economics - paper two

gross domestic product (GDP)

gross domestic product (GDP)

total value of output (goods and services) being produced in a country in a given time

real GDP

GDP adjusted for inflation

per capita income

GDP/total population

economic growth

increase in real GDP

consequences of economic growth

+higher GDP, lower unemployment, better living standards

-inflation risk, environmental concerns, negative externalities

unemployment

people able, available and willing to work at the going wage rate but cannot find a job despite an active search

unemployment rate

number of unemployed / work force

seasonal

seasonal changes in unemployment/demand for labour eg farming and tourism

structural

mismatch of skills and job opportunities as the pattern of labour demand changes eg mining coal ; occurs when demand for labour is less than supply of labour in an indivual labour market

cyclical

weakness of aggregate demand eg recession, decrease in GDP and jobs

frictional

people moving between jobs eg new entrant to the labour market

consequences of unemployment

decrease standard of living, government spending increased (jobseekers allowance), increase gap between rich and poor, consumer spending decreases

inflation

persistant increase in levels of prices in an economy ; so a fall in purchasing power of money

consumer price index

measures changes in the cost of living of a typical household so increase CPI means decrease purchasing power of money so increase inflation

inflation rate

annual percentage change in the consumer price index

causes of inflation

demand pull : economic boom where demand > supply

cost push : where production costs are increasing

consequences of inflation

wage price spiral, decrease in investments and expansion, increase gap between rich and poor

balance of payments

record of the financial transactions between the UK and the rest of the world over one year

current accounts

record of trade in goods and services, investment income and transfers

export

product sold to foreign market (money flows in)

import

product bought from foreign market (money flows out)

current account deficit

import > export (money flows out)

current account surplus

exports > imports (money flows in)

trade in goods

food imports, oil purchases, export of manafactured goods

trade in services

spending of overseas tourists in the UK

income flow

earning of UK citizen working overseas paid into UK, profits paid to overseas companies on their business in the UK

transfers

UK financial aid to overseas countries

consequence of current account deficit

+consumers benefit from : choice, lower prices, better quality products, better living standards

-profit for UK firms decrease, government finance effected

consequences of current account surplus

+increase income, decrease unemployment, profit for firms increase, government finance decrease

-consumers have less choice, higher prices, worse living standards as all quality products sent abroad, reliance on other countries

how can we reduce current account deficit

expenditure reduction, expenditure switching, supply side

expenditure reduction

reducing demand for goods and services - so imports fall : higher direct tax, increase interest rate

expenditure switching

encourage consumer spending to switch to domestic produced goods and services, getting foreign countries to purchase our goods and services ; raising price of imports via tax, make exports cheaper

supply side

businesses need to become more competitive ; raise productivity and encourage investments in industries with a large potential

globalisation

increasing interdependance of businesses and countries on eachother

international trade and globalisation

+specialisation ; economic growth, economies of scale, producing more jobs and skilled workers

-wage inequality, exploiting lack of regulations, competition from imports

moral considerations ; child labour, materials used

sustainability considerations ; transport, pollution

free trade

countries and businesses can trade without any restrictions such as regulations, tariffs or barriers

free trade agreements

where there are no import tariffs or quotas on products from one country entering another

consequences of free trade

+more choice for consumers ; lower price and better quality, specialisation, increase output and economic growth

-trade diversion ; away from countries outside agreement, increase competition for domestic firm, environmental considerations, money leaving our economy

factors contributing to globalisation

transport, technological changes, economies of scale, lower regulations and tax, growth of MNC

exchange rate

value or price of one currency in terms of another

MULTIPLY

when exchanging £ to foreign currency

DIVIDE

when exchanging foreign currency to £

strong pound

demand increases, supply decreases, imports cheaper, exports expensive

weak pound

demand decreases, supply increases, imports expensive, exports cheap

income distribution

a measure of how many people earn different levels of income in the economy

income

flow of earnings eg labour wages

wealth

stock of assets that have market value eg properties

causes for income inequality

education, skills, experience, unemployment, prejudice, inheritance/wealth, regional

consequences for income inequality

-self perpetuating poverty cycle (rich get richer, poor get poorer), unable to get education so unable to get good job to make money, crime rates increase, decrease in healthcare, increase illness, unable to get basic necessities, increase spending on fast food

+encourage enterprise, incentive to work harder, promotes efficient resource allocation

methods to reduce income inequality

progressive taxation, welfare benefits, minimum wage

progressive taxation

the more you earn the higher percentage of tax you have to pay

poverty trap

government benefits could lead to poor becoming dependant on benefits

factors that influence demand and supply of £

inflation, interest rate, current account deficit, public debts, political stability, unemployment

elements of fiscal policy

government income

government expenditure

fiscal policy

influences the level of economic activity through the manipulation of government income and expenditure

government spending > total tax revenue

budget deficit

government spending < total tax revenue

budget surplus

using fiscal policy to meet government objectives

low unemployment ; increase gov spending on businesses setting subsides, decrease taxation so business have more money to hire with

low stable inflation ; increase taxes when inflation increase to stop demand pull inflation, decrease gov spending

increase GDP ; decrease taxation, invest in businesses to increase productivity

current account surplus ; tarriffs to decrease imports, increase productivity and competition

distribution of income ; increase tax for the wealthy, spend more on communities

government income

tax revenues, sales of government services eg prescriptions, selling assests and borrowing

government spending

+satisfy wants and needs, increase employment, increase economic growth

-keep spending money they havent got, more interest payed back when in debt

problems with using fiscal policy

recognition lags (knowing what to do), imperfect information (to make right desicion), response lags (done once a year)

interest rates

the price or cost of borrowing money and the reward for saving

fixed - stays the same

variable - changes depending on economy

how are interest rates determined

the Bank of England determines the interest rates each month, this will affect other banks which gives loans to businesses and consumers

borrowers vs savers

if you are borrowing you would want a low interest rate so you have to pay less money

if you are lending out money you would like higher interest rates meaning you get more money back afterwards

monetary policy

manipulation of the base interest rate and other monetary tools to influence general levels of demand in the economy. controls inflation and price stability and encourages economic growth

monetary base rate set by

monetary policy comittee

increase in money supply

leads to an increase in demand and spending as more notes, coins and virtual money are in circulation

expansionary monetary policy

aims to boost economic activity and grow the economy

contractionary monetary policy

aims to slow down inflation by reducing excess spending and demand

supply side policies

policies designed to improve the quantity and quality of factors of production (CELL) which leads to an increase in productive capacity in long term two types ; free market and interventionist

free market supply side policies

reducing taxation

abolishing minimum wages

reducing trade union power

privatisation and deregulation

interventionist supply side policies

infrastructure improvement

education and training

susides and tax incentives to promote investment

privatisation

the process by which public businesses (owned by gov) are ‘sold off’ to be private companies eg british gas, railtracks

deregulation

less laws and regulations for businesses to follow increase productivity

ad vs dis of SSP

+increase economic growth, decrease inflation, decrease unemployment, better CA position on balance of payments

-waste of money which could be used in other areas, government may become unpopular if they choose wrong policy

role of money

medium of exchange ; trade in goods and services

• store of value

• unit of account ; used to measure value of things

• standard of deffered payment ; debt

narrow money

cash, notes and coins. this is what springs to mind when people think of money

broad money

notes, coins and banks and building society deposits ; exists in accounts but bank doesnt actually keep that amount of money as cash

what causes inflation

if the money supplied is more than the increase in the real value of output in the economy it will cause prices to increase

financial intermederies

banks, building societies, pension funds

borrowers vs savers

borrowers want low interest rate whilst savers want high interest rates

role of financial institutions

to channel funds from those who have surplus funds to those who have a shortage of funds

role of bank of england

• set interest rate

• manage money supply

• regulations for the financial services

• issues bank notes

• foreign reserves

• bank reserves

commercial banks eg HSBC, barclays

• accepts deposits

• lending to economic agents

• offering financial services eg credit cards

• foreign exchange

interest rates set up by commercial banks depends on

• rate set by central bank

• length of loan

• risk of borrower

• past records of repayment

• collateral