Economics Edexcel Theme 2.1 Detailed Summary

Economic Growth

This is an increase in real or potential GDP. This will lead to higher living standards and high levels of employment.

GDP

Gross Domestic Product

Gross Domestic Product

This is the value of all the goods and services produced in an economy in a year.

Real Gross Domestic Product

This is measured at constant prices adjusted for inflation.

Nominal Gross Domestic Product

This is measures at current prices including inflation.

Total Gross Domestic Product

This is the combined monetary value of all the goods and services.

Gross Domestic Product Per Capita

Gross National Product per head of the population.

Gross National Product

This is the value of all the goods and services produced in an economy in a year plus all the goods produced in other countries, contributing to a country, minus any outflows to other countries.

Gross National Income

This is the sum of all producers who reside in a nation plus product taxes and receipts of primary income.

Purchasing Power Parity

This is a theoretical exchange rate that equalize a bundle of goods in one country with that of another. This will minimise misleading comparisons.

Limitations Of Gross Domestic Product

Size of the Public sector
Exchange rates
Consumer and Capital spending
Income Distribution
Informal economy

National Well-being

The national statistics association is trying to improve how we measure happiness.
Currently 91% of the UK said they were happy with their family life.

The Relationship Between Gross Domestic Income and Subjective Happiness

In general terms the higher Gross National Product per capita the higher the average satisfaction score is.
However the UK grew by 5% from 2007 to 2014 with no change in the level of satisfaction.

Inflation

This is a persistent increase in general price level.

HyperInflation

This is when inflation reaches a very high level that is uncontrollable and unsustainable.

Disinflation

This is a slowdown in the rate of inflation.

Deflation

This is a persistent decrease in general price level.

CPI

Consumer Price Index

Calculating The Consumer Price Index

This is calculated through the use of two surveys.

The first survey is the family expenditure survey. Over 7000 households will receive a survey and each members of the household will fill it in. These will then be assigned a weighting. For example of 30% is spent on food, 30% of the weighting will be on food. This will make up the basket of goods.

The second survey is the monthly price survey. This where civil servants gather the average price for the basket of goods. This is for around 650 products. After prices are gathered in high and low cost shops they will be multiplied by the weightings. This difference in CPI is called CPI inflation and this is done annually every January.

Limitations of Consumer Price Index

It is only an average household
Does not account for atypical spending
It does not account for housing
It is slow to respond to changes

Retail Price Index

The retail price index is an alternative measure to the consumer price index. This accounts for housing costs and so it will have higher values.

Types of Inflation

Demand Pull
Cost Push
Money Supply

Demand Pull

Demand pull inflation is unsustainable inflation caused by an increase in demand in the economy, usually at full employment level.

Causes of Demand Pull Inflation

Depreciation of sterling causing imports to be dearer and so factor costs increase.

Fiscal stimulus means that the government will cut tax and increase spending and so income and consumption will rise.

Low interest rates will make saving less attractive and so borrowing and consumption will increase.

Growth in export markets will lead to the multiplier effect increasing exports further and price level.

Cost Push

Cost Push Inflation is a sustainable inflation caused by rising factor input costs.

Causes of Cost Push Inflation

If factor input costs increase then businesses will increase price to retain profits.

If the Labour market increases in value I.e. the national minimum wage than business will experience higher costs and so prices will rise.

If people expect inflation then they may ask for higher wages again causing inflation.

Indirect taxes on goods will increase the price for consumers, causing inflation.

A depreciation of the exchange rate will make imports dearer and so costs will increase.

If there are monopolies in an economy than they may increase prices to take advantage.

Money Supply

If interest rates are low and the Monetary policy becomes ineffective and they can't decrease any further then inflation can't rise. Therefore we use quantitative easing. This allows banks to generate a money supply to buy government bonds as an asset. This then allows the government to buy bonds from investors allowing money into our circular flow of income. This will increase aggregate demand and cause hyperinflation.

Effects on the Consumer

Those on low fixed incomes will be hardest hit, due to its regressive effect. This means the cost of living will rise and the purchasing power parity fall and so spending power falls.
However loans repayments will be lower as the real value of a debt decreases with inflation.

Effect on Firms

With decreased interest rates borrowing and investing becomes more attractive rather than saving. But consumers may want higher wages and so costs will increase.
From an international perspective they may become less competitive, this will reduce business confidence as it is unpredictable.

Effect on the Government

The government will be require to pay more pensions and welfare benefits as the real value of these will of increased.

Effect on Workers

If inflation rises then real incomes will fall. Furthermore their will be an increase in redundancies as business may not he able to keep on all their staff.

Measures of Unemployment

Unemployment can be measured by;

The claimant count
The international Labour organisation

The Claimant Count

This counts the number claiming unemployment related benefits. I.e. Job Seekers Allowance. Here they must prove they are actively seeking work.

Evaluation of the Claimant Count

Not everyone eligible for JSA claims it, as there is often problems or discrimination in some form with;

Females
Under 18's
Early retirements
Time lags
Stigma

Therefore it is likely and underestimate of unemployment.

The International Labour Organisation

The ILO is a measurement performed through interviews and over the phone. They will ask if;

They have been out of work for 4 weeks

If they are willing to work in 2 weeks

Whether they will commit to at least 1 hour per week.

Part time staff are included in the measurement and so the figures are likely to be much higher.

Advantage of the ILO

It is internationally comparable.

Unemployment

This is when you are looking for work and actively seeking work, but you are not currently employed.

Underemployment

This is when you are employed, but you are not working to your productive potential and so you are working part time, whilst looking for full time employment.

Significance of changes in employment on consumers

Decreased employment will reduce the amount of disposable income in the economy and so the standard of living will decrease. This could result in psychological and mental effects on society.

Significance of changes in employment on firms

For firms there will be reduced costs as the supply of the Labour Force will increase. Those with inferior goods will see a rise in profits and be able to retrain or take on more staff.

However consumers will have less income, which will decrease consumption and business confidence.

Significance of changes in employment on workers

This will result in a waste of resources, as workers will lose their skills if they are not utilised.

Significance of changes in employment on the government

This will mean the government will pay more benefits through job seekers allowance. Furthermore it will provide an opportunity cost as the money could be spent elsewhere. Furthermore their will be decrease tax gains as less people will be working and less people will be paying for goods with indirect taxes.

Significance of changes in employment on society

This will result in an opportunity cost as they could be used elsewhere. Furthermore it could result in negative externalities through the form of crimes.

Inactivity

This is when you are not actively looking for work. This is usually the elderly, disabled or children or those discouraged as they have not worked in such a long time.
This will result in a decrease in potential labour force and a decrease in the productive potential of an economy.

Types of Unemployment

There are 5 types of unemployment in the UK these are;

Structural
Frictional
Seasonal
Demand deficient
Real wage

Structural Unemployment

This is a long term decline in demand, which costs the economy jobs. This occurs mainly in the manufacturing industry, as they replace humans with capital goods. This is known as technological unemployment. This was shown in the coal and shipping industries.

This type of unemployment is worsened by the immobility of labour, as if people do not have transferable skills then they will have no skill to contribute to employment. Furthermore globalization can also impact this as Labour costs will be cheaper in other countries.

Frictional Unemployment

This is the difference between the time between you leaving a job and getting another one. This is a temporary unemployment and so it is very common.

It is rare to get 100% employment, as people as always moving jobs.

Seasonal Unemployment

At certain points of the year, usually around summer and winter there is more employment due to tourism and Christmas so unemployment falls, due to the increase demand.

Demand Deficient Unemployment

This is when there is a lack of demand for certain goods and services. This occurs when the trade cycle is in a decline or recession. This forces businesses to trade off between closure and redundancies, due to the lower consumption. This is caused by an increase in productivity, as there will be excess supply.

Real Wage Unemployment

If real wages are above the equilibrium level then there will be unemployment. However at equilibrium there will be full employment. By making society flexible and removing the national minimum wage more people will work as they will begin to except lower pay.

However removing the national minimum wage in low growth could cause major economic effects and a slowdown in the economy.

Balance of Payments

This is a record of transactions between one country and the rest of the world.

It states how much is spent on imports and the value of exports.

Exports

These are goods and services sold to foreign countries and are positive in the balance of payments, as they are an inflow.

Imports

These are goods and services bought from foreign countries, and are negative in the balance of payments, as they b are an outflow.

Components of the Balance of Payments

There are 3 parts of the balance of payments these are;

The current account
The capital account
The official financing account

Current Account

This records a trade In goods, a trade in services, investment income and transfers.

Current Account Surplus

This means there is a net inflow of money into the circular flow of income. The UK is in a surplus with services, but a deficit with goods.

Current Account Deficit

This means the spending on imports from foreign countries is higher than exports to foreign countries.

If this is large and runs for a long time like the UK's then there may be financial difficulties financing the deficit.

Macroeconomic Objectives

The 7 Macroeconomic objectives are;

Balance of Payments
Economic Growth
Low inflation
Income distribution
Environment
Full employment
Balancing the deficit

Balance of Payments and Economic Growth

This will result in higher income and increased consumption, so there will be more imports, which will worsen the current account.
However economic growth will also cause investment which will increase productive efficiency, leading to an increase In quality and more exports, improving the current account.

Balance of Payment and Inflation

When achieving low inflation interest rates will increase. This will attract hot money and so it will cause an appreciation in the exchange rate, reducing exports and increasing exports, worsening the current account.
However these both work well together, as low inflation tends to lead to stable prices, leading to increase competitiveness, improving the current account.

Interconnectedness of Economies through international trade

The sum of all the countries current account should be zero, since what one country exports is another countries imports.

If the EU faces economic decline then demand for UK produced goods will fall as the EU can't afford their imports.

This means we are interdependent, as one countries conditions will affect another.