ECONOMICS - MISS MCNELIAGE

What is the economy?

The production and exchange of goods and services through the relationship of consumers/businesses and the government

What may affect the economy?

• inflation/unstable prices

• imports and exports

• cost of living

• taxes

• tariffs

4 macroeconomic objectives

1. Economic growth

2. Unemployment

3. Inflation

4. Balance of payments

When did economic growth peak? (2 points)

1 - 2021 - 25% (coming out of lockdown)

2 - 2022 - 10% (Russia invaded Ukraine - oil)

What is the definition of unemployment?

Willing, able, and available to work but unable to find work in an economy at a given time

When did UK unemployment rate peak?

2021 - COVID - non essential businesses closed, factories reduces workers, childcare forced parents to stop work

What is the economic term for making people redundant?

Labour shedding

During COVID, what % did GDP go down?

20%

Despite COVID increasing unemployment, it didn't significantly increase, why is this?

The furlow scheme

What is the furlow scheme?

In order to limit a dramatic change in unemployment, the government agreed to pay for 80% of people's wages - so people were still employment but not actively working

Why did the government agree to the furlow scheme?

Businesses were generating less revenue, but costs were still remaining the same, so business could not afford to pay workers who were no longer needed

• employment was not rising in proportion with the decrease in economic growth so the government had to intervene

What is inflation?

An increase in the general price level in an economy over a period of time

What does inflation lead to? (In terms of spending/money)

A reduction in the purchasing power of money

What is deflation?

General price level is below 0 - so prices decrease

What is disinflation?

Prices are decreasing but at a slower rate

What is it called when the rate of inflation has a gradual change?

Stable inflation

What is cost of living crisis also referred to as in economics?

The rate in inflation

What is the % of inflation at the highest point (in 2022)?

11.5%

Why was 11.5% such a big problem for the economy?

Wages did not increase at the same rate - this means lower disposable income

What does disposable income mean?

Less money for spending

Who would the 11.5 inflation rate have the biggest impact on?

Those with fixed or low incomes

To help combat the high inflation rate, what was increased and why by?

Interest rates - The Bank of England

Who did the increase in interest rates affect the most?

The people with loans and mortgages (debt repayments)

How much did the Bank of England raise interest rates from?

0.25% to 5%

What is the % of the current inflation?

3.8%

Why is there a steep gradient in 2022?

• recovering from COVID - high levels of economic growth

• Russia/Ukraine war - oil

What does a steep gradient of inflation show?

Inflation is occurring at a quick/fast rate

What is the budget balance?

The difference between how much the government is spending in relation to how much they receive in taxation

What does a balance, deficit and surplus mean? (in terms of government tax and spending)

Balance = G=T

Deficit = G>T

Surplus = G<T

Decreasing tax means a decrease in what else?

• income tax

• corporation tax

• VAT (value added tax)

Why was there a huge increase in government spending in 2020?

In COVID government spent money on:

• the furlow scheme

• pay to eat out (payed people to go and eat out to help hospitality businesses) “eat out to help out”

• nightingale hospitals

• PPE (personal protective equipment)

What is an index number?

A figure reflecting price or quantity compared with a base value

What are index numbers used for?

To track economic variables and makes comparisons over time

What are the 2 key uses of index numbers?

• GDP (index numbers shows how GDP changes)

• inflation - calculated using CPI and RPI

What is the base value of an index number?

100

What is CPI and RPI?

CPI - consumer price index

RPI - retail price index

What is real disposal income per capita?

Measures adjusted for taxes and gene gust and inflation per person

How do you calculate percentage change?

Change divided by original x 100 = % change

Why would gas prices increased in 2022?

Russia and Ukraine war - oil (majority of oil in Russia)

What was the chain of effects this increase in index prices increase?(5)

• push up prices

• increases bills

• decreased disposable incomes

• decreased cost of living

• limits economic growth (consumers had less to spend)

How is the rate of inflation calculated?

CPI - consumer price index

What is it called where a basket and goods are used to measure inflation?

A basket of goods and services

What does the basket of goods and services measure?

The changes in prices over a period of time

What is the basket of goods and services?

A representative basslet used with weights attached to each item in association with how significant/importance the item is

What is an example of something that has been take out and added in to the basket of goods and services?

In - airfryers

Out - CDs

What are example of the higher weights and why?

Most significant effect if these price changes

• food and non-alcoholic beverages

• housing, water, electricity bills

• transport

• recreation and culture

• restaurants and hotels

What are the 2 key uses or index numbers?

GDP

Inflation

How do you calculate an index number?

Index number = current figure / figure in base time period x 100

What do you do for RATES?

Percentage change

If a question asks how far below, what is the unit?

Index points

How do you calculate a ratio?

Proportion / Total

What can you always do after working out an index number?

Check if the answer may be too low or too high compared to given/previous values

What are the 2 type of terms?

• nominal

• real

What are the differences between real and nominal?

Real - includes inflation (taking it into account)

Nominal - does not include inflation

As real values take inflation into account, what can they reflect?

Reflect the purchasing power of the currency and give a more accurate picture of the economic situation

What are things that would need to be converted from nominal to real terms? (4)

• national income statistics - eg. nominal to real GDP

• wages and salaries - Eg. nominal wages converted to real wages

• savings and debts - Eg. nominal debt converted to real debt

• commodities - Eg. nominal oil prices converted to real oil prices

What is the nominal to real term calculation?

Real value = index of comparison period/index of the current period x nominal value

Most of the time, what is the index of comparison period?

100

STARTER - What is the consequences of Rachel Reeves increasing income tax?

Less disposal income - spend less - bad for businesses - less economic growth

If you are given no information, what do you assume?

It is the nominal value

And the one which mentions prices is the real value

Due to the cyber attack on Jaguar Land Rover, what happened to economic growth?

Slowed

What is this an example of?

An economic shock

What do shocks do to the economy?

Destabilize the economy

If consumer spending growth remains weak, what does this mean?

• consumers have less confidence

• leads to uncertainty (due to the upcoming budget)

• so they save money

• (also due to predicting Reeves will increase taxes)

• this leads to inflation as prices have to go up

What is an evaluation of "the economy contracting by 0.1%"?

• only contracted by w small amount for a small period of time, therefore not much of an impact

If interest rates, decreases, what does this do to the cost of borrowing?

Makes borrowing cheaper

So peoples with mortgages are helped

Increased disposable incomes - increases spending - increase economic growth

If a business "absorbed", what does this mean for their profits?

Leads to lower profits

If a question says to what extent, what should you do?

Use the data to justify

• yes (agreeing with the question)

• no (disagreeing with the question

• other evidence (no conclusion can be made due to inaccurate or not specific data)

What should you always do, when using data?

Talk about the limitations - what it doesn't show, why it can be inaccurate (linking to the question)

As well as reasons why this may be

If you agree with the question, how many points should be made?

• yes x2

• no x1

Should you have a conclusion?

Yes - summarize what you have said and make sure you have answered the question

If GPD is low, what does this mean in terms of consumers?

Consumers have low confidence - less spending

If real GDP growth (%), is lower than the previous year, what does this mean?

The economic growth is increasing at a slower rate than the year before

What is the monetary policy and what is the fiscal policy?

Monetary - interest rates, exchange rates

Fiscal - government tax and spend

What is the UK’s trade balance?

The difference between exports and imports

If the UK’s trade balance with Germany is -5.2 billion in 2012 and -5.9 billion in 2013

What does this mean?

• the trade baldness deficit has increased

• 0.7 increase

• imported more - value of imports increased

• exported less - value of exports decreased

If the UK’s trade balance with balance with USA is +3.1 billion in 2012 and +3.8 billion in 2013

What does this mean?

• the trade balance surplus has increased

• increased by 0.7

• imported less - value of imports decreased

• exported more - value of exports increased

If the UK’s trade balance with China is -5.5 billion in 2012 and -5.0 billion in 2013

What does this mean?

• the trade balance deficit has decreased

• decreased by 0.5

• imported less - value of imports decreased

• exported more - value of exports increased

What should you do in 4 markers?

• use data

• compare

• manipulate the data

• calculate (percentage changes, differences, averages, trends)

• be specific

• link back to the question

What does IMF stand for?

International Monetary Fund

What is a ratio used for?

Comparing 2 numbers

How can ratios be presented?

As a percentage or fraction

What are some examples of ratios economists use?

• concentration ratios (concentration of a particular market)

• productivity (ratio of outputs to inputs)

• demography (dependency ratio young and older)

• labour market (labour force participation)

• elasticity

• terms of trade (index of import prices to index of export prices)

• GDP per capita (GDP/population to give income per head)

The GDP of the US was $18billion and the UK was $6billion (6:1)

Why is the US higher?

• larger economy

• larger population size - bigger factor of production (labour)

• more productively efficient

• better investment in capita stocks (factors of production)

• larger land mass

• higher productive potential

• US has better trade balance (smaller deficit)

• trusted economy so good trade conditions

• radical fiscal policy (tax and spend)

• higher investment in tech/AI (enterprise - FOP)

• UK GDP is low and weak

• UK has a propensity to import goods whereas trump limits imports (encourages Americans to buy domestic goods)

What is a logical chain of reasoning about Trumps tariffs on imports?

• increased tariffs on imports

• import price rises

• increased demand for domestic products

• increased necessity for labour

• reduces unemployment

• increases incomes

• increased standard of living?

What is the equation to finding the ratio (in terms of house prices and incomes)?

House prices/ratio = income

If the unemployment ratio is high, what does this mean for the demand and prices for houses?

Lower incomes - lower demand for houses - decreased house prices

Why would London have a high ratio of house prices to incomes?

Higher population in London - lots of job opportunities (economic center of the UK) - prices are to be inflated (bubble)

What does “bubble” mean?

A rapid increase in the price of assets (like housing or stocks), exceeding their actual value

What do concentration ratios show?

The marker share held by the largest firms in the industry

What do concentration ratios determine?

The level of competition and market control

What are concentration ratios expressed as?

Percentages

How do you calculate the 3 firm concentration ratios?

Add together the marker share of the top 3 firms

Due to Nike having the larger market share in the athletic footwear industry, what does this mean in terms of power and prices?

The higher the concentration ratios - the higher the power

Nike can negotiate their prices with suppliers to lower price per unit (Nike has significant bargaining power of suppliers)

Customers are willing to pay higher priced due to the strong branding and reputation

If the smaller firm has a concentration ratio of 0.8, what would a new firm entering the market have?

Anything below 0.8

If the “other firms” add to 35% and the top firm is 22%, do you add the 35%?

No

A 4 firm concentration ratio rises from 55% to 72%, what does this suggest about the level of competition?

More market share for the 4 firms, decreases market share for other firms, decreasing the level of competition (firms dominate) (from 45% to 28%)

The 5 firm concentration ratio in an industry is 29%, explain implications for consumers?

• the top 5 firms have 92% market share, all other firms have 8% market share

• consumers have less choice

• firms can increases prices (due to having large amounts of power)

• firms benefit (due to economies of scale)

If a 4 firm concentration ratio has decreased by 8%, what is this significance?

8% is not significant in comparison to other market share of the businesses in that market - this increase competition slightly

If 2 firms merge, and combine 12% and 9%, what could concerns be?

There would be less choice for consumers