OCR GCSE Economics - Paper 2

What is economic growth?

Growth in GDP over time

What is GDP?

The total value added of goods and services produced in a country in a year

Formula for rate of growth

Rate of growth= change in GDP/ original GDP x 100

What is GDP per capita?

GDP divided by population

What is standard of living?

How well off people are

Why might GDP per capita be misleading?

Actual GDP will be distributed unevenly

What is a boom?

A period of high economic activity and high levels of employment over a considerable period of time

What is a recession?

A period when the country's GDP falls for 2+ consecutive quarters (6 months)

Determinants of economic growth (7 points)

-Investment: Spending on capital goods

-Changes in technology: improves the quality of capital

-Education and training: Affects the quality and quantity of work done

-Labour productivity

-Size of the workforce: more workers = more goods and services produced by firms

-Natural resources

-Government policies (e.g. having a mixed economy, good infrastructure etc)

What is labour productivity?

Output per worker over a period of time

What is productivity (largely) determined by?

Investment in capital, changes in technology, education and training

Benefits of economic growth(4)

1) A rise in material living standards- more output available to consume than before

2) A reduction in poverty- more output and higher incomes give the government more revenue from tax which can be used for benefits

3) Rise in welfare of the population

4) Rise in employment and fall in unemployment- more workers required to produce extra output

What is a mixed economy?

An economy that is based on the market system of allocating resource

Costs of economic growth (5 costs)

1) Environment costs- air pollution, global warming and loss of non-renewable resources

2) Congestion (urban areas become congested and overcrowded- lowering quality of life)

3) Lower quality of life (boring, repetitive jobs that are more stressful)

4) Inequalities of income and wealth (gap between rich and poor can widen)

5) Inflation (total demand is rising but total supply is rising slower- demand-pull inflation)

What is employment?

The use of labour in the economy to produce goods and services

What is unemployment?

Occurs when workers able and willing to work at the current wages rate are unable to find employment

What is full employment?

When an economy is using most of its workers to produce output

What is the Claimant Count?

The method of measuring unemployment according to the number of people who are claiming unemployment-related benefits

What is the level of unemployment?

The number of people in the working population who are unemployed.

What is the rate of unemployment?

The percentage of the country's workforce that is unemployed

Formula for unemployment rate

Unemployment rate = number of unemployed/workforce x 100

What is seasonal unemployment?

Caused by a fall in demand during a particular season (e.g. coastal resorts employing many workers in the summer months only)

What is frictional unemployment?

Unemployment caused by time lags when workers move between jobs- workers leave their jobs but don't start looking for one straight away. There will always be frictional unemployment as it takes time to find jobs

What is structural unemployment?

Unemployment caused by a permanent decline of an industry/industries (e.g. steelwork closes down). Workers may find it hard to move to a different occupation as new jobs may require different skills

What is cyclical unemployment?

Unemployment caused by a lack of demand in the economy. Demand for goods and services falls- fewer workers required to produce output- others become unemployed. This causes the unemployed to have lower incomes and spend less so firms have lower profits and employ less

Benefits of unemployment

1) Wage rates decrease which mean its cheaper for firms to invest in capital and etc. As unemployed workers are competing for jobs, firms do not have to raise wage rate

2) Firms are more competitive as costs are lower

Costs of unemployment

-Lower standard of living

-Loss of self-esteem and status (could lead to relationship breakdowns within families)

-Excluded workers- workers are unemployed for so long they become unemployable

-Costs to tax-payers (Government will need to spend more money on benefits)

Costs of unemployment to the government

-Labour resources wasted

-Unemployment leads to more unemployment (i.e. cyclical unemployment)

-Budget deficit (government spends more than it receives in tax revenue)- unemployed are not paying income tax or NI contributions

Costs of unemployment to regions

-Unemployment is often spread unevenly throughout the country- some areas tend to suffer more than others

-Could cause social problems like rise in crime rate

- Value of property decreases for homeowners

What is the distribution of income?

How incomes are shared out between individuals and households

What is inequality of income?

Some individuals/ households have low incomes while others have much higher incomes

What are the 5 different ways an individual can earn income?

1) Wages- People who work in highly skilled jobs with high demand get higher wages than others

2) Rent- The owners of land and property can gain an income from rent. Rent is the reward for letting others live/ work in the owner's property

3) Interest- The reward for saving/lending.

4) Profit- This can be through enterprise or through being a shareholder in a company

5) State Benefits- For unemployed, disabled or pensioners

What are dividends?

Shares of a company's profit

How do the factors of production link to the four factor incomes?

Land -> Rent

Labour -> Wages

Capital -> Interest

Enterprise -> Profit

What is wealth?

A stock of assets that can be given monetary value and measured at a particular point in time

e.g. assets that can earn you income like rent, interest or dividents

What is income?

A flow of money going to the factors of production over time

e.g. a weekly wage or a monthly salary

What is gross income?

Income received before any taxes are taken or benefits given

What is net/ disposable income?

Income available after the effect of direct taxes and benefits

How is income distributed in the UK?

There is a high level of inequality of income

Why is income unevenly distributed in the UK? (5 reasons)

1) Age- Younger and older age groups have lower average incomes than those in the middle

2) Gender- Still illegal gender discrimination and women often take time out of work to have/raise kids

3) Reliance on benefits- These benefits are much lower than the average wage

4) Differences in Wages

5) Income-earning assets are distributed unevenly- Not all households in the UK receive the four factor incomes

What is the distribution of wealth?

How wealth is shared out between individuals and households

How is wealth distributed in the UK?

It is divided even more unequally than income

Why is wealth unevenly distributed in the UK? (4 reasons)

1) Inheritance- The rich pass down their assets through generations and keep on being rich

2) Savings- Savings can earn interest to help build up wealth over time but low-income households don't have the luxury of having money to save

3) Purchase of property- People have properties which can earn income for them and they can buy more properties

4) Enterprise- People building up wealth through their own enterprise

Consequences of differences in income and wealth for an economy? (4 consequences)

1) Poverty and deprivation

2) Poor housing

3) Poor health

4) Inequality of opportunity (e.g. poor standard of education in an area)

What is relative poverty?

Where people are poor in that their standards of living is considerably lower than the typical living standards in that society.

What is the poverty line?

The agreed international measure used throughout the EU whereby those with less than 60% of average income are classified as poor

What is deprivation?

When households/ individuals have very few possessions at all

What is the general price level?

The measure of overall prices of goods and services in an economy at a particular point of time

What is price stability?

When the general level of prices stays constant over time, or grows at an acceptably low rate

What is inflation?

A sustained rise in the general price level over time. It can also be described as the fall in the purchasing power of money

What is the cost of living?

The price level of goods and services bought by the average family

What is the rate of inflation?

The percentage rise in the general price level over time. It is usually expressed as annual rate of inflation

What are real values?

The value of something taking inflation into account.

(E.g. the real value of a worker's wage refers to the goods/services that can be bought with that wage)

What are nominal values?

The value of something in money terms

What is the formula to work out real values?

Nominal - Interest = Real

What is CPI (Consumer Price Index)?

Method used to calculate rate of inflation. It is given the no. 100 at the start of the period and if prices rise in the next month so too does the index

What is the 'basket' of good and services?

The goods and services the average UK families spend their money on. The price of all goods and services in this basket are recorded every month

What is weighting?

A system the government uses that represents the importance of goods and services in the total spending of the average family- this makes CPI more accurate

What are the two main causes of inflation

Demand pull inflation and Cost push inflation

What is demand-pull inflation?

When the aggregate demand in the economy rises and the supply of goods and services does not increase to match this increase in demand. This can occur during a boom in the economy or when the economy is near full employment

What is monetary inflation?

Rise in the money supply which enables consumers to demand more goods and services

What can cause demand-pull inflation?

-Firms demanding capital goods for investment

-Consumers in foreign countries who buy exports

-Government spending more

What is cost-push inflation?

Caused by higher costs of production (e.g. wage rises). If this occurs, then firms will raise the prices of their goods and services- leading to inflation

What is productivity?

Output per worker per period of time

What can cost-pull inflation be caused by?

1) Worker's wages > Productivity

2) Rises in the wages of workers

3) Higher import prices (higher costs of imported goods leads to higher costs of production)

What is the Wage-Price Spiral? (6 steps)

1) Inflation occurs

2) Workers want higher wages to compensate (value of real wages has decreased)

3) Workers paid more

4) Cost of production rises for firms due to higher wages

5) Firms increase prices of goods and services to compensate

6) More cost-push inflation

CYCLE RESTARTS

Consequences of inflation for consumers

1) Loss of consumer confidence- consumers don't know how much to save or what they can afford

2) Shoe leather costs- extra time and effort is spent looking to purchase goods

3) Fall in real incomes- Cost of living increases and standard of living decreases

4) Consumers who are debtors gain- Debts get cheaper (real value has gone down)

5) Income redistribution problems

Consequences of inflation for producers

1) More flexibility- Easier for relative prices to adjust (especially wages). Workers may not accept a wage cut during 0% inflation but could accept a 2% rise in 3% inflation. It could also be easier for businesses to increase their prices

2) Menu costs- Firms have to adjust price lists more often. Some capital equipment may also have to be changed more often

3) Labour market conflicts- Workers will want money wage to rise in tandem with inflation but firms may not be able to afford this leading to strikes

4) Unemployment- Workers made redundant to deal with reduction in output (could lead to cyclical unemployment)

5) Producers lack business confidence- Firms less likely to invest

6) Producers lose as creditors

Consequences of inflation for savers

Value of savings decreases in real terms

Consequences of inflation for the government

1) Government gains as a debtor

2) Government spends more to provide benefits

3) Government spends more as a major employer- Public sector jobs like NHS workers' demand more wages

4) Government receives more in tax- More VAT and income tax can help finance spending

5) Policies required to combat inflation

What is government spending?

The total amount of money spent by the government in a given period of time

Areas of government spending (6 areas- first 3 are most important)

1) Social protection- the system of social security benefits (e.g. pensions, jobseeker's allowance etc)

2) Health- NHS

3) Education

(These are the 3 biggest areas of government spending)

4) Defence- spending on armed forces

5) Law and Order- Police, courts and prisons

6) Debt Interest- amount of money government owes

What is direct tax?

A tax on income/wealth

Examples of direct taxes (3 main ones then 2 irrelevant ones)

1) Income tax- paid at a rate dependent on income

2) NICs- Paid by both employees and employers

3) Corporation tax- A tax on the profits of companies

(3 main ones)

4) Inheritance tax- A tax on the transfer of wealth at time of death

5) Capital gains tax- A tax on the profit when an asset is sold for more than it was bought

What is an indirect tax?

A tax on spending, often defined as a tax on goods and services.

Examples of indirect taxes (2 main ones then 3 other irrelevant ones)

1) VAT- A tax on a wide range of goods and services

2) Excise duties- Tax on a specific range of goods (e.g. demerit goods with negative externalities like alcohol)

(2 main ones)

3) Insurance premium tax

4) Gambling duty

5) Air passenger duty

Where does most of the government's revenue from taxes come from? (top 3)

1) Income tax

2) VAT

3) NICs

What are local taxes?

Taxes in which the revenue goes to the local authorities

What are the 2 local taxes?

1) Council tax- A tax on the value of an occupier's home

2) Business rates- A tax paid on the value of property owned by business

What is a balanced government budget?

Tax revenue = government spending

What is a budget?

The revenue and expenditure of an individual or an organisation

What is a budget deficit?

Tax revenue < government spending. Government is able to spend more than it receives in tax revenue because it borrows the difference

What is a budget surplus?

Tax revenue > government spending. The extra tax revenue can be used to build up reserves or pay off past borrowing

What is fiscal policy?

A policy that uses government spending and taxation to affect the economy as a whole in order to meet macroeconomic objectives

What are the 4 macroeconomic objectives?

1) Economic growth

2) Low unemployment

3) Balance in the balance of payments

4) Price stability

How can budget deficit be used to achieve economic objectives?

1) Reduction in taxes- More disposable income for taxpayers which can eventually lead to more economic growth and price stability

2) Increased government spending- increased spending in things like education and NHS can reduce unemployment, increase economic growth and price stability

How can budget surplus be used to achieve economic objectives?

-A decrease in government spending- This would lead to a reduction in incomes in the economy which could lead to price stability and a balance in BOP

-An increase in taxes- reduces disposable income of taxpayers so AD reduces which could lead to price stability and a balance in BOP

How might direct taxes affect labour markets?

1) If income tax is increased workers may not feel it is worth their time to seek higher-paying jobs if that extra income is just gonna be taxed anyways

2) If corporation tax is decreased, then firms have extra income to spend on employing more labour and expanding

How might indirect taxes affect labour markets?

1) Increase in indirect taxes will reduce consumer spending and decrease revenue of firms and producers which could lead to an increase in unemployment

2) Increase in excise duties would decrease the consumption of demerit goods

How does government spending affects markets? (Remember the acronym LCS)

1) (L)abour Markets- government is a huge employer of labour

2) (C)onstruction Markets- If government decides to increase spending on infrastructure and stuff then there will be a greater demand for construction workers

3) Private (S)ector- e.g. if the government builds more schools then firms that supply furniture, whiteboards etc will benefit from rise in demand

Importance of government subsidies

1) Start-up grants to encourage enterprise

2) Subsidies targeted to encouraging businesses in deprived areas

3) Subsidies to firms in renewable energy market

If the government wants to achieve price stability and a healthier balance of payments, what fiscal policy might they choose?

Budget surplus (Reduced government spending and increased taxation)

If the government wants to achieve economic growth or reduce unemployment, what fiscal policy might they choose?

Budget deficit (increase government spending and reduced taxation)

Costs of fiscal policy

1) If taxation is reduced, consumers may decide to save instead of spending additional disposable income

2) A rise in disposable incomes might lead to a rise in spending on imported goods which could lead to a larger BOP deficit

3) Could lead to inflation if rising AD is not matched by rising AS

How does the government aim to redistribute income and wealth?

1) Progressive taxes- A tax which takes a greater % of tax on higher incomes

2) Inheritance tax

3) Reducing indirect taxes

4) Increased government spending on things like education and social protection benefits

Consequences of redistribution measures

1) Benefits might act as a disincentive to work if they are too high and taxes are also high

2) People might not look for better jobs if post-tax reward is low

3) Brain drain (smart people moving away to escape high tax revenue)

4) High corporation tax may discourage businesses from being in UK

5) People might be reluctant to save if interest is heavily taxed

Difference between tax avoidance and tax evasion

Tax evasion- Illegal

Tax avoidance- Legal way of avoiding extra tax

What is monetary policy?

A policy that aims to control the total supply of money in the economy to try to achieve the government's economic objectives, particularly price stability

What is the UK target inflation rate?

1-3%

How might monetary policy be used to achieve economic growth and reducing unemployment?

Reducing interest rates. This will hopefully lead to an increase in spending, output and employment