?

Having a job

How does unemployment affect consumers?

Unemployment reduces disposable income and living standards

What are the effects of higher unemployment on firms?

Higher unemployment increases the labor supply

What are the consequences of unemployment for workers?

It results in a waste of resources

What financial implications does unemployment have for the government?

Increased spending on Jobseeker's Allowance (JSA) entails an opportunity cost and leads to reduced revenue from income and indirect taxes.

What societal impacts arise from unemployment?

Opportunity costs due to lost production and potential negative externalities such as crime and vandalism.

Who is considered economically inactive?

Individuals not actively looking for jobs

What is structural unemployment?

A long-term decline in demand for goods and services in an industry

What characterizes frictional unemployment?

The temporary period between leaving one job and seeking another

What is seasonal unemployment?

Unemployment that occurs at specific times of the year

What causes demand deficiency (cyclical unemployment)?

A lack of demand for goods and services during economic declines or recessions

How does real wage inflexibility contribute to unemployment?

Wages above market equilibrium can cause unemployment

What is the significance of migration for employment and unemployment?

Migrants increase labor supply and bring high-quality skills

What are the components of the balance of payments?

A record of all financial transactions between a country and others

What does the current account measure?

The balance of trade in goods and services

What is a current account surplus?

A situation where there is a net inflow of money into the circular flow of income.

What is a current account deficit?

When a country spends more on imports than it earns from exports.

What are the UK government's macroeconomic objectives?

Full employment

How do current account imbalances relate to economic growth?

Selling more exports increases aggregate demand (AD) and improves economic growth; deficits tend to fall during economic declines and rise during growth.

What is the interconnectedness of economies through international trade?

The sum of all countries' trade balances should be zero