Theme 2 - The UK Macroeconomy

What is the positive outside gap?

.Caused due to workers overworked, land overworked and machines overworked.

Define economic growth?

.How fast a country's output(goods and services) is growing.

What is GDP?

.Gross Domestic Capita
.Total value of everything a country produces in a year.

What is total GDP?

.Overall size of a countries economy.

What is GDP per capita?

.Splits total GDP by population of country.

Why is GDP Per capita so important?

.If GDP grows faster than population, there is more to go around-more jobs, goods and services.

What is nominal GDP?

.Includes inflation so can make economy look bigger than it actually is.

What is real GDP?

.Takes out inflation so shows the true size of the economy.

What is Gross National Income(GNI)?

.Value of everything a country produces plus the money it earns from overseas and minus the money foreigners earn in the country and send back home.

What is Gross National Product(GNP)?

.GNP focuses on what citizens of a country produce, whether they're working or owning businesses at home or abroad.

What's the difference between GNP and GDP?

.GNP-What citizens produce globally
.GDP-What's produced inside the country

What is Purchasing Power Parities(PPP)?

.An exchange rate between 2 currencies, comparing the cost of a typical basket of goods in one country to the same basket in another.

Why is PPP important?

.Cost of living adjustments-Show how much people spend to maintain their standard of living.
Reducing Gaps-narrows gap of GDP between rich and poor countries.

What are the 4 main causes of Economic growth?

.Tax cuts
.Government spending
.Labour productivity
.Technological advancements

What is the fiscal balance equation?

.Tax revenue-government spending

Define inflation

.Increase in general price level
.Decrease in purchasing power of money

Define deflation

.Decrease in general price level

What is cost push inflation?

.Caused by an increase in firms costs which then get passed onto consumers in form of higher prices.
.SRAS shifts left.

Draw the Cost push inflation graph

.Y1-Y2
.SRAS1-SRAS2

What is demand pull inflation?

.Caused by an increase in the demand for goods and services
.AD shifts right.

Draw the Demand pull inflation graph

.AD1-AD2
.P1-P2

What is Retail Price Index(RPI)?

.Measure of inflation that includes housing costs, such as payments on mortgage interest and council tax.

What is Consumer Price Index(CPI)?

.Measure of inflation that tracks changes in price of basket of goods and services purchased by households overtime.

What are the limitations of CPI?

.Doesn't show changes in quality
.Not everyone responds to family expenditure surveys
.Substitutes- CPI assumes consumers buy same goods if price changes however people may switch to alternatives.

What is the difference between CPI and RPI?

.CPI-All private households
-Excludes housing costs and council tax
.RPI-Includes housing costs and council tax

Draw the Trade cycle graph

.Slump
.Recession
.Recovery
.Boom
.Actual GDP

What are some factors that can cause economic growth?

.Capital investment
.Technological advancements
.Human capital development
.Government policies

What is actual growth?

.Increase in real GDP over time, representing the economy's current performance.

What is potential growth?

.Increase in an economy's capacity to produce goods and services, reflecting the long term productive potential.

Difference between Actual Growth and Potential Growth?

.Actual Growth is observed in real time changes in GDP, while potential growth is an estimate of the economy's capacity.

.Actual growth is influenced by short term factors(demand) whereas potential growth is driven by long term factors(supply).

Define unemployment

.Number of people without employment that are currently seeking work.

Define underemployment

.When a worker is not able to work as many hours as they want to.

Define claimant count

.Number of people receiving benefits for being underemployed.

What are the 5 types of unemployment?

.Frictional unemployment
.Structural unemployment
.Seasonal unemployment
.Cyclical unemployment
.Real wage inflexibility

What is frictional unemployment?

.Due to people moving jobs/ time between leaving a job and looking for another

What is structural unemployment?

.Mismatch between the jobs and the skills of workers in the economy.

What is seasonal unemployment?

.Demand for workers affected by seasons.
.Only during certain points in a year employed
.e.g. Summer-more tourists employed.

What is Cyclical unemployment?

.Lack of demand for goods and services, usually during recessions as firms forced to close or workers fired as profits fall

What is real wage inflexibility?

.Wages too high so surplus of labour causing unemployment as firms can't afford to hire.

What is the impact of unemployment on workers

.A loss of income which would mean a decrease in living standards which may mean more stress and potentially a loss of skills.

What is the impact of unemployment on firms

.A decrease in demand of goods and services, they can offer lower wages to the unemployed which means businesses can save money.

What is the impact of unemployment on consumers

.Less money available to spend, less choice meaning lower quality.

What is the impact of unemployment on government

.Fall in tax revenues as less workers which would mean taxes may need to rise to cover costs.

What is the impact on unemployment on society

.More crime
.Worse wealth
.Fall in income
.Social deprivation

What are Balance of Payments(BoP)

.Records of all financial transactions between economic agents from one country with other countries.

What is the current account?

.Balance of trade in goods and services+ net primary income and net secondary income.

What is net primary income?

.Income received from overseas minus income paid to foreign entities

What is net secondary income?

.Overseas aid relief ,private money transfers e.g. from migrants

What is the capital account?

.Includes debt forgiveness, capital transfers, copyrights and sales of patents.

What is the financial account?

.Records transactions in assets and liabilities between a country and the rest of the world

What is aggregate demand?

.Total level of spending in the economy at any given price level.

What is the aggregate demand equation?

.AD=C+I+G+(X-M)

C=Consumption
I=Investment
G=Government Spending
X=Exports
M=Imports

AD curve and reasons for a downwards sloping curve

.Shows the relationship between price level and real GDP.

Reasons for downwards sloping curve.

.Income effect-Rise in price not matched with rise in income
.Substitution effect-UK prices rise so people buy foreign goods
.Interest rate effect-Firms must pay workers more.

Movement and shifts along AD curve

.Movements caused by change in prices, caused by inflation or deflation.
.Shift is caused by any change in any other variable that makes up AD.

What is consumption?

.Consumer spending on goods and services
Around 60 of AD.

What is MPC(Marginal Propensity to Consume)

.How much an increase in income affects consumption.
.Change in consumption/change in income.

What is MPS(Marginal Propensity to Save)

.How much of an increase of income is saved
.Change in savings/changes in income

What are some influences on consumer spending

.Interest Rates- higher interest means higher prices.
.Tastes and attitudes- people want newest +best things

What is gross investment?

.The amount of investment carried out and ignores the level of depreciation

What are animal spirits?

.Describes the feeling of managers and owners of firms on whether their investment would be profitable.

What is government spending?

.Government providing public goods and merit goods

What are 2 influences on government expenditure?

.Trade cycle-In a recession, government increase spending to increase demand and reduce unemployment. Also more spending on benefits.

.Fiscal Policy-Governments use of spending and taxation to influence the economy

What is an influence of net trade.

.Strong pound makes imports cheaper and exports more expensive and therefore imports increase and exports decrease.

What is aggregate supply(AS)?

.Volume of goods and services produced within the economy at a given price level.

Short-run aggregate supply(SRAS) curve reasons

.SRAS curve is upward sloping because as prices increase, firms are willing to produce more but at higher costs of production due to overtime and temporary workers.

What is the difference between LRAS and SRAS?

.Long run-Total output of economy when all factors of production are variable
.Short run-Total output of economy when one factor of production is fixed

Movements and shifts of AS

.Movement-Change in price level
.Shift-Range of other factors

What are some factors influencing SRAS

.Change in costs of raw materials and energy- an increase in these increases cost of production so SRAS shifts left.

.Changes in exchange rates-Weaker pound leads to increase in prices of imports so SRAS shifts left. If pound stronger, imports cheaper so SRAS shifts right.

LRAS Classical Curve

LRAS Classical Curve

LRAS Keynesian Curve

LRAS Keynesian Curve

What is the circular flow of income?

.It measures the flow of income between households and firms.
.Also with injections and withdrawals which increase and decrease circular flow.

An example of a multiplier effect

.Government spends £1 billion on building schools
.This provides wages for construction workers
.Workers spend part of income on goods and services
.This spending becomes income for other workers and businesses
.Process repeats creating additional income at each stage until effect dies

What are the governments 4 Macroeconomic objectives?

.Economic growth
.Low unemployment
.Low and stable rate of inflation
.Balance of payments equilibrium on current account

What are demand-side policies?

.Macroeconomic policies to influence aggregate demand in an economy

What is a fiscal policy?

.Involves government spending and changes in taxation managed by the government

What is monetary policy?

.Involves managing interest rates and money supply with quantitative easing and controlled by central bank

What is quantitative easing?

.Central banks create new money digitally to buy government bonds and other financial assets to stimulate economic growth and increase money supply.

What are government bonds?

.Loaning money to government and later being paid with interest

What are the main objectives of the Central Bank(Monetary)?

.Inflation at 2 percent
.Maximum sustainable employment
.Supporting economic growth

How does higher interest rates control inflation?

.Higher interest raises cost of borrowing so less spending and investment
.This reduces AD with upward pressure on retail price
.High interest rates lead to appreciation of currency making imports cheaper which helps to reduce inflation.

What are some economic effects of higher interest rates?

.Less consumer spending as less disposable income.
.More money saved, decreasing AD
.Less investment for firms as borrowing more expensive.
.Value of assets decreased so lower spending, wealth effect.

What is the positive outside gap?

.Caused due to workers overworked, land overworked and machines overworked.