2.1 ECONOMICS

GDP

Gross Domestic Product: Total value of national output of products produced in a given time period

Economic growth

Increase in real value of products, measured by a % change in GDP. Long run economic growth is measured by an increase in a country’s productive capacity

Nominal GDP

Value of national output of products at current prices

Real GDP

GDP with inflation taking into account

Gross National Income

GDP plus net income from overseas

Purchasing Power Parity

How many units of one currency needed to buy the same basket of goods that can be bought with a given amount of another currency.

Cyclical Unemployment

Occurs when AD falls, causing a contraction in national output. Because labor is a derived demand, if output falls then demand for workers falls, as they are not needed, increasing unemployment. Additionally, a decrease in AD means that firms receive less revenue. So, to maintain profit margins, they must keep production costs low, and since labor is a firms biggest production cost, this results in workers being made redundant, increasing unemployment.

Frictional Unemployment

Caused when workers are looking for a better job or are in between jobs. Includes new entrants to the labor market.

Structural unemployment

When long term changes to an industry are caused by the immobility of labor. Occupational immobility can occur when workers do not have the skills to transfer to another job sector or role. Geographical immobility can occur when workers are not willing and able to move to where jobs are available. This can be caused by technological advancements, such as self-checkouts instead of cashiers. This would make cashiers redundant. Another cause is deindustrialization, which may be caused by lower labor costs abroad, so production moves abroad, reducing the amount of jobs for that industry in the country, increasing unemployment.

Real Wage Inflexibility

When the real wage is set above equilibrium, leading to excess supply or demand for workers, leading to unemployment. When wages increase, supply of workers increase as more workers are willing and able to supply themselves, due to higher incomes. However higher wages mean higher production costs, and since firms are profit maximisers, they will reduce production costs to maintain profit margins, demanding less workers as workers are a firms highest cost. This causes an excess supply of workers, leading to unemployment.

Lost output

Unemployment means that labor, which is a factor of production, is not being fully optimized. If factors of production are not being fully utilized, this means that an economy is operating below its productive capacity, which means its not producing as much as possible, meaning the economy loses out on output.

Gov Finances

Unemployment means people are not working. Therefore, they are not earning, so cannot pay income tax. Additionally, their incomes are lower, so they are not spending as much, so the govt loses out on VAT. Additionally, the government has to pay JSA and benefits for those who are unemployed, further increasing their expenditure and drawing resources away from other services such as the NHS and education. The increased expenditure and decreased income could lead to a budget deficit, disrupting govt finances

Lost income

Decrease in income means that living standards drop, and in order to keep up with essentials, borrowing may increase, which would increase debt levels. Homelessness could also increase as people can’t pay rent.

Greater Worker Pool

High unemployment means firms can easily choose the most productive worker for a role, keeping production costs low, shifting SRAS to the right. A productive worker also means that the most amount of a product possible is being produced, increasing the productive capacity of an economy whilst also increasing the value of output, increasing GDP.

Low Inflation

Unemployment means that workers don’t have much wage bargaining power. This keeps wages low, decreasing production costs. Low costs means firms do not have to increase prices to maintain profit margins, leading to lower prices, leading to less inflation.

Inflation

Lower Purchasing Power

Assuming ceteris paribus, high inflation means that consumers can buy less with the same amount of money. This would make it harder for households to purchase essentials, meaning that living standards fall, potentially increasing poverty.

Erosion of Savings

If interest rates don’t increase in line with inflation, then the value and purchasing power of savings can become eroded, negatively affecting those who live on savings, such as those who are unemployed or retired.

Erosion of export competitiveness

High inflation leads to higher prices, which makes domestic goods less attractive to foreign purchasers, meaning foreign countries are less likely to buy domestic goods. This could lead to a decrease in a country’s revenue. This could especially impact countries that rely on exports for revenue.

Wage Price Spirals

High inflation could lead to workers asking for higher wages to keep up with inflation. Higher wages means a firms production costs increases, which are passed on in higher prices. Higher prices leads to an increase in inflation. An increase in inflation leads to workers once again asking for higher wages, causing a spiral.

Inflation benefits

Higher wages

Inflation means that workers can bargain for higher wages, meaning they receive more cash. A higher wage could increase subjective happiness and productivity, increasing output and bring the country closer to its productive capacity whilst increasing GDP. However, if its not inline with inflation, fiscal drag can occur.

Firms encouraged to increase output

If inflation is low, firms know they can increase prices whilst keeping demand, leading to higher profits. This will encourage them to produce, increasing the country’s output and GDP

Improv of Gov Finances

As wages increase, fiscal drag can occur. This could result in higher tax revenue, increasing income. Additionally, VAT revenue can go up, as it is an ad valorem tax if the GPL increases, so would the VAT applied to each product. This means more VAT is paid. However fiscal drag could decrease a workers spending, which results in less products being bought, so less VAT is paid.