2.1 economic growth

GDP

the total value of goods and services which an economy produces over a period of time

Economic growth

the increase in real GDP or the productive capacity/ potential output of the economy

real

adjusted for inflation

nominal

not adjusted for inflation

Real GDP

the total value of goods and services which an economy produces over a period of time, adjusted for inflation

GDP per capita

 GDP/ population, so average income per person

GNI (gross national income)

GDP + net income paid into the country by the other countries

Inflation

the average annual increase in the price level of the economy

Price level

the average prices of all the goods and services in a country

Deflation

the average annual decrease in the price level of the economy (negative rates of inflation)

Disinflation

the average annual increase in price level of the economy at a slower rate

Demand pull inflation

shift outwards of aggregate demand (total demand)

Cost push inflation

shift inwards of aggregate supply

Balance of payments

a set of transactions between one country and the rest of the world

Happiness

a measure of satisfaction, fulfilment, or wellbeing. The government uses the Gross National Happiness Index to measure quality of life.

PPP

shows how much a basket of goods costs in one country in comparison to another. It also shows the cost of living in a country and uses exchange rates to make international comparisons between countries.

Limitations GDP

1. does not take into acount population difference

2. does not take into account informal sector

3. does not take into account income distributions

UK target inflation

is 2% (+/- 1%).

Consumer Price Index (CPI)

• Used to calculate inflation

• Uses a basket of goods from approx. 7000 households

• CPI uses living costs and food and expenditure survey

• Assigns weights to those goods which the greatest proportion of income have been spent on.

Evaluation - Limitations of CPI

• Doesn't take into account housing expenses e.g. mortgages and rent which takes up greatest proportion of income.

• UK Gov now uses CPIH

• Doesn't take into account like-to-like goods.

• Doesn't take into account quality of goods into account.

Sampling issues:

• not everyone responds to the survey, around 70%.

• Sampling bias, around 60% of the survey takers are truthful when doing survey.

 

Updating the CPI basket - Only updates once a year

1. Tastes and preferences

• Tastes and preferences change frequently, but the CPI basket is only updated once a year.

1. Prices of certain goods

• Prices of certain goods increase, and therefore people switch to substitute goods.

1. New technology

• Technological advancements happen throughout the year, which consumers are likely to purchase more.

Causes of inflation

• 

Economic effects of inflation

• Real incomes decrease

• Income inequality: for people on fixed term contracts

• Loss of international competitiveness: less demand from abroad for your goods, worsens trade deficit. Exports are likely to fall

• Investment from abroad might decrease. Companies usually like to invest in England because there are people with high incomes who are able to pay for high priced goods, and are able to export/ there is a demand for export.

• Erodes the real value of savings.

Unemployment

when a person is able and available to work but cannot find work

Claimant count

• can seek JSA (Job seekers allowance)

• needs to apply at an unemployment office (stigma)

• 18-60 years old

• saving cap: £16k

• does not apply after 6 consecutive months of unemployment

  Eval

• not eveyrone eligible applies due to stigma attached

• prone to benefit fraud (self-employed people claim benefits)

ILO

• international measure

• unemployed if out of work for 4 weeks, but willing to work within 2 weeks

• registration via survey, interview, or questionnaire

• 16-65

• internationally recognised

  Eval

• sampling issues - data may not be reliable or accurately collected

Underemployment

when a person or worker is employed, but there are not enough hours of work available, or when a worker is not employed in the right sector in which they have been trained

Inactivity

a situation where people are unwilling or unable to work

e.g. pensioners, disabled people, students

this can make the levels of unemployment appear lower than they really are

Causes of unemployment

1. structural unemployment

2. frictional unemployment

3. seasonal unemployment

4. cyclical unemployment

5. real wage inflexibility

Balance of payments

a set of transactions between one country and the rest of the world

Components of current account

1. 1. 1. 1. 

Aggregate demand (AD)

the total planned expenditure on an economy’s goods and services in a given period of time

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

• consumption is the largest component, making up 65%

• investment makes up 15% of AD

Consumption

the total consumer spending on an economy’s goods and services

Factors affecting consumption

• disposable income

• savings ratio

• consumer confidene

• interest rates

• wealth effects

Investment

the increase in the capital stock of the economy or firms spending on capital goods

2 types

• gross investment (total increase)

• net investment (gross investment-depreciation)

Factors influencing investment

• rate of economic growth

• business expectations and confidence/ animal spirits

• demand for exports

• interest rates

• access to credit

• influence of gov and regs

Government expenditure

spending by the government on public goods and services

Factors influencing gov exp

• trade cycle

• fiscal policy

Net trade

the difference in the value of exports to the value of imports

Factors influencing net trade balance

• protectionism

• inflation

• productivity

• exchange rate (spiced/wpidec & river)

• real income

• non-price factors

• state of the economy

Aggregate supply (AS)

the total production of goods and services in an economy

Factors influencing SRAS

• wage costs

• interest rates

• costs of raw materials

• indirect taxes/regulations

• exchange rate

economic growth

the increase in real GDP or the productive capacity/ potential output of the economy.

Factors influencing LRAS (same as PPF)

the quality and quantity of the factors of prodcution

Capital	Technology advancements	Investment
Enterprise	Competition	Investment
Land	Increase yields E.g. better irrigation and agricultural methods.	Discovery of new resources
Labour	Education & training to increase productivity (SHPIEL)	Immigration

Circular flow of income

how money flows into and out of the economy

income

a flow concept which refers to the value of money over time

wealth

a stock concept which refers to the total value of assets over a period of time

Injections

money flowing into the circular flow of income

InGeXions

• investment

• government expenditure

• exports

Withdrawls

money flowing out of the circular flow of income

MTS

• imports

• taxing

• savings

the multiplier effect

when a change in injections leads to a more than proportionate change in income

the multiplier ratio

the ratio of injections to a change in real income

the multiplier process

when one persons spending is another persons income

mpc

for every one additional pound earned what proportion of income goes towards consumption

muliplier =?

1/mpw=1/mpm+mpt+mps=1/1-mpc

actual growth

increases in rgdp

potential growth

increases in productive capacity

output gaps

the difference between actual growth and potential growth (when drawing diagram draw AD, SRAS, and classical lras)

eval

• difficult to identify the potential growth due to inaccuracies and inadequacies of economic data

• difficult to calculate/identify where the AD is on the LRAS

recession

two successive quarters of negative GDP

Impacts of economic growth - benefits

consumers

• incomes increase and unemployment falls

• affordability increases

• purchasing power increases

• wider access goods and services

• increase living standards and subjective/national happiness

gov

• higher tax revs

• invest in more benefits for society

• gov spending likely to decrease

• improves gov budget position

• national debt likely to decrease

firms

• as consumption increases, so demand g&s increases

• firms produce and sell more to meet rising demand

• increased sales rev and increased profits

• can reinvest into tech and r&d

• can produce high qual innovative goods which increase int comp

Impacts of economic growth - costs

society (external costs)

• external costs increase

• higher production of goods and services from firms leads to increased air pollution

• co2 emissions increase as firms are using non-renewable resources

• leads to increased respiratory problems e.g. asthma bronchitis which leads to increased pressure on healthcare services

• could also lead to depletion of natural resources

income inequality

• increases income inequality as low income households are likely to experience no increase in their wages in the short-run

• this is due to them being on fixed contracts

• whereas high-income household who own the factors of production will experience a rise in their income/profits

Gov macroeconomic objectives (tigers)

• trade(i.e. economic growth, strong sustained stable)

• inflation ( low and stable inflation rate

• growth

• employment ( low unemployment)

• redistribution wealth (distribution income)

• stability

Demand side policies

a deliberate manipulation of AD on oder to achieve macroeconomic objectives. either monetary or fiscal policy

Monetary policy ( c, i,x-m)

a policy implemented by the mpc in the central bank

uses q.e. and interest rates

Index number

An economic data figure that reflects price/quantity compared with the base year

Volume

the quantity or amount of goods and services produced

Value

how much a good is worth, determined by its price