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