OCR GCSE Economics Paper 2

What is economic growth?

Growth in GDP (value of output) over time.

Gross Domestic Product (GDP)

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

GDP per capita

GDP divided by the population. represents the average income of each person in the country.

Boom

A period of high economic growth and high levels of employment

Recession

"A period when the country's GDP falls for two (or more) consecutive quarters."

What are the causes of economic growth

Investment Changes in technology Education and training Labour productivity The size of the workforceNatural resourcesGovernment policies

Explain how investment can affect economic growth

Spending on capital goods (business premises, machinery and equipment) means that the economy has the ability to produce more goods and services

Explain how changes in technology can affect economic growth

Technological progress means the quality of capital goods improves, and a given quantity of capital can now produce more output than before.

Explain how education and training can cause economic growth

The more literate, educated, trained and skilled the workers, the higher the output of a country is likely to be

What are the benefits of economic growth

A rise in material living standards A reduction in poverty A rise in the welfare of the populationn A rise in employment and a fall in unemployment

What are the costs of economic growth

Environmental costs Air pollution Global warming Congestion Loss of non-renewable sourcesA lower quality of life Inequalities of income and wealthInflation

Explain how economic growth can cause a lower quality of life.

People may move to cities where life is busier and more stressful. They may move to better-paid but boring lives. People may exercise less and become unhealthy; they may become obese.

Explain how economic growth can cause inflation

A period of economic growth may lead to the price level rising. This happens when the total demand is rising but total supply is rising at a slower rate than demand, and so leads to demand-pull inflation

Inflation

A sustained rise in the general price level over time.

Cost of living

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

Price stability

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

Rate of inflation

The percentage rise in the general price level over time.

What are nominal values

Value of something in money terms e.g. a workers nominal wage is £400 a week

What are real values

takes inflation into account. refers to the goods and services that can be bought with that wage

How is inflation measured

Consumer price index - gov. undertakes a survey to determine goods and services average UK families spend money on and records prices of these goods and services every month

What are the two causes of inflation

Demand-pull inflation and cost-push inflation

Demand-pull inflation

Caused when the aggregate demand in the economy rises and the supply of goods does not increase to match the increase in demand, so the price is pulled up.

Cost-push inflation

Caused by higher costs of production, which then lead to a rise in the price level. Costs of production include wages, materials, fuel, rent etc.

The wage-price spiral

rise in general price level workers demand higer wages to compensate wages paid to workers ise costs of production to firms rise firms put up the prices of goods/services general price level rises further

Consequences of inflation for consumers

Loss of consumer confidence Shoe leather costsReal incomes may fallIncome redistribution problems Consumers who are debtors gain

Consequences of inflation for producers

More flexibilityMenu costs Labour market conflicts Unemployment Producers lose as creditors Producers lack business confidence

Consequences of inflation for savers

Inflation makes the purchasing power of money fall over time. Therefore, savings wil lose value in real terms in times of inflation.

Consequences of inflation for the government

Government gains as a debtor Government spends more as a provider of benefits Government spends more as a major employer (NHS)The government receives more in tax Government policy needs to combat inflation

Goverment spending

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

What are the top 3 areas of government spending

Social protection (benefits)Health Education

Name a few other spending areas

Defence Debt interest Housing and environment Public order and safteyPersonal social services Transport

Government revenue

The source of finance for government spending

Direct tax

A tax on income or wealth

Indirect tax

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

Name a few direct taxes

Income tax - tax on your income National insurance contributions - paid by employees and employer Corporation tax - tax on profits of companiesInheritance tax - tax on transfer of wealthCapital gains tax - a tax on profit when an asset is sold for more than it was bought

Name a few indirect taxes

VAT - tax on wide range of goods/services Excise duties - tax on specific range e.g. petrol, tobaccoInsurance premium taxAir passenger duty Gambling duties

Fiscal Policy

A policy that uses government spending and taxation to affect the economy as a whole

What can fiscal policy be used for

Economic growth Low unemployment Price stability A balance in balance of payments

Budget deficit

When government spending is greater than tax revenue

Budget surplus

When tax revenue is greater than government spending

How can a budget deficit be used to acheive economic objectives

Increase in government spending Reduction in taxes

How can a budget surplus be used to acheive economic objectives

Decrease in government spending An increase in taxes

What does an increase in government spending result in

It could spend more on NHS and educationmore nurses and other staff receiving wages incomes rise, so people spend moreincreased spending becomes incomes for firms firms employ more workers to meet extra demandThese workers will now have incomes to spend

what does a tax reduction result in

Disposable income of taxpayers increase; Consumers spend more, total demand rises; Firms receive greater incomes; Firms employ more workers to meet extra demand; These workers will in turn have incomes to spend.

Budget surplus can be used

when there is too much inflation or a large balance of payments deficit.

Problems with fiscal policy

Budget deficit increases disposable income but no guarantee that they will spend the money As disposable incomes rise, extra spending might be on imported goods. This may lead to a larger balance of payments deficitBudget deficit leads to a rise in total demand, supply would rise to meet the demand, leading to more output and employment. However, supply may not be able to rise in order to meet demand, causing inflation.

What measures does the government use to redistribute income and wealth

Progressive taxesInheritance taxes Reducing indirect taxes Government spending and redistribution

Consequences of redistribution measures

If people find that they can live well enough on benefits, they may not bother to seek work.Some high earners may move abroad to escape tax High direct taxes acts as a disincentive for businesses to investPeople may be reluctant to save if a lot of their interest is taxed

What is monetary policy

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

What objectives can be achieved with monetary policy?

Economic growth Low unemployment Price stability A balance in the balance of payments

How can economic growth and low unemployment be achieved with interest rates

Reduce the interest rates to encourage spending, this leads to greater output and more employment

How can price stability be achieved with interest rates

Increase interest rates to encourage saving and reduce spending. This causes more price stability

How can a healthier balance of payments be achieved with interest rates?

Increase interest rates to encourage saving and reduce spending. The reduced spending includes spending on imports and this achieves a healthier balance of payments.

How monetary policy affects growth and employment

Interest rates are reduced Borrowing by consumers rise Borrowing by firms rise Saving fallsAsset prices rise Disposable incomes rises for households with mortgages The external value of the currency falls

How monetary policy affects price stability

If inflation is anticipated to rise above 2%, the MPC likely to increase interest rates Borrowing by consumers fallsBorrowing by firms fallsSaving rises Asset prices falls Disposable income for households with mortgages decreases The external value of the currency rises

Exports

Goods and services sold abroad

Imports

Goods and services bought from abroad

International trade

The exchange of goods and services between countries

Why might a country import and export goods/services

Different countries have different resources meaning different countries are more suited at making particular goods/servicesAllows for a wider range of goods/services

What are the benefits of imports and exports for consumers

Lower prices (as a result of worldwide competition or greater specialisation and economies of scale)More innovative and better quality goodsGreater choice of goods

What are the benefits of imports and exports for producers

Access to larger market to sell goods and services Increased competition leading to greater efficiencySpecialisation and lower average costs Larger market for buying inputs and lower average costs

Free trade agreements

Free movement of goods and services between countries without any restrictions

European Union (EU)

An economic and political group of countries in Europe that have free trade with each other

Balance of payments

The record of all financial transactions between one country and the rest of the world

Current account

The record of trade in goods and services, income flows and transfers between one country and the rest of the world.

Balance of payments on current account

The total of net trade in goods and services, income flows and transfers between one country and the rest of the world.

Balanced current account

Where the sum of exports plus the inflow of income and transfers is equal to the sum of imports plus the outflow of income and transfers

Current account deficit

Where the sum of exports plus the inflow if income and transfers is less than the sum of imports plus the oitflow of income nd trasnfers

Curretn account surplus

Where the sum of exports plus the inflow if income and transfers is greater than the sum of imports plus the oitflow of income nd trasnfers

The importance of balance of payments on current account

Whether there is a deficit or surplus The size and duration of the deficit or surplus The effects of the current account balances within the balance of payments

The importance of a current account deficit

It means that a country is consuming more than it is producing anf the income from this extra output is going overseas May reflect total demand for domestic goods if it is due to a factor that will take a long time to change crucially, it increases the debt of a country as the extra spening on imports is not being fully financed by revenue from exports

Alternatively, current account deficit may

not be such a concern if it is only a temporary deficit reduce inflation within the domestic economy as imports are greater than exports over time, lead to a fall in the exchange ratenot matter if it is only a small percentage of GDP

Some effects related to a current account surplus include:

it may reflect riding total demand for domestic goods, which can be linked to decreased unemploymendit actually decreases the debt of a country because more money is flowing into the country

Alternatively, the current account surplus may:

cause rising inflation within the domestic economy as exports are greater than imports, thereby increasing total demandhide the causes that have a negative impact on global economic growth over time, lead to a rise in the exchange rate, which can decrease the international competitiveness of UK goods and eventually decrease exports

evaluating the importance of the size and duration of deficit or surplus

if it is small or lasts for a short amount of time it is of less significance. However, it is large or lasts for a longer amount of time, then it ma be more significant and it may be worth investigating the causes of the trend.

Causes of surpluses on the balance of payments on current account

The strenfth of economy lack of growth in the domestic economy a fall in the exchange rate a net inflow of investment income

Causes of deficits on the balance of payments on current account

Structural problems in the economy - firms overpricing goods, poor-quality goods.falling income overseas a rise in exchange rate a net outflow of investment income

Currency

the system of money used in a country or group of countries

exchange rates

The price of one currency in terms of another currency.

Why might the demand for pounds increase

"UK goods become more desirable incomes rise in the eurozone interest reates in the UK rise relative to other countries' interest rates speculators think value of pound will rise in future so worthwhile buying now to exchange for euros laterthe UK becomes more attractive for foreign investment"

Why might the supply of pounds increase

eurozone goods become more desirableincomes rise in the UKinterest rates in the eurozone rise british speculators think value of euro rise so worthwile buying euro now to exchange for pounds latereurozone becomes more attractive for foreign investment

The effect of changes in the exchange rate on consumers

If there is a rise in the exchange rate: import prices fall improved standard of living increased tourism overseas a fall in interest rates a fall in the inflation rate

The effect of changes in the exchange rate on producers

if there is a rise in the exchange rate: A fall in import prices a rise in export prices increased tourism overseasa fall in interest rates a fall in the inflation rate