economics- theme 2

3 ways of calculating GDP

• national output

• national expenditure

• national income

facts about the UK GDP

• GDP growth rate 4.3%

• UK GDP: $3.1 trillion

income

the amount of money that is earned in a periodor received by individuals or entities through various sources, such as wages, investments, or business profits.

economic agents

• households

• firms/investment

• government

• exports

trade deficit

more imports than exports

why does the AD curve shift down wards

• REAL INCOME EFFECT

• BALANCE OF TRADE EFFECT

• INTEREST RATE

real income effect

as the price level falls, the real value of income rises and consumers have a higher value of purchasing power, leading to increased consumption.

Balance of trade effect

a fall in the relative price level leads to improvements in a country's trade balance by making exports cheaper and imports more expensive.

interest rate effect

if price inflation is low and this might lead to a reductionin interest rates if the central bank aims to stimulate economic activity, resulting in increased investment and consumption.

Main factors influencing the level of consumer spending

• changes in real disposable income

• level changes in employment and job security

• interest levels

• consumer confidence and wealth effects

• changes in asset prices

disposable income

the income left over for an individual or household after taxes have been paid

reasons for saving

• for a rainy day

• retirement

• unexpected expenses

corporation tax

tax businesses pay on their profits

SPICED

a strong pound makes imports cheaper and exports dearer

impact of a weaker pound on the UK economy

• A weaker pound increases the cost of imports, leading to higher prices for consumers, while making UK exports cheaper and potentially boosting demand abroad.

• shifts the AD curve out

• the pound is worth less against other currencies

trade surplus

exports>imports

trade deficit

imports>exports

what does having a strong pound mean

• the pound is worth more compare to other currencies

• This means that each pound can buy more foreign currency, reducing the cost of imports and potentially leading to lower prices for consumers.

• imports increase, exports decrease so net trade decreases

why the aggregate supply curve is sloping upwards

• A higher price level can lead temporarily to an increase in profit margins, leading to increased production

• to increase production, firms need to increase their short term costs and will then raise the price of their products to consumers

Running costs for firms

• wages and salaries

• raw materials

• imported materials

investment for firms

• machinery

• equipment

what shifts SRAS

• availability of resources

• cost of productions

• exchange rates

• productivity

what shifts LRAS

• an increase in the quantity or quality of the factors of production

changes in exchange rates

• a weakening in the exchange rate will result in an increase in the price of imports

• this will incrase the cost of production for all firms in an economy as theyhave to pay a higher price for imported goods and services

• leading to a potential decrease in short-run aggregate supply.

the classical LRAS view

• suggests that in the long run, the economy's output is determined by supply factors like labour, capital, and technology, remaining unaffected by price levels

• LRAS is perfectly inelastic at a point of full employment of all resources

• in the long run an economy will always return to full employment level of output

the keynesian LRAS view

• the curve was more L shaped

• supply is elastic at lower levels of output as there is a lot of spare capacity in the economy

• struggling firms will increase output without raising prices

• supply is perfectly inelastic at a point of full employment

GDP

the total value of goods and services produced in a given time

How is GDP measured

calculating all the money spent on goods and services minus the value of imports+exports

limitations of using gdp

• doesn’t tell the whole story

• the hidden economy: unpaid work such as volunteering and household labour isn’t taken into account

• GDP does not capture quality of life indicators

• income distribution

• environmental impacts

• potentially leading to an incomplete understanding of economic health.

Real GDP

• nominal GDP- inflation

what does GDP per capita masure

the average economic output per person in a region, reflecting living standards and economic health.

5 countries with the lowest GDP per capita

5- Central Africa republic

4- malawi

3- south sudan

2-seirra leone

1-Burundi

GNI

• total amount of money earned by a country’s people and businesses in a given time period

• more accurate way of measuring output and wealth as GDP doesnt consider the income earned by citizens outide of the country

purchasing power of parity

• different countries' currencies through a "basket of goods" approach, reflecting the relative value of currencies and cost of living.

why use PPP

• allows businesses to set their prices to take into account the economic reality of each country

• making their product affordable and competitive with local competitors

• leading to increased sales and revenue

advantages of PPP

• simplicity and intuitiveness

• inflation adjustment

• long term economic planning

disadvantages of PPP

• market distortions

• non-uniform availability of goods

• and services across countries, potential inaccuracies due to differing consumption patterns, and the lack of consideration for non-tradable goods.

national wellbeing

• refers to overall quality of life and material propensity enjoyed by individuals and households

measuring economic wellbeing

• median households income

• income inequality

• wealth and assets

• air and water quality

inflation

a sustained increase in the general price level

how to measure inflation

• consumer price index

• retail price index

types of inflation

• Demand-pull inflation- occurs when aggregate demand exceeds aggregate supply, increasing demand for goods and services

• Cost-push inflation- results from rising costs of production, leading businesses to pass on costs to consumers.

• Wage price spiral- occurs when workers demand higher wages to keep up with rising living costs, increasing costs of productions

• Hyperinflation

• Deflation

causes of infaltion

• Demand-side factors- high consumer spending due to low interest rates, high levels of business investment

• Supply side factors- rising wages, increasing raw material prices

• Monetary factors- excessive growth in the money supply

consumer price index

measures the average price change of a basket of goods and services commonly purchased by households

retail price index

includes housing costs such as mortgage interest payments, making it generally higher than CPI

positive effects of inflation

• moderate inflation encourages spending and investment rather than saving, leading to economic growth.

• can reduce the real value of debt

negative of inflation

• reduces purchasing power

• creates uncertainty, reducing investment

• fixed income households suffer the most

• can lead to wage price spiral

easterlin paradox

an increase in consumption of material goods will increase happiness if basic needs aren’t met but once these needs are met, an increase in consumption won’t increase long term happiness

limitations of CPI

• not fully representive of all consumers- inaccurate for non typical households

• ignores regional differences in inflation

limitations of using GDP for comparing countries

• doesn’t take into account inequality

• doesn’t include unpaid/voluntary work

• ignores differences in cost of living and may misrepresent economic well-being.

labour force

consists of all workers actively working and unemployed

non labour force

includes all of those not seeking work e.g pensioners and students

measures of unemployment

• ILO survey

• claimant count

ILO survey

• survey’s sent to 60,000 people at random every quater useful for international comparisons, responders self determine if they’re unempoyed

claimant count

counts the number of people claiming jobseeker's allowance and unemployment benefits