A-Level Economics (Edexcel A) Micro and Macro

What is economic growth?

Refers to an increase in GDP.

What is the PED value of a good that is elastic?

PED>1

What is the PED value of a good that is inelastic?

PED<1

What is a normal good? (YED)

Refers to a good which increases in demand when consumer incomes increase (YED>0)

What is inflation?

Refers to the fall in the value of money or the general rise in prices.

What is PPP (Purchasing Power Parity)?

Refers to the comparison of prices across countries to understand the true cost of living.

What is CPI?

Refers to the most detailed measure of inflation.

What is disinflation?

Refers to the average price level slowly rising.

What is deflation?

Refers to the fall in the average price level

What are some of the problems of inflation?

1) Value of money decreases.

2) Reduced international competitiveness

3) “Shoe leather” costs

4) Economic agent uncertainty

5) Political/Psychological Costs

What is the wealth effect?

Refers to when changes in wealth make people feel richer/poorer, even when their income has not changed

What are some of the problems of deflation?

1) Economic agent uncertiainty

2) Wage cuts

3) Deflationary spiral effect

4) Higher real debt burdens.

What is the difference between real and nominal GDP?

Real GDP is adjusted with inflation, whereas nominal GDP is without inflation at all.

What is used to calculate GDP?

Consumption, Investments, Government Spending and Exports-Imports (C,I,G,(X-M))

What is demand-pull inflation?

Refers to when aggregate demand surpasses aggregate supply, so value of specific goods increase exponentially.

What is meant by cost-push inflation?

Refers to when costs of production increases, so firms lay off the costs by increasing the prices of goods and services

What is the wage-price spiral?

Refers to when workers demand higher wages, which can cause both demand-pull and cost-push inflation.

What are some of the limitations of CPI?

1) Not representative of everyone.

2) Quality accounts are not included.

3) Cost exclusions (e.g, mortgage repayments are excluded.)

4) Data collection issues

What is discretionary spending?

Refers to consumer spending money on non-essential items, such as alcohol.

What is precautionary spending?

Refers to when consumers spend more and save less due to decreasing consumer confidence in the economy.

What is meant by hyperinflation?

Refers to an extremely high rates of inflation.

What is the CB target for inflation?

Around 2% (acceptable = 1% - 3%)

What are interest rates?

Refers to the cost of borrowing and the reward for saving.

What are some of the causes of demand-pull inflation?

1) Increased spending.

2) Cuts in interest rates

3) Decrease in direct tax

4) Higher wages

What are some of the causes of cost-push inflation?

1) Currency depreciation

2) Higher wages

3) Higher taxes/tarrifs

4) Supply chain disruptions

Why are differences between PPP and exchange rates important?

This implies that actual exchange rates do not reflect true cost of living in a region.

What are some of the limitations of GDP?

1) Quality over quantity

2) Data collection —> Causes comparison issues

3) Inequality/ Poverty

What is GDP?

Refers to the total value of products produced within a country annually/quaterly.

What is the Easterlin Paradox?

Refers to the principle that, as a country gets richer and people’s basic necessities are met, the average happiness does not necessarily continue to increase.

What is unemployment?

Refers to the proportion of the working-age population that is actively seeking work but not working.

What is employment?

Refers to the proportion of the working age population that is working.

What is the labour force?

Refers to the proportion of the population willing and able to work.

What is the working age population?

Refers to population of those between the ages of 16-64 years old.

What is underemployment?

Refers to those who are employed but seeking more work hours.

What is the claimant count?

Refers to the measurement of unemployment that records the number of people claiming unemployment-related benefits.

What is the International Labour Organisation survey? (ILO)

Refers to the measure of unemployment that surveys and estimates the number of people who are without a job, actively seeking work and are available to start work in the next 2 weeks.

What are the pros of using the claimant count?

1) Easy to collect data.

2) Cheap to collect data.

What are the cons of using the claimant count?

1) Political manipulation.

2) Data fraud =» Unemployment underestimates

3) Exclusion of people who are not out of work and actively seeking to work but don’t claim. (Not quality enough)

What are the pros of ILO?

1) More accurate

2) Based on international standards.

What are the cons of ILO?

1) More costly to collect data.

2) Not quality tested, e.g, only need to work 1h/week to be counted employed.

What is frictional unemployment?

Refers to unemployment which results from the time taken for individuals to move between jobs/ into employment.

What is seasonal unemployment?

Refers to unemployment which results from specific jobs existing at certain times of the year.

What is geographical unemployment?

Refers to unemployment that occurs when workers are unable or unwilling to move from one area to another to take available jobs.

What is structural unemployment?

Refers to unemployment which results from a mismatch between the skills of the unemployed and the skills needed for the available jobs.

What is real-wage unemployment?

Refers to unemployment which results from wages being kept above equilibrium price level, so the labour supply exceeds labour demand.

What is cyclical unemployment?

Refers to unemployment which results from insufficient AD and insufficient labour demand.

What is hysteresis?

Refers to how reccessions can have permanent negative impacts on the economy.

What is the impact of unemployment on workers?

1) Loss of income 

2) Psychological factors 

3) Less attractive to employers

4) Loss of skills (Hysteresis)

What is the impact of unemployment on businesses?

1) Decrease in demand for products
2) Decrease in net profit margins
3) Redundancy costs/ Severance

What are the impacts of unemployment on the government?

1) Less tax revenue
2) More welfare spending, e.g, JSA
3) Increase in government spending
4) Political pressure

What are the positives of migration?

1) Economic gorwth
2) Flexible labour markets
3) More job vaccancies filled
4) Net fiscal benefit

What are the negatives of migration?

1) Potential fall in real wages.
2) Increased pressure on public services.
3) Culture clash
4) Dependents outside of working age => “Fiscal drags."

What is aggregate demand? (AD) 2

Refers to the total level of new demand, expenditure and spending in an economy. 2

What are the components of AD?

1) Consumption (C)
2) Business Investment (I)
3) Government spending (G)
4) Exports - Imports (X-M)

Why is AD always downward sloping?

1) Inflation erodes purchasing power
2) Ceteris paribus (All other factors and variables are kept the same.)
3) Higher prices cause decreased quantity demanded for goods and services.

What is the average propensity to consume?

Refers to the proportion of income that is spent on consumption.

What is the marginal propensity to consume?

Refers to the proportion of a rise in income that is spent on consumption.

What are the factors that affect consumption (C)?

1) Real disposable income (Income)
2) Interest rates
3) Consumer confidence (Animal spirits)
4) Wealth effect
5) Credit availability
6) Direct taxes
7) Unemployment

How do you represent consumption mathematically?

C = a + bYd

What is autonomous consumption (a)?

Refers to the level of consumption that occurs when income = 0, which represents basic spending on essentials.

What is the marginal propensity to save (B)?

Refers to the proportion of extra income that is saved rather than spent which is in a “savings-to-income” ratio.

What is disposable income (Yd)?

Refers to the income households have left after paying direct taxes and receiving transfer payments.

What are transfer payments?

Refers to payments made by the government to individuals without any goods or services being exchanged, e.g, UI.

What was Keynes’ perspective on consumption?

Argues that emotional and psychological factors influence consumer and business decisions. (Animal spirits)

What was Friedman’s perspective on consumption?

Argues that people spend according to their long-term income, not short term emotional changes. (PIH)

What are animal spirits?

Refers to consumer confidence levels of consumption, e.g, bull and bear markets.

What is a bull market?

Refers to a market that appears optimistic and profitable.

What is a bear market?

Refers to a market that is pessimistic and not profitable.

What is aggregate demand? (AD)

Refers to the total level of demand, expenditure and spending in an economy.

What are the components of AD?

Consumption (C), Business investments(I), Government Spending (G) and Exports-Imports (X-M)

What is the percentage make-up of AD/GDP?

C= ~65%
I = ~15%
G = ~20%
X-M = ~2%

What causes movements in the AD curve?

Caused by changes in price levels.
1) Inflation => Causes contractions 
2) Deflation => Causes expansions

What causes shifts in the AD curve?

Caused by changes in the AD components.
1) Increase in components = Outward shift
2) Decrease in components = Inward shift

What is an injection?

Refers to additions of money into a circular flow of income that increases overall spending and national income.

What is an example of an injection?

E.g,
1) Increase in G
2) Increase in AD
3) Increase in GDP

What are withdrawals/leakages?

Refers to losses in the circular flow of money that reduce total spending and national income.

What is an example of a withdrawal?

E.g,

1) Decrease in C
2) Decrease in AD
3) Decrease in GDP

What are investments (I)?

Refers to the total value of all newly produced capital goods.

What are the 2 types of investments?

1) Physical = Investing into physical places, e.g, factories.
2) Human = Investing into human skills, e.g, education and work training.

What is the savings ratio?

Refers to the proportion of real income that is saved.

What is gross investment?

Refers to the total additonal capital stock.

What is depreciation?

Refers to the amount by which an assets value decreases.

What is capital stock?

Refers to the total value of a country’s productive assets currently in use to produce goods and services.

What is net investment?

Refers to the change in the capital stock of a country after taking into account depreciation.

How is net investment calculated?

Gross investment - Depreciation

What are the factors that effect investment (I)?

1) Economic growth
2) Business confidence
3) Risk
4) Interest rates
5) Access to capital stock
6) Fiscal policy

What is fiscal policy?

Refers to things related to government tax revenue and government spending.

What is “G” in terms of fiscal policy?

Refers to government spending on publicly provided goods, e.g, NHS.

What is “T” in terms of fiscal policy?

Refers to government tax revenue from direct or indirect taxation.

What are some examples of direct taxation?

1) Income tax
2) Corporation tax
3) Inheritance tax
4) National insurance contributions (NIC’s)

What are some examples of indirect taxation?

1) VAT
2) Landfill tax
3) Excise duties
4) Sugar tax

What are automatic stabilisers?

Refers to fiscal instruments that happen to counter the “boom-bust” market cycles.

What comprises the U.K’s government spending in terms of percentages?

Total = £772 bn.
1) Social protection (31%)
2) Health (19%)
3) Education (13%)
4) Government debt interest (5%)

What comprises U.K’s tax revenue in terms of percentages?

Total = £1.05tn.
1) Health (15%)
3) State pensions (10%)
3) Universal credit (8%)

What are the 2 primary automatic stabilisers?

1) Progressive taxation
2) Unemployment benefits

What is demand?

Refers to the number of goods and/or services that consumers are willing to purchase at a given price and time.

What is the law of diminishing marginal utility?

The law that states that as consumption increases, satisfaction gained from the unit consumed decreases.

What is the income effect?

Refers to the way changes in price impact consumer purchasing power.

What is the substitution effect?

Refers to the way changes in price impact demand for goods and services.

What is opportunity cost?

Refers to the value of the second best alternative.