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Econ AS > 2.1.1 + 2.1.2 > Flashcards

2.1.1 + 2.1.2 Flashcards

1
Q

What does GDP measure?

A

GDP measures the total value of national output of goods and services produced in a given time period

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2
Q

Output =

A
  • national income = expenditure(aggregate demand)

O=E=Y

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3
Q

Value of output

A
  • value added from each sector

- primary, construction, manufacturing, tertiary, quaternary, quinary

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4
Q

Y - factor incomes

A
  • total incomes for people in jobs + self employment
  • profits of private and public businesses
  • rent income
    Transfer of payments are excluded
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5
Q

E - expenditure

A

AD = C + I + G + (X-M)
C - CONSUMPTION
I - INVESTMENT SPENDING
G - GOVERNMENT SPENDING

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6
Q

importance of the concept of value added

A
  • gdp can be analysed by measuring value of output of different industries and by value of spending on goods and services
  • value added is increase in market value of goods and services during each stage of production supply
    Value added = value of production - value of intermediate inputs used in a supplying a good
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7
Q

Intermediate input

A

Goods and services such as energy, raw materials, semi finished goods

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8
Q

Economic growth

A
  • economic growth is the increase in real value of goods and services measured by % change in gdp
  • economic growth is the long run increase in country’s productive capacity
  • 2009 was recession, real value decrease by 4%
    Uk gdp lost 25% from feb 2020 -> April 2020
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9
Q

Nominal GDP

A

The monetary value of national output of goods and services measured at constant prices

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10
Q

Real GDP

A

Strips effects of inflation

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11
Q

Index number formula

A

Index number = raw no in period/ raw no in base period x 100

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12
Q

Price index formula (with nominal and real gdp)

A

Price index = 100 x nominal gdp/real gdp

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13
Q

Real gdp per capita

A

Real income per head of population expressed at constant prices

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14
Q

Real disposable income

A

Income after deduction of taxes + benefits + adjusted for inflation

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15
Q

Gross national income (GNI)

A

GNI is GDP + net property income from overseas
Remittance transfers are included in GNI
GNI per capita is a component in HDI

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16
Q

Purchasing power parity (PPP)

A
  • How many units of ones currency needed to buy the same quantity of goods and services as another currency
  • countries with relatively high cost of living, eg Norway, downward adjustment to nations PPP adjusted GNI per capi7
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17
Q

Big Mac Index

A

Compares US dollar price of Big Macs across countries, to compare one’s currency to US dollar
Indicator to the PPP of a country
Big Mac used for comparison as it is product available in almost every country and
manufactured in a standardized size, composition and quality.

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18
Q

Standard of living

A
  • main indicator is real GNI per capita expressed at PPP
  • inclusive growth - living standards improving when a country sustains a rise in per capita incomes, and benefits spread widely across population
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19
Q

Key benefits of using real GDP when assessing changes in living standards (4)

A

Easy to make comparisons over time
Easy to compare across different countries
Correlates with other measures such as HDI
Higher income generally = buy more goods and services

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20
Q

Flaws in measuring GDP as an indicator of changes in living standards

A
  • Inaccurate data
  • Gdp tends to understate real national income per capita due to growth and presence of shadow economy + unpaid work (volunteering)
  • errors in calculating inflation rate
  • GDP method of measure will change over time so hard to compare
    • no measure of inequality, pollution, corruption, poverty, quality of goods and services
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21
Q

Shadow economy

A

Illegal activities, also tax evasion

Estimated tax gap to be £3.5 billion in 2016

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22
Q

Median income

A

Income of middle household if all ranked from highest to lowest

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23
Q

GNH -gross national happiness

A

Introduced in Bhutan

  • sustainable and equitable social economic development
  • environmental conservation
  • preservation and promotion of national culture
  • good governance
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24
Q

Real income + subjective happiness links?

A

Easterlin Paradox

  • people believe more money will make them happier than it does
  • Richard easterlin argued that life satisfaction does rise with average incomes but only up to a point, beyond this point marginal gain in happiness declines
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25
Q

Distinction between economic growth & economic welfare

A

Economic growth
o Growth is a sustained growth of real GDP over time.
o Short term economic growth is usually driven by an increase in aggregate demand
o Contributes to rising average living standards i.e. a higher per capita GDP/GNI.
o Growth is a long run increase in a country’s productive potential / productive capacity.
Economic welfare
o socioeconomic factors accounted for as many aspects of well-being are not directly linked to material aspects of life.
o Welfare measure might include changing levels of inequality + median household incomes.

26
Q

Inflation

A

Inflation is the sustained increase in the general price levels, leading to a fall in the real purchasing power of money

Uk gov aim for 2% inflation

27
Q

Disinflation

A

Disinflation is the fall in the rate of inflation, but not sufficient to bring about deflation

28
Q

Consumer Price Index (CPI)

A

CPI = main measure for inflation in the UK and EU

  • base year selected, family expenditure survey carried out
  • representative basket of over 700 goods and services used, and weightings for each item
29
Q

Next year CPI

A

Sum of all (PI x Weightings)

Answer/ sum of weighting’s = price index

Eg. If price index = 102, then 2% inflation

30
Q

Limitations of CPI

A
  • cpi not fully representative, so is inaccurate for the non typical house
  • spending patterns eg. Singles vs married couples with kids
  • change in quality - price of goods may have increased due to improvements in quality
  • doesn’t account for regional differences in cost of living
31
Q

Causes of inflation:

A

Domestic causes - inflationary pressures within domestic economy, eg. Rising wage costs and increases in costs of components, and raw materials
External causes - Inflationary pressures from OUTSIDE a country, eg. Global oil cost/ price increase

32
Q

Importance of inflation expectations

A
  • Once inflation becomes established, difficult to remove
  • most agents will raise inflation expectations and build it into their calculations
  • if people expect higher prices, this can feed through to higher wage claims so costs go up
33
Q

Cost-push inflation

A
  • occurs when costs of production for business increases
  • therefore this is when inflation originates from inward shifts in SRAS
  • output of goods and services and real output both tend to fall
    because, rise in costs = fall in business profits
    Can bring stagflation
34
Q

Stagflation

A

Slow economic growth + rising inflation

35
Q

What causes cost-push inflation

A

Occurs when firms respond to rising costs by increasing prices to protect profit margin

  • rising unit costs
  • higher prices for raw materials
  • increase in business taxes
36
Q

Demand Pull inflation

A

total demand exceeds total supply
- as economy approaches full capacity, labour or resource shortages more freq
= harder for firms to expand production to meet rising demand
- AS becomes more inelastic as economy approaches full employment national income
Businesses usually pass higher costs with higher prices when demand is strong

37
Q

Demand pull inflation characteristics

A
  1. Demand pull inflation is when AD grows at unsustainable rate leading to positive output gap (actual gdp> potential gdp)
  2. When there is excess demand, firms can raise prices and gain bigger profit margins
  3. DP inflation when there is full employment of resources, AS inelastic
38
Q

Growth of money supply

A
  • when economy’s money supply increased quicker than economic growth rate, expect inflationary pressures on CP
  • too much money chasing too few goods
    Quantity theory of money
39
Q

Quantity theory of money

A

fisher formula of MV = PT

M - money supply
V - velocity of money
P - price level
T - volume of output

40
Q

Effects of inflation in reality

A
  • impact depends on severity of inflation and of rise in prices is persistent
41
Q

Potential winners from rising inflation

A
  • workers with strong wage bargaining power
  • debtors if real interest on loans are negative
    so real value of debt may fall
  • asset price inflation -> wealthy groups
  • producers if their prices rise faster than their costs = higher profit margins
42
Q

Potential losers from rising inflation

A

Savers
Retired on fixed income
Workers with low bargaining power

43
Q

Economic growth + rising employment associated with …

A

With low levels of demand pull inflation

44
Q

Risks of high + volatile inflation

A
  • inequality, regressive effect on lower income families
  • falling real incomes if wage lags behind rise in prices
  • neg. real interest rates, if interest on savers is lower than inflation
  • increased cost of borrowing
  • wage inflation
  • business uncertainty
45
Q

Negative impacts of inflation on government

A
  • pressure to raise value of state welfare benefits
  • can cause gdp growth to slow down - less tax revenue
  • high inflation leads to increased market rates so borrowing is more expensive
  • high relative inflation = worsening of international competitiveness causing a fall in exports threatening jobs
46
Q

Positive impacts on government of inflation

A
  • fiscal drag - nominal value of wages increase = higher % tax
  • could reduce real value of government debt
  • real interest of borrowing might be negative if nominal value is less than rate of inflation
  • moderate more inflation helps businesses = more profits = more tax paid
47
Q

Policies to control inflation

A

Inflation can be reduced by policies that slow down AD growth, or expand AS
- fiscal policy - less spending on state provided services, raising direct taxes
- monetary policy - higher interest rates, tougher control on bank lending
Supply side policies - increase labour productivity, competition and innovation within markets
controls on wages - 1% pay cap of public sect

48
Q

Deflation

A

Deflation A decline in the general price level, signified by an annual inflation rate below 0% (negative)

49
Q

Hyper inflation

A

A period of high rates of inflation, usually leading to a loss of confidence in a currency.

50
Q

Causes of price deflation

A

Demand side causes and supply side causes

51
Q

Demand side causes

A

Also known as malign deflation

  • deep fall in AD causing a persistent recession
  • when AD shifts to left (less economic growth)
  • large negative output gap
52
Q

Supply side causes

A

Known as benign deflation

  • improved labour + capital productivity
  • tech advances in prod process
  • high exchange rate - import prices fall (so SRAS out)
  • falling wage rates, falling prices for other imports
53
Q

Economic effects of price deflation

A

Holding back of spending
Debts increase
Low profits margins as lower prices

54
Q

Evaluating the impact of inflation on a government:

A

Impact on government depends on:

  1. Extent to which market interest rates rise e.g. on bond yields for newly issued government debt
  2. Extent to which high inflation and falling real incomes leads to an expanding informal economy / higher rates of tax avoidance
  3. Extent to which the government is a major employer in the economy and is forced to increase public sector pay and welfare benefits to protect low income families
  4. Extent to which rising costs reduces the ability of a government to fund investment projects
55
Q

Real wage change =

A

Nominal wage change - rate of inflation

56
Q

Economically inactive

A

Those who are of working age but are neither in work nor actively seeking work

57
Q

Measures of unemployment

A

The claimant count

The ILO unemployment rate

58
Q

Claimant count

A

Claimant count only records unemployed people who are claiming unemployment benefits

59
Q

RPI

A

● RPI includes ​housing costs such as mortgage and interest payments and council tax, whereas CPI does not.
● CPI takes into account the fact that when prices rise people will switch to product that has gone up by less. Therefore, the CPI is generally lower than the RPI.
● RPI excludes the top 4% of income earners and low income pensioners as they are not ​‘average’ households​ whilst CPI covers all households and all incomes

60
Q

Effects of inflation on consumers

A
  • if wages don’t rise with, = less disposable income
  • those in debt will be able to pay off at a cheaper value, but bad for vice
  • possible psychological effects - prices rising may make them feel worse off - check studies.
61
Q

Effects of inflation on firms

A
  • UK goods more expensive - less competitive = harder to export - net trade = AD
  • deflation can lead to speculators saving
  • unplannable
  • firms will have to calculate new prices - change menus - costs
62
Q

Effects of inflation on workers

A
  • wage rises in line
  • deflation could see staff lose jobs as less derived demand for labour

Econ AS (16 decks)

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