economics gcse paper 2

define inflation

a sustained rise in the general price level of goods and services in an economy over a period of time

define deflation

a sustained fall in the general price level of goods and services in an economy over a period of time

define disinflation

a fall in the rate of inflation, meaning prices are still rising but at a slower rate than before

define supply side policies

government measured designed to increase aggregate supply in the economy

examples of supply side policies

1. Tax cuts to improve incentives

• Low income tax to encourage people to work for more hours

• Low corporation tax encourages firms to invest and expand

2. Education and training

• Government invests in schools, colleges and universities to improve skills

• Improves labour productivity and long-run output

3. Deregulation

• Removes unnecessary rules

• Increases competitions and makes firms more efficient 

4. Privatisation

• Firms aim to be more profit efficient 

5. Infrastructure investment

• Reduces business costs and improves productivity

6. Labour flexibility reforms

• Makes hiring and firing easier, encouraging work helping reduce unemployment and improve efficiency

define demand side policies

government measured designed to increase aggregate demand in the economy

examples of demand side policies

1. Fiscal policy

• Fiscal policy: government changes spending and taxes to influence the economy

• Cut taxes → increase disposable income and consumption

2. Monetary policy

• Monetary policy: Central bank controls interest rates and money supply to manage inflation and growth.

• Low interest rates → cheap borrowing → more spending → higher demand

• High interest rates → expensive borrowing → less spending → less demand

3. Exchange rate policy

• Lower exchange rate → exports cheaper → imports more expensive → less demand

• Increase exchange rate → exports expensive → imports cheaper → more demand

4. Consumer confidence policies

• Government measures to stabilise the economy can improve confidence

• Higher confidence means more spending and investment

define demand pull inflation

inflation caused by too much demand in the economy relative to supply

cost push inflation

when higher production costs lead to firms increasing prices

advantages of privatisation

1. Greater efficiency

• Motivated by profit

2. Improved quality and innovation

• To attract customers

3. Revenue for the government

• Selling state owned assets raises a lot of money

4. Wider share ownership

• People own shares in companies, spreading wealth more widely

5. Increased dynamic efficiency

• They invest in things like research and development improving technology and long term productivity

disadvantages of privatisation

1. Loss of social objectives

• They focus on profit and ignore social needs

2. Risk of monopolies

• Privatisation can lead to higher prices 

3. Weaker job security

• Redundancies and attempts to maximise profit

4. Loss of government income 

• Can’t get income from the private firms

5. Inequality and public concern

• Essential services may become less affordable

formula for percentage change

(difference / original) x 100

what happens to exchange rate when there’s higher demand

currency value appreciates

what happens to exchange rate when there’s higher supply

currency value deppreciates

what are advantages of international trade

1. lower prices - cheaper goods

2. more choice - different countries

3. cheaper materials - variety of materials

4. specialisation - higher effeciency

disadvantages of international trade

1. foreign competition

2. business closures

3. unemployment

advantages of dergulation

1. Lower costs for firms

• Less paper work = less money spent on compliance

2. More competition

• Lower barriers of entry

3. Higher efficiency and innovation

• More competition

4. Faster business growth

• Low barriers to entry, can expand quickly

disadvantages of deregulation

1. Less protection for consumers

• Low quality 

2. Risk of exploitation

• Unfairly raise prices

3. Environmental damage

• Firms may pollute more

4. Market failure risk

• Industries may become unfair

define trade bloc

group of countries that agree to trade more easily with each other

how do interest rates affect exchange rates?

High interest rates → high demand → currency appreciates

how does inflation affect exchange rates?

High inflation → goods become expensive → exports fall → currency depreciates

how does economic growth affect exchange rates?

Strong growth → higher demand → currency appreciates

how do balance of payments affect exchange rates?

More exports → higher demand → current appreciates

More imports → less demand → currency depreciates

how do speculations affect exchange rates?

Traders think currency will increase in value → demand rises → currency appreciates

Traders think currency will decrease in value → demand falls → currency depreciates

how does political stability affect exchange rates

Politically stable → increase in demand → currency appreciates

Politically unstable → decrease in demand → currency depreciates

what is the world trade organisation

an organisation that promotes free trade by persuading countries to abolish barriers

what does the world trade organisation do

1. Trade negotiations

• Encourages countries to make trading agreements 

• Aims to bring about trade liberalisation (move towards greater free trade through removing trade barriers)

2. Implementation and monitoring

• Ensures countries are following the trade rules

3. Settling trade disputes

• Makes sure that trade disagreements are resolved fairly

define economic growth

Increase in real GDP (national income) over time. It means the economy is producing more goods and services leading to a higher income and output

define gross domestic product

Main measure of economic growth, it’s the market value of all final goods and services produced in a country in a year including exports and imports. Real GDP adjusts for inflation

what are some limits of using GDP

1. Inflation - Make growth seem higher than it is

2. Population growth- GDP may rise

3. Hidden economy - Unrecorded work not included

4. Non-market activity - Home-grown food

5. Data inaccuracies - Hard to measure correctly

6. Living standards

External costs - pollution

what happens during the boom phase of economic cycle

• Growth: very high

• Inflation: rising

• Unemployment: low

what happens during the downturn phase of economic cycle

• Growth: slowing

• Inflation: falling

• Unemployment: rising

what happens during the recession phase of economic cycle

• Growth: negative (GDP falls)

• Inflation: very low or falling

• Unemployment: high

what happens during the recovery phase of economic cycle

• Growth: increasing

• Inflation: rising slowly

• Unemployment: falling

what are the impacts of economic growth

1. Unemployment - lower unemployment

2. Standards of living - higher standards of living

3. Poverty - less poverty

4. Productive potential - higher PPC

5. Inflation - higher inflation

Environment  - negative impact on environment

what are impact of unemployment

1. Output - reduces PPC

2. Use of scarce resources - labour wasted

3. Poverty - unemployed have less money

4. Government spending - higher spending on benefits

5. Tax revenue - less tax

6. Consumer confidence - people spend less money 

7. Business confidence - firms invest less

Society - high unemployment can damage communities

whats the effect of supply when subsidies

Supply increases → cost of production decreases → price falls 

whats the effect of supply on tarrifs

Supply decreases → cost of imports rises 

uses of monetary policy

• Control inflation

• Reduce unemployment

• Support economic growth

• Stabilise economy

whats the effect of high interest rates

• Less borrowing

• Less spending

• Less aggregate demand

whats the effect of low interest rates

• More borrowing

• More spending

• More aggregate demand

whats the role of central bank

• Set base rate

• Control interest rates

• Implement monetary policy

how to use monetary policy to reduce inflation

Increase interest rates

→ borrowing ↓

→ money supply grows slower

→ demand ↓

→ inflation falls

how to use monetary policy to reduce unemployment

Lower interest rates

→ more spending & investment

→ higher output

→ economic growth increases

how to use monetary policy to increase economic growth

Decrease interest rates

→ borrowing ↑

→ spending ↑

→ demand ↑

→ firms produce more

→ employment rises

how to use monetary policy to fix a recession

Cut interest rates

→ boost demand

→ help economy recover