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.