Edexcel IGCSE Economics - Paper 2: Macroeconomics and The Global Economy

Flashcards from Chapters 25-42 of the Pearson Edexcel IGCSE Economics textbook.

Budget Deficit

Amount by which government spending is greater than government revenue

Macroeconomics

Study of large economic systems such as those of a whole country or area of the world

What are the macroeconomic objectives?

Reducing unemployment, Protect the environment, Balance of payments (current account), Economic growth, Controlling inflation, Redistribution of income

Economic growth

Increase in the level of output by a nation

National income

Value of income, output or expenditure over a period of time

What does GDP stand for?

Gross Domestic Product

Gross Domestic Product (GDP)

Market value of all final goods and services produced in a period (usually yearly), an internationally recognised measure of national income

Why is GDP used to measure economic growth all over the world?

Using the standard definition means that meaningful comparisons can be made between the growth rates of different countries

What does GDP measure?

The value of all goods and services produced in a country for sale

What are limitations to GDP as a measure of growth?

Inflation, Population Changes, Statistical Errors, Value of Home Produced Goods, Hidden Economy, Living Standards, External Costs

Why can inflation limit the effectiveness of GDP?

Price increases make growth rates misleading

How can the problem of inflation and GDP be solved?

Using real GDP

Why can population changes limit the effectiveness of GDP?

Increases in population may offset growth in GDP

How can the problem of population changes and GDP be solved?

GDP per capita

Why can statistical errors limit the effectiveness of GDP?

The information has been entered inaccurately or left out by the government

Why can the value of home produced goods limit the effectiveness of GDP?

Some goods and services are not traded and therefore economic activity is not recorded

Why can the hidden economy limit the effectiveness of GDP?

Paid work and services can go unrecorded

Why can living standards limit the usefulness of GDP?

GDP rising does not directly constitute an increase in living standards

Why can external costs limit the effectiveness of GDP?

GDP does not take external costs like environmental costs into account

What are the four stages of the economic cycle?

Boom, Downturn, Recession, Recovery

Boom

Peak of the economic cycle where GDP is growing at its fastest

What are some characteristics of boom?

GDP is growing fast, existing firms will be expanding, new firms will be entering the market, demand will be rising, jobs created, rise in wages, profits rise, prices rise

How does economic growth affect productive potential?

Economic growth can increase the productive potential of a country

Overheat

If an economy overheats, demand rises too fast, causing prices and imports to rise, a situation that governments may try to correct by raising taxes and interest rates

Unsustainable growth

Economic growth that it is not possible to sustain without causing environmental problems

Why can economic growth lead to inflation?

If economic growth is too fast, the economy can overheat, which leads to inflation

What are the effects of economic growth on the environment?

Increased greenhouse gas emissions, global warming, pollution, using up finite resources quickly, unsustainable for future generations

Aggregate Demand

Total demand in the economy including consumption, investment, government expenditure and exports minus imports

Deflation

Period where the level of aggregate demand is falling

Inflation

Rate at which prices rise, a general and continuing rise in prices

What does CPI stand for?

Consumer Price Index

Consumer Price Index (CPI)

Measure of the general price level (excluding housing costs)

Retail Price Index (RPI)

Measure of the general price level which includes house prices and council tax

What does RPI stand for?

Retail Price Index

Demand

pull inflation

How can demand

pull inflation occur?

Cost

push inflation

How can cost

push inflation occur?

Interest rates

Price paid to lenders for borrowed money, the price of money

Monetarists

Economists who believe there is a strong link between growth in the money supply and inflation

What is the relationship between inflation and interest rates

Inflation is more likely to happen if interest rates are low because of the increases in borrowing

What is the impact of inflation on prices?

Prices rise, inflation reduces the purchasing power of money, fall in living standards for households

Purchasing power of money

Amount of goods and services that can be bought with a fixed sum of money

What is the impact of inflation on wages?

Workers need to increase their wages to compensate for the loss in purchasing power

Why can a wages/prices spiral develop during a period of inflation?

Firms need to raise prices in order to justify higher wage costs, which would demand higher wages and so on

What is the impact of inflation on exports?

If inflation is higher at home, demand for exports is likely to fall

What is the impact of inflation on unemployment

High levels of inflation usually mean that AD is rising, so firms will be keen to increase output since prices are increasing, which reduces unemployment

Menu costs

Costs to firms of having to make repeated price changes

Shoe leather costs

Costs to firms and consumers of searching for new suppliers when inflation is high

Hyperinflation

Very high levels of inflation, rising prices get out of control

What is the impact of inflation on menu costs?

Menu costs increase

What is the impact of inflation on shoe leather costs?

Shoe leather costs increase

What is the impact of inflation on uncertainty?

Higher uncertainty if inflation is high and varying

What is the impact of inflation on business and consumer confidence?

Decrease due to higher uncertainty

What is the impact of inflation on investment

Inflation results in a decline in business investment

Unemployment

When those actively seeking work are unable to find a job

How is unemployment measured?

The Labour Force Survey (in the EU)

What are the definitions of unemployment from the ILO?

People without a job, want a job, have actively sought work in the last 4 weeks and are available to start work in the next 2 weeks, or out of work, have found a job and are waiting to start it in the next 2 weeks

What are the types of unemployment?

Cyclical unemployment, Structural unemployment, Seasonal unemployment, Frictional unemployment, Voluntary unemployment

Laying off

To stop employing someone because there is no work for them to do

Cyclical or demand deficient unemployment

Unemployment caused by falling demand as a result of a downturn in the economic cycle

Structural unemployment

Unemployment caused by changes in the structure of the economy such as the decline in an industry

What are the types of structural unemployment?

Sectorial unemployment, Technological unemployment, Regional unemployment

Sectorial unemployment

Occurs when people are laid off because the industry they work in is in decline

Technological unemployment

Occurs when jobs that were previously done by people are now done by machines

Regional unemployment

Unemployment in a particular country is not likely to be the same in all regions

Seasonal unemployment

Unemployment caused when seasonal workers, such as those in the holiday industry, are laid off because the season has ended

Frictional unemployment

When workers are unemployed for a short period of time as they move from one job to another

Voluntary unemployment

Unemployment resulting from people choosing not to work

Impact of unemployment on output

Output is lower than it could be because the productive potential of a country is not being fully exploited

Impact of unemployment on use of scarce resources

It is a waste of resources and results in lower levels of national income as people who are out of work do not make any contribution to production

Impact of unemployment on poverty

Increased employment leads to increased poverty

Impact of unemployment on government spending

Increases because unemployed people are entitled to receive financial benefits from the state

Impact of unemployment on tax revenue

Decreases as taxes are linked to income and spending

Impact of unemployment on consumer confidence

Likely to fall because state benefits are lower than wages so people play a less significant role in the economy

Impact of unemployment on business confidence

Businesses are less likely to take risks and may postpone or cancel investment products

Balance of payments

Record of all transactions relating to international trade

Capital and financial account

The part of the balance of payments where flows of savings, investment and currencies are recorded

Current account

Part of the balance of payments where all exports and imporst are recorded

Exports

Goods and services sold overseas

Imports

Goods and services bought from overseas

Current account deficit

When value of imports exceeds the value of exports

Current balance

Difference between total exports and total imports (visible and invisible)

Current account surplus

When value of exports exceeds the value of imports

Balance of trade or visible balance

Difference between visible exports and visible imports

Invisible trade

Trade in services

Primary income

Money received from the loan of production factors abroad

Secondary income

Government transfers to and from overseas agencies such as the EU

Visible trade

Trade in physical goods

Beneficiary

Someone who gets advantages from an action or charge

Exchange Rate

Price of one currency in terms of another

What is the relationship between the current account and exchange rates?

If a country's exchange rate gets stronger, it will have a negative impact on the current account

How does increased quality of domestic goods affect the current account?

It will cause a current account surplus/improvement in the current account

How does increased quality of foreign goods affect the current account?

It will cause a current account deficit/the current account will worsen

How does an increase in the price of domestic goods affect the current account?

It will cause a current account deficit/the current account will worsen

How does an increase in the price of foreign goods affect the current account?

It will cause a current account surplus/improvement in the current account

Persistent

Continuing to exist or happen, especially for longer than is usual or desirable

How does a current account deficit affect leakages from the economy?

It suggests the country is dependent on imports, so money flows outwards to overseas businesses

How does a current account deficit impact inflation?

A country running a high current account deficit may be exposed to inflationary pressures

How would a current account deficit lead to low demand for exports?

A country with a high current account deficit may have domestic goods of either a price too high or a quality too low