2.1

Question 1

What is economic growth?

Answer 1

Rate of change of output

Question 2

What is GDP?

Answer 2

An indicator for standard of living
Total GDP represents overall GDP of a country
GDP per capita is total GDP divided by number of people in a country

Question 3

What is the difference between real and nominal GDP?

Answer 3

Real GDP is adjusted for by inflation
Nominal GDP is unadjusted for inflation

Question 4

Why do we use GDP per capita?

Answer 4

To make comparisons of growth between countries

Question 5

What are purchasing power parities?

Answer 5

An exchange rate of one currency for another which compared how much a typical basket of goods cost compared to one in another country
Useful when comparing countries as cost of living is taken account for

Question 6

What are the problems of using GDP to measure standard of living?

Answer 6

-Lack of information provided - the distribution of income is provided as an average
-Quality of goods and services - GDP per capita provides no information on an increase/decrease in quality overtime. Poor quality may have decreased standard of living
-Doesn’t include unpaid or voluntary work - If it did, GDP would be higher
-Difference in hours worked - GDP doesn’t capture the amount of time taken to produce GDP per capita

Question 7

What is national happiness?

Answer 7

Happiness and income are positively related of low incomes but higher levels of income has no correlation with happiness. This is the Easterlin Paradox.

Question 8

What is inflation?

Answer 8

The general increase of prices in the economy which erodes the purchasing power of money

Question 9

What is deflation?

Answer 9

The fall of prices and indicates a slowdown in the rate of growth of output in the economy

Question 10

What is disinflation?

Answer 10

A reduction in the rate of inflation

Question 11

What is CPI?

Answer 11

Calculated using a defined basket of consumer goods and services

Question 12

What are the limitations of CPI?

Answer 12

-Its impossible for the figure to take into account every single good that is sold in the country therefore CPI isn’t totally representative
-It doesn’t include the price of housing so the data may be lower than it should be
-Difficult to make comparisons because the figure is more recent than RPI

Question 13

What is RPI?

Answer 13

An alternative to CPI
-RPI includes housing costs
-CPI is generally lower than RPI
-RPI ignores the top 4% of income earners and low income earners as these aren’t average households while CPI covers all households and incomes

Question 14

What is demand pull inflation?

Answer 14

Phase of accelerating inflation which arises from a rapid growth in AD
-This is caused by the economy growing too quickly and the prices for everything starts to rise

Question 15

What is cost push inflation?

Answer 15

When businesses respond to rising unit costs by increasing prices to maintain profit margins
-Caused by rising labour costs, higher global prices, depreciation in value of exchange rate and increase in indirect taxes
-Inflation from cost-push factors can be difficult to control, since the central bank has little control over these causes

Question 16

What is growth of money supply?

Answer 16

If people have access to money they will want to spend it but there’s no increase in the amount of goods and services supplied so prices will rise

Question 17

Effect on inflation

Answer 17

Consumers
-If people’s incomes don’t rise with inflation they will have less to spend which could cause a fall in living standards
-Decreased spending of consumers

Firms
-British goods will be more expensive so firms will become less competitive and make it more difficult to export
-Inflation and deflation is difficult to predict so firms cannot plan for the future

Governments
-If governments fails to change excise taxes in line with inflation government revenue will fall. However, if they fail to change personal income tax allowances, real government income will increase and taxpayers have less money

Workers
-Living standards will decrease if they don’t receive yearly pay rises of rate of inflation
-Deflation could cause some staff to lose jobs as there is a lack of demand meaning firms see a fall in profit

Question 18

What is inexdation?

Answer 18

Some of the costs of inflation can be reduced by anticipating the effects of inflation in the future so wages and taxes can be increased in line with inflation

Question 19

What is balance of payments?

Answer 19

Record of all financial dealings over a period of time between economic agents of one country and all other countries

Question 20

What are the components of balance of payments?

Answer 20

Current account
Looks at where money flows

Question 21

Parts of a current account

Answer 21

Trade in goods - goods that should be traded
Trade in services - services traded in and out of the country known as invisibles
Income - wages, interests, profit or dividends can be repatriated into the country

Question 22

Equation for current balance

Answer 22

Current of balance = Balance of trade + Balance of invisibles + Net income / current transfers

Question 23

What shows a surplus or deficit?

Answer 23

Surplus = X > M
Deficit = M > X

Question 24

Macroeconomic objectives of balance of payments

Answer 24

-High economic growth means current account becomes a deficit as there is increased imports due to increased demand
-Export led growth, which would cause economic growth and improve current account balance; it alternatively causes inflation

Question 25

Interconnectedness of economies

Answer 25

These four factors have caused globalisation: -Proportion of output of an individual economy which traded internationally grows -Many more people own assets in other countries -Increased migration -Technology being shared faster

Question 26

What is unemployment?

Answer 26

Represents a waste of resources so level of unemployment is a good indicator of the country's economy

Question 27

What is claimant count?

Answer 27

The number of people receiving benefits for being unemployed

Question 28

What is ILO?

Answer 28

Shows anyone over 16 who can be classed as employed, unemployed or economically active

Question 29

What is LFS?

Answer 29

Sample of people living in households which ask questions about personal circumstances and activity in market to class people's employment status

Question 30

What is the difference between LFS and claimant count?

Answer 30

-People in the hidden economy or those who fraudently claim benefits are in claimant count but not LFS. However, some people aren't eligible for benefits so appear in LFS but not claimant count -LFS tends to be higher than claimant count -Claimant count may not account things happening in the labour market

Question 31

Why are both LFS and claimant counts underestimates of unemployment levels?

Answer 31

They both don't include: -Working part time people that would like to work full time -Government training schemes who'd prefer unemployment -Sick or disabled people -People not actively looking for jobs but willing to accept if there was an offer

Question 32

What is under employment?

Answer 32

Those who are in part time or zero hour contracts when they'd prefer to be full time. Also includes those who are in jobs that don't reflect their skill level

Question 33

How does under employment link to economic growth?

Answer 33

Under employed have lower incomes and will spend less, reducing consumption which will reduce AD and slow growth of the economy

Question 34

Types of unemployment

Answer 34

Seasonal unemployment - once a specific season has passed labour force drastically reduces Frictional unemployment - moving people between jobs Real wage inflexibility - result of real wages above market clearing level leads to excess supply of labour Cyclical unemployment - general lack of demand for goods within a country Structural unemployment - long term decline in demand in an industry

Question 35

Types of structural unemployment

Answer 35

Regional - where certain areas of a country suffer from industry closures Sectoral - where one sector suffers in a dramatic fall in unemployment Technological - technology replacing people's jobs

Question 36

Ways migration affects employment

Answer 36

-Immigrants come for low paid jobs which leads to immigrants spending which creates jobs and total employment increases -Causes lower wages as supply of labour increased so firms are able to recruit foreign workers and price equilibrium of labour reduced -More competition for UK workers with low motivation for low skilled jobs which will increase number of UK citizens unemployed

Question 37

Impacts of unemployment

Answer 37

Workers: -Those unemployed usually have a loss of income which results in a decrease in living standards -Suffer from stigma of being unemployed and feel degraded leading to stress Firms: -Decrease in demand for goods because people will have lower incomes which leads to fall in profit -Long term unemployment leads to a loss of skills so firms have a smaller pool of skilled people to employ -Can offer lower wages because people will still accept Consumers: -Unemployed consumers have less to spend -Firms may lower prices so its cheaper for unemployed and employed consumers Government: -Reduced income results in a fall in tax revenues and higher spending on welfare payments for families with people out of work, incurring opportunity cost -Increase in budget deficit Society as a whole: -Rising unemployment links to social deprivation -Areas of high unemployment sees a fall in demand for goods / services leading to a fall in income and loss of jobs -Results in loss of potential national output. This will have a negative effect on LRAS and damage the economy's growth potential so can't reach desired PPF