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Economics Practice Test 1

  • Revision

    Economics Revision Sheet

    Definition of Economic Growth

    Economic growth refers to the increase in the production of goods and services in an economy over a period of time.

    How is Economic Growth Measured?

    Economic growth is typically measured by the increase in a country’s Gross Domestic Product (GDP).

    Definition of GDP

    Gross Domestic Product (GDP) is the total value of all goods and services produced within a country in a specific time period.

    GDP Formula and Explanations of the Components of GDP

    The GDP formula is: GDP = C + I + G + (X - M)

    • C (Consumption): Total spending by households on goods and services.

    • I (Investment): Total spending on capital goods that will be used for future production.

    • G (Government Spending): Total government expenditures on goods and services.

    • X (Exports): Total value of goods and services sold to other countries.

    • M (Imports): Total value of goods and services purchased from other countries.

    Target and Current Rate of GDP Growth

    • Target GDP Growth Rate: Varies by country, typically around 2-3% for developed economies.

    • Current GDP Growth Rate: Check latest data from reliable sources like the World Bank or national statistics offices.

    Limitations of GDP

    • Does not account for income distribution.

    • Ignores non-market transactions.

    • Does not consider environmental degradation.

    • Excludes the shadow economy.

    Inflation

    Definition of Inflation

    Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.

    How is Inflation Measured?

    Inflation is commonly measured by the Consumer Price Index (CPI).

    Explain CPI

    The Consumer Price Index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households.

    Causes of Inflation

    • Demand-Pull Inflation: Occurs when demand for goods and services exceeds their supply.

    • Cost-Push Inflation: Results from an increase in the cost of production, leading to higher prices for final goods and services.

    Target and Current Rate of Inflation

    • Target Inflation Rate: Often around 2% for many developed economies.

    • Current Inflation Rate: Check latest data from reliable sources like central banks or national statistics offices.

    Effects of Inflation

    • Reduces purchasing power.

    • Can lead to uncertainty in business investment.

    • May cause wage-price spirals.

    • Can erode savings.

    Unemployment

    Define Unemployment, Labor Force, Not in Labor Force, Employed, Participation Rate

    • Unemployment: The state of being jobless and actively looking for work.

    • Labor Force: The total number of people employed or actively seeking employment.

    • Not in Labor Force: Individuals who are not seeking employment or are retired.

    • Employed: Individuals currently working for pay.

    • Participation Rate: The percentage of the working-age population that is part of the labor force.

    3 Main Types of Unemployment

    • Frictional Unemployment: Short-term unemployment that occurs while people are looking for a job that matches their skills.

    • Cyclical Unemployment: Unemployment caused by economic recessions.

    • Structural Unemployment: Long-term unemployment arising from mismatches between workers' skills and job requirements.

    Target and Current Rate of Unemployment

    • Target Unemployment Rate: Often around 4-5% for many developed economies.

    • Current Unemployment Rate: Check latest data from reliable sources like the Bureau of Labor Statistics or national statistics offices.

    Effects of Unemployment

    • Loss of income for individuals.

    • Increased government spending on social benefits.

    • Potential for increased crime rates.

    • Loss of skills over time for the unemployed.