MACRO THEME 2.1

What is GDP?

GDP is the value of all goods/services produced in an economy in one year.

Two main approaches to measure GDP?

Expenditure approach and Income approach.

Expenditure approach formula for GDP?

C + I + G + (X – M).

Components of expenditure approach GDP?

Consumption, Investment, Government spending, Net exports.

Income approach to GDP includes?

Wages, Rent, Interest, Profit.

Why do both GDP approaches equal?

One party’s expenditure is another party’s income.

Nominal GDP definition?

GDP at current prices without inflation adjustment.

Real GDP definition?

GDP adjusted for inflation.

GDP per capita formula?

GDP ÷ population.

What does GNI measure?

Total income earned by a country’s residents and businesses, regardless of location.

How is GNI adjusted from GDP?

Add income residents earn abroad, subtract income foreigners earn domestically.

Why is GNI per capita better than GDP per capita?

Provides a more realistic measure of national wealth.

What is PPP?

Purchasing Power Parity – adjusts for cost of living differences across countries.

PPP meaning in simple terms?

Shows how many units of local currency are needed to buy what $1 buys in the USA.

Key metric: Real GDP

Accounts for inflation, better than nominal.

Key metric: Real GDP per capita

Accounts for both inflation and population differences.

Key metric: Real GNI per capita

Best for income analysis across countries.

Limitation of GDP: Inequality

GDP per capita is an average that hides distribution.

Limitation of GDP: Quality changes

Doesn’t measure improvements in product/service quality.

Limitation of GDP: Unpaid work

Excludes voluntary and family care work.

Limitation of GDP: Hours worked

Does not capture working time to generate income.

Limitation of GDP: Environmental factors

Ignores externalities and health impacts.

ONS measures of happiness?

Health, relationships, environment, education, work satisfaction, living conditions.

What is the Easterlin Paradox?

Happiness rises with income only up to a certain point.

Inflation definition?

Sustained increase in the average price level.

Deflation definition?

Fall in average price level (below 0%).

Disinflation definition?

Prices still rising, but at a slower rate.

UK inflation target?

2% per year (CPI).

What does CPI measure?

Tracks prices of a "basket" of ~700 goods/services.

CPI basket updated how?

Reviewed annually, goods enter/exit with spending patterns.

How are CPI weights chosen?

Based on household spending proportions.

Where is CPI data collected?

Prices from ~150 UK locations monthly.

CPI formula?

CPI = (Cost of basket in year X ÷ Cost of basket in base year) × 100.

Example: Base year basket = $400, Year 2020 = $435

CPI = (435 ÷ 400) × 100 = 108.75.

Example: Base year basket = $400, Year 2021 = $544.05

CPI = (544.05 ÷ 400) × 100 = 136.01.

Inflation rate formula?

[(New CPI – Old CPI) ÷ Old CPI] × 100.

Cause of inflation: Demand-Pull

Excess AD (C+I+G+(X–M)) shifts right, raising prices.

Cause of inflation: Cost-Push

Increased costs (wages, raw materials) shift SRAS left.

Cause of inflation: Money supply growth

Lower interest rates or QE increase liquidity → AD rises.

Cause of inflation: Wage-Price spiral

Higher prices → workers demand higher wages → higher costs → higher prices.

Unemployed definition?

Not working but actively seeking work.

Labour force definition?

All employed + unemployed (usually 16–65).

Economically inactive definition?

Working age not in labour force.

ILO Survey definition?

Quarterly household survey; allows international comparisons.

Claimant Count definition?

Unemployment measured via Jobseeker’s Allowance claims.

Underemployment definition?

Workers want more hours or jobs below their skill level.

Unemployment rate formula?

(Unemployed ÷ Labour force) × 100.

Employment rate formula?

(Employed ÷ Working-age population) × 100.

Labour force participation formula?

(Labour force ÷ Total population) × 100.

Inactivity rate formula?

(Inactive working-age ÷ Working-age population) × 100.

Structural unemployment definition?

Skills mismatch with job needs, e.g. deindustrialisation.

Cyclical unemployment definition?

Demand-deficient, caused by fall in AD during recession.

Seasonal unemployment definition?

Temporary jobs tied to seasons (fruit pickers, ski instructors).

Frictional unemployment definition?

Short-term between jobs.

Real-wage unemployment definition?

When wages are set above market equilibrium (e.g. minimum wage).

Positive effects of migration on labour

Fills shortages, increases supply, boosts consumption and job creation.

Negative effects of migration on labour

Can displace locals, dependent family may not work, may raise unemployment.

Impacts of unemployment: Individuals

Income loss, stress, family breakdown, health decline.

Impacts of unemployment: Economy

Lost output, reduced consumption.

Impacts of unemployment: Government

Higher welfare spending, lower tax revenue.

Impacts of unemployment: Firms

Lower demand, skill loss in workforce.

Current account balance definition?

Exports – Imports of goods/services + net income + transfers.

UK 2017 trade balance in goods?

-£32.9bn (deficit).

UK 2017 trade balance in services?

+£27.9bn (surplus).

UK 2017 net income balance?

-£2.1bn (deficit).

UK 2017 current transfers?

-£3.6bn (deficit).

UK 2017 current account total?

-£10.7bn (–3.7% of GDP).

What is a current account deficit?

When outflows > inflows (imports > exports).

What is a current account surplus?

When inflows > outflows (exports > imports).

Has the UK run a current account deficit since 1985?

Yes.

Is current account deficit the same as budget deficit?

No, they are different.

Why are modern economies interdependent?

One country’s imports = another’s exports.

Why must global imports = global exports?

Account balances across the world must sum to zero.

Why do supply chains create interconnectedness?

Production depends on imports (e.g. cars need ~30,000 parts globally).

Examples of recent global disruption to trade?

COVID-19 pandemic and Russia–Ukraine war.