3.1: UK macroeconomy

Question 1

Economic growth

Answer 1

Increase in GDP on an annual or quaterly basis

Question 2

Gross domestic product (GDP)

Answer 2

Total value of goods or services produced by a country

Question 3

GDP per Capita

Answer 3

GDP / population

Question 4

Purchasing power parity (PPP)

Answer 4

Additional exchange rate adjustment that equalises the price of internationally traded goods across countries

Question 5

Arbitrage

Answer 5

Buying goods at a cheaper exchange rate in one country and selling them for profit in another

Question 6

National income

Answer 6

Total value of goods and services produced in an economy in a given period of time (same as GDP) -> higher GDP = higher incomes = higher standard of living. Used to see if people are generally becoming richer

Question 7

Limitions of GDP

Answer 7

Doesn’t include unpaid work, gifts or black markets
Can’t measure quality of goods/services
Can’t show externalities
Some countries have poor data collection so can’t show GDP accurately
Can’t show sustainability
Can’t show national happiness
Can’t show what GDP is spent on

Question 8

Real GDP

Answer 8

GDP adjusted for inflation

Question 9

Nominal GDP

Answer 9

GDP at current prices

Question 10

Inflation

Answer 10

An increase in the general price level over a period of time

Question 11

What is used to measure inflation?

Answer 11

Consumer price index (CPI), Retail price index (RPI)

Question 12

How is inflation calculated?

Answer 12

Calculated by changes in price of the basket of goods (each item is weighted according to the % of household income is spent on them)

Question 13

What happens if there is high and unexpected inflation?

Answer 13

Goods and services become unaffordable as the purchasing power of income falls

Question 14

Index numbers

Answer 14

A way of expressing economic data i.e. what countries did best after 2008 financial crisis or compare average price of housing
New value / base value x 100 = index

Question 15

Disinflation

Answer 15

Inflation falls but remains positive

Question 16

Deflation

Answer 16

Price level is going down

Question 17

Causes of inflation

Answer 17

Growth in money supply - money pushed into economy -> purchasing power decreases -> price rises
Currency depreciation -> price of imports rise
Cost-push (rise in production cost)
Demand-pull (rise in demand)

Question 18

Consequences of inflation on consumers

Answer 18

Real incomes fall -> purchasing power falls -> standard of living falls
Inequality rises (skilled workers wages may increase with inflation)
Cash loses value quickly
Prices rise

Question 19

Impact of inflation on savers

Answer 19

Real interest rate (nominal interest rate minus inflation) falls as inflation rises

Question 20

Impact of inflation on borrowers

Answer 20

Gain as real interest rates fall
Indebtedness falls as value of debt falls

Question 21

Consequences of inflation on firms

Answer 21

Volatile prices reduce investment due to risk
Fall in international competitiveness (exports less competitive)

Question 22

What happens if inflation is expected to rise?

Answer 22

People spend to avoid higher prices -> demand rises -> price rises -> wages expected to rise -> higher costs -> higher prices

Question 23

Unemployment

Answer 23

Amount of people willing and able to work but can’t find a job

Question 24

Measures of unemployment

Answer 24

Claimant count - amount of people receiving job seekers allowance
International Labour Organisation measure - actively seeking work for past four weeks and ready to start in two weeks. Collected by labour force survey

Question 25

Underemployed

Answer 25

Working part-time but would like more hours

Question 26

Frictional unemployment

Answer 26

When people are moving between jobs

Question 27

Structural unemployment

Answer 27

Mismatch between skills workers have and skills firms are looking for

Question 27

Cyclical unemployment

Answer 27

Caused by economy moving from expansion to recession . Is short term

Question 27

Seasonal unemployment

Answer 27

Due to seasons of the year

Question 27

Real-wage unemployment

Answer 27

Real wages too high in a market and above market clearing wage - caused by: high trade union power, high national min wage, slow to adjust wages

Question 27

Employment rate

Answer 27

% of population at working age who are employed

Question 28

What causes a rise in employment rate

Answer 28

Economic growth (vice versa for rise in unemployment) Inflation due to rise in demand for imports

Question 29

Inactivity rate

Answer 29

% of population of a working age who are not actively seeking employment. If this rises: - Govt expenditure rises - Govt revenue falls

Question 29

Supply-side factors causing unemployment

Answer 29

Refers to supply of labour by workers. Those affecting employment/unemployment could be: - Labour market flexibility i.e. trade union strength - Skills of workers - Geographic mobility of workers - Occupational mobility of workers

Question 30

Demand-side factors affecting unemployment

Answer 30

Refers to demand for labour. Those affecting employment/unemployment could be: - Health of firms i.e. profit, demand for goods - Confidence of firms - Strength of economy - Government intervention to encourage hiring - Level of labour market costs/regulations for hiring

Question 31

Balance of payments

Answer 31

Record of all transactions of a country does with the rest of the world. Made up of three accounts: current, capital and financial

Question 32

Financial account

Answer 32

Net foreign ownership of domestic assets Hot money flows

Question 33

Capital account

Answer 33

Sale/transfer of patents copyrights, franchises, leases and other transferable contracts and goodwill Transfers of ownership of fixed assets

Question 34

Current account

Answer 34

Trade in goods/services (X-M) Net primary income - net factor income from abroad (i.e. remittances, profits, interest on dividends) Net secondary income - net unilateral transfers (i.e. foreign aid)

Question 35

What does the balance of payments had to add up to?

Answer 35

0 but errors and omissions in calculating what comes in and goes out of an economy. So "balancing item" or "net errors and omissions" added to make it 0.

Question 36

What makes up the current account?

Answer 36

Unilateral transfers - payments sent by govt or individuals abroad in which no good or service is received Income receipts and payments - includes money received from foreign investments Services trade balance - exports and imports of services Merchandise trade balance - exports and imports of goods

Question 37

Causes of a current account deficit

Answer 37

Low productivity Inflation higher domestically than abroad -> reduces international competitiveness Strong exchange rate -> reduces price of imports + increasing price of exports Non-price factors i.e. quality of goods/services Supply-side constraints -> cause goods imported from abroad

Question 38

The current account deficit is a concern

Answer 38

If due to low exports If a high % of GDP and getting worse

Question 39

The current account deficit is not a concern

Answer 39

If due to capital imports -> productivity good in future If due to purchase of current goods -> improves standard of living in short term If due to foreign direct investment (FDI) from past -> profits being repatriated today, meaning investments was profitable

Question 40

The effects of a current account deficit

Answer 40

Needs to be financed by a financial account surplus - will become a problem if foreign investors stop wanting to purchase assets in that country If a country has a free floating currency, the currency will depeciate -> may partially affect the competitiveness of exports. Will also cause import prices to rise -> higher prices -> cost-push inflation

Question 41

What does a current account surplus mean?

Answer 41

A country is exporting lots of goods. GDP = C + I + G (X-M). Exports > imports -> GDP may be rising -> signals economic growth

Question 42

What does a current account deficit mean?

Answer 42

May mean economic growth slowing and unemployment rising Could also mean importing more primary goods (food and raw materials) -> labour force working in productive economic areas like intellectual property -> may reflect change in structure of an economy and its labour force May also show high imports. If labour and input costs are cheaper overseas, this may reduce inflationary pressure i.e. cheaper to produce in china than UK