2.1

Economic growth 2.1.1

An increase in real GDP over time. The rate of economic growth percentage change in real GDP over a period of time.

Gross domestic product(GDP)

Total value of final g/s produced within a country’s borders over a given period of time

what does total GDP measure?

The total output/income of an economy

How is GDP per capital measured?

Total gdp / n.o people

What is nominal GDP?

Value of gdp without being adjusted for inflation

what is real GDP?

Value of gdp adjusted to inflation

Factors which can increase gdp (name 3)

Larger labour force

More capital

Improved technology/productivity

These may raise total output, but not necessarily GDP per capita

Draw the circular flow of income

What is the purpose of the price mechanism

It is to allocate resources efficiently therefore giving firms incentive to be more innovative, make more products

State injections into the circular flow of income

Government spending

Investments

Exports

State the withdrawals in the circular flow of income

Imports

Taxation

Savings

Provide the 4 factors of labour

Land

Labour

Capital

Enterprise

What is the purpose of firms

To use the 4 factors of production from households to create g/s

What do household get in return for labour and land from firms

Land they can gain rent

Labour they can gain wage

What do households do after gaining factor income

They spend on g/s

Define economic growth

an increase in real GDP over time, growth is the percentage change in real GDP

State the factors which can increase economic growth

More capital provided

Improved technology

More/new resources

Larger labour force

Increase in quality or quantity of g/s

State the limitations of using GDP as a measurement to compare living standards

Hidden economy is not accounted for + people selling and earning money from it avoid paying taxes on it

Distribution of income may be unequal majority of wealth could be from rich people whilst the poor have a lot less

Scarce resources if they contribute to the economy it’s not sustainable for long term

Living environment like pollution and congestion can reduce quality of life despite rise in GDP

State the difference between GDP and GNP

GDP measures production within a country’s borders.

GNI measures income received from residents, including net primary income from abroad

Draw a short run economic growth graph

Draw a long term economic growth graph

Draw the economic cycle

National income

Total income earned by the factors of production in an economy over time

What is inflation?

The sustained increase in general price levels over time.

If nominal income does not rise as fast as prices, real purchasing power falls

What is the meaning of deflation?

Sustained fall in general price levels (negative inflation rate)

What is disinflation?

A fall in the rate of inflation: prices are still rising, but more slowly

Define aggregate demand

The overall demand for goods and services within a country

What causes demand pull inflation?

AD grows unsustainably than the economy’s ability to produce, creating pressure on price levels/resources

Firms therefore raise price levels and earn more profits

What are cost push factors?

Supply side of the economy, when firms face rising costs. Higher production costs (e.g energy and raw materials)

This shifts SRAS left/up , raising price levels and potentially reducing real output

Who is hit the hardest by inflation?

Low/fixed income households, due to regressive effect

Why does inflation affect low income households more?

They spend larger share of income on essentials; if these prices rise faster than their income, real disposable income would fall sharply

What happens to purchasing power of money during inflation?

Money buys fewer g/s; a persons real income falls only if nominal income rises more slowly than prices

How does inflation affect workers?

If nominal wages rise more slowly than prices, real wages and purchasing power fall

How can unpredictable inflation affect firms investment

It would lead to greater uncertainty about costs.

Prices and returns can reduce confidence and delay or cancel investment → lowering future productive capacity

How does inflation affect the government?

Benefits/pension may raise in spending

Nominal tax revenue may rise

Real spending power can fall

How can inflation cause unemployment ?

Higher costs shift SRAS left, reducing real output

Firms may cut production and labour demand → causing cyclical unemployment

What does consumer price index(CPI) measure

the rate of change in prices of a basket of consumer goods and services

Excludes housing costs

What does retail price index(RPI) measure

price index that measures prices changes in a basket of g/s

Includes housing costs such as mortgage

What is the key difference between RPI and CPI

RPI includes housing costs, CPI does not

If CPI rises what does it tell you?

An increase in the general price levels of g/s by households

What does unemployment mean?

The number of people of working age who are willing and able to work, and are actively seeking for work but do not have a job. Have also been unemployed for over 4 weeks

Labour force meaning?

The total of those in employed and unemployed

Who are the economical active people? + provide examples

People of working age who are NOT seeking for work

E.g:

full time students

Long term ill people

What does underemployed?

Those who have a job, but their labour is not used to its full productive potential, therefore they are waste of productive potential

What is the formula for unemployment rate?

What are the measures of unemployment?

Claimant count and labour force survey

How does the claimant count work ?

It counts the number of people claiming unemployment related benefits such as JSA (job seeker allowance)

Give one limitation of the claimant count?

Not all unemployed people are eligible to claim benefits, thus the figures may be lower than the actual amount of unemployed people.

How does the labour force survey work (LFS)?

It asks people if they meet the following criteria :

• Out of work for 4 weeks, but actively looking

• Willing and able to start work within 2 weeks

Give one advantage and one limitation of the LFS?

Advantage: includes unemployed people who do not claim benefits

Limitation: it is a sample survey, so estimates can be affected by sampling error and responses

What are the types and causes of unemployment?

Structural unemployment

Frictional unemployment

Cyclical(Demand deficit) unemployment

Seasons, unemployment

Real wage unemployment

What is structural unemployment?

It is unemployment caused by the decline of a specific g/s

What is frictional unemployment ?

Short term unemployment for when people are in between jobs

How does cyclical unemployment arise?

A fall in AD reduces output; firms need fewer workers, so derived demand for labour falls and unemployment rises

What is Seasonal unemployment?

Unemployment caused by fluctuations in demand for certain g/s during different times of the year.

E.g ski trainer, unemployed during summer due to no demand for skiing lessons

What is real wage unemployment?

If real wages are kept above the market-clearing level, labour supplied exceeds labour demanded, thus creating unemployment

What is the impact of unemployment on consumers?

Consumers will have lower disposable income

Standard of living falls

Impacts of unemployment on firms?

Lower consumer spending

profits + sales decreased

HOWEVER; may benefit from it as there will be a larger labour pool available

Impacts of unemployment for the economy/government?

• Government may received less income tax

• Spend more on benefits; losing output

• Long term unemployment can harm skill

• May cause a rise in social unreal

What does the balance of payment account record?

Records all financial transactions between a country and the rest of the world

What are imports?

It is money that flows out of the country, and goods come in

What are exports?

Money that flows into the country, and goods go out

What does the current account show?

Shows the difference in value between exports and imports

What is a current account surplus(+)?

When exports > imports, money that flows INTO the country

Credits/receipts > debits/payments across goods

What is a current account deficit(-)?

when exports < imports, money that flows OUT of the country

Credits/receipts < debits/payments

What is primary income?

Net income from investments

What is secondary income?

Net transfers of money, such as foreign aid or pensions.

what are consequences of an imbalance in the current account ?

• It may reduce net exports/AD and require financing through capital inflows.

• Pressure on the exchange rate, thus currency may depreciate in value → making imports more expensive

What may cause an imbalance?

High inflation

Changes in exchange rates

Periods of economic growth

Productivity

Competitiveness

How can sterling appreciation affect the current account?

• If the £ increase in value → Uk exports become dearer to foreigners → imports cheaper to Uk buyers

• Export demand may fall → but import demand may rise

Explain how productivity would cause an imbalance on the current account

• If productivity increases → lower unit costs(economies of scale) → improves competitiveness due to more goods produced