Macroeconomics pack 2

Question 1

National income

Answer 1

the total value of goods and services produced by a country’s economy in a specific period, typically a year

Question 2

Gross Domestic Product (GDP)

Answer 2

The value of of all goods and services produced in an economy over a year. GDP is the most common measure of national income

Question 3

What are the three main methods for calculating national income

Answer 3

• Expenditure method: This adds up all the annual expenditure of consumers, investors, government spending and net exports
• Output method: The total money value of goods and services produced by the different sectors of the economy in a given year
• Income method: The total money value of factor payments (wages, rent, interest) fir the use of factors of production over the years

As there are so many calculations to make for the GDP of an economy, not all methods will be identical due to statistical errors, so an average of thee three methods is taken

Question 4

Nominal GDP

Answer 4

the value of all goods and services in an economy over a year, unadjusted for inflation

Question 5

Real GDP

Answer 5

the value of all goods and services in an economy over a year, adjusted for inflation

Question 6

GDP per capita

Answer 6

The money value of all goods and services in an economy over a year divided by the total population of the economy. (gdp per person kind of)

Question 7

GDP per capita formula

Answer 7

GDP per capita = GDP divided by population

Question 8

Difference between GDP and GNI (Gross national income)

Answer 8

GNI is the value of all goods and services produced in an economy over a year within national borders, plus net income from production abroad, whereas GDP does not calculate the income from production abroad. GNI is a net figure

Question 9

When will GDP be greater than GNI

Answer 9

When a country is sending significant profit, dividends and incomes to another country, so the net GNI figure becomes negative

Question 10

When will GNI be greater than GDP

Answer 10

When a country is receiving significant dividends, profit and incomes from another country, so the net GNI figure becomes positive

Question 11

Economic growth

Answer 11

The increase in real GDP over time

Question 12

When comparing economic growth figures over time and between countries why do economists need to be careful

Answer 12

• Economic growth is the rate of change of real GDP eg. when economic growth is slowing down GDP will still be rising just at a slower pace
• Economic growth rate will disguise the level of GDP in a country eg. although there may be faster rates of growth in developing countries, this does not indicate that there GDP is higher overall
• The accuracy of growth figures depends on the validity of GDP statistics

Question 13

Difference between actual growth and potential growth

Answer 13

Actual growth is a increase in real GDP in the economy over time whereas potential growth is an increase in the productive potential of the economy over time - Potential growth is the long-term growth rate of the economy

Question 14

How can actual vs potential growth be shown on a PPF diagram

Answer 14

A movement in the PPF represents actual as output has risen but the productive potential has remained constant. In contrast, a shift from PPF1 to PPF2 represents potential growth as there has been an increase in the productive potential of the economy

Question 15

Factors that cause actual growth

Answer 15

• An increase in business investment
• Reduction in savings
• Increase in consumption
• A decrease in the trade deficit

Question 16

Factors that cause potential growth

Answer 16

• Investment in capital goods
• Advancements in technology
• Improvements in education and healthcare

Question 17

Output gap

Answer 17

The differences between actual level of GDP and the productive potential of the economy

Question 18

Positive output gap

Answer 18

When the actual level of GDP is above the productive potential of the economy. This can be achieved in the short run by operating over capacity

Question 19

Negative output gap

Answer 19

When the actual level of GDP is below the productive potential of the economy. Associated with high amounts of spare capacity and high levels of unemployment

Question 20

Why is difficult to get a precise value of the output gap

Answer 20

As it involves estimating the productive potential which is harder to measure

Question 21

Business cycle (Trade cycle)

Answer 21

A phenomenon whereby GDP fluctuates around its underlying trend, following a regular pattern

Question 22

Boom and slumps

Answer 22

Where the economy is operating well above its productive potential. This is followed by a slowdown where growth decelerates and then a recession if there are 2 consecutive quarters of negative growth. A prolonged recession would be a slump of depression

Question 23

Features of an economic boom

Answer 23

• High rates of economic growth
• Low rates of unemployment and higher real wages
• Low levels of spare capacity
• High rates of inflation

Question 24

Features of a recession

Answer 24

• Negative rates of economic growth
• High rates of unemployment and lower real wages
• High levels of spare capacity
• Low rates of inflation

Question 25

Positive effects of economic growth on consumers

Answer 25

- Higher employment opportunities and income as businesses are likely to expand and therefore need to take on more labour. This will reduce unemployment, create more job opportunities and lead to higher incomes - Higher consumer confidence as they are less worried about losing their jobs. This could lead to a reduction in saving and higher spending

Question 26

Negative effects of economic growth on consumers

Answer 26

- Higher inflation means that incomes consumers earn will be lower in real terms. For example, in the UK low or falling real incomes have been a major issue in recent years - Higher relative poverty and income inequality as the gains from economic growth may be more beneficial for those on higher incomes than those on lower incomes. Eg. top business owners could see incomes rise substantially more than shop floor workers.

Question 27

Positive effects of economic growth on firms

Answer 27

- As there are more people being employed demand for goods and services increase so they will be making higher sales and profits eg. a high end restaurants may serve more customers as consumers use their higher income to spend on more meals out - There will also be an increase in their economic confidence and will therefore have more incentive to reinvest their profits in order to expand via higher investment.

Question 28

Negative effects of economic growth on firms

Answer 28

- Rising costs as inflation and wages rise if there is an increase in cost push inflation. Therefore manufacturers are likely to see total cost rise and therefore it is uncertain if profits will rise - Reduced international competitiveness as UK firms may need to increase their prices so UK exports are less competitive in international markets, with negative effects on the UK's trade deficit and profitability of firms

Question 29

Positive effects of economic growth on the government

Answer 29

- Higher tax revenue as workers earn higher incomes, they will pay more income tax to the government as well as more VAT on foods and services purchased - Reduced need for government spending as there is less need for the government to spend on welfare such as the job seekers allowance, also less need for expansionary policy

Question 30

Negative effects of economic growth on the government

Answer 30

- Conflict with other macroeconomic objectives such as low inflation, reduced environmental damage and a reduced trade deficit

Question 31

Positive effects of economic growth on current and future living standards

Answer 31

- Current living standards may rise as higher employment and incomes allows consumers to increase spending on goods and services - Future living standards may rise if economic growth is fuelled by higher productivity, such as new technology in the economy. This should boost the productive potential in the future

Question 32

Negative effects of economic growth on current and future living standards

Answer 32

- May cause current living standards to fall: Opportunity costs, as higher consumer goods may need to be sacrificed in order to increase the production of capital goods. Can be shown on the PPF - May cause future living standards to fall as fast and unsustainable economic growth could damage the environment due to increased production and transportation of goods around the world

Question 33

Factors that create desirable economic growth

Answer 33

- The magnitude of growth: should be around 2-3% so inflation doesn't get too high - Use of renewable energy makes economic growth more sustainable - An increase in potential growth, such as via education and new technology, is more sustainable and os less likely to cause inflationary pressure

Question 34

Subjective Happiness

Answer 34

Feelings of wellness and satisfaction that cannot be objectively measured

Question 35

What does economic theory suggest the relationship between happiness and economic growth

Answer 35

Economic theory suggests that rising real incomes will lead to an increase in living standards and therefore happiness as consumers can purchase more goods and services to fulfill their needs and wants

Question 36

The Easterlin Paradox

Answer 36

Highlights an apparent contradiction and finds that happiness and income are positively correlated at low levels of income however once consumers have met their basic needs, consumption of more goods and services is less important than other non-financial factors

Question 37

Importance of relative incomes

Answer 37

We only feel happier if we feel better off then the people with whom we compare ourselves. This helps to explain why rising incomes may not be causing higher happiness, as incomes may have risen for all members of society

Question 38

UK national wellbeing

Answer 38

National wellbeing is an economic measure of quality of life conducted by the ONS in the UK that attempts to look beyond simply the UK's GDP figures, such as including health, the environment and personal well-being

Question 39

Limitations of measuring National Well-being statistics

Answer 39

- Harder to measure subjective indicators accurately as they are based on feelings or opinions - The measure is not aggregated meaning that there is no single measure of well-being from the measure

Question 40

Inflation

Answer 40

An increase in the general price level

Question 41

Disinflation

Answer 41

An fall in the rate of inflation

Question 42

Deflation

Answer 42

A fall in the general price level

Question 43

What does having a stable rate of inflation provide

Answer 43

A stable rate of inflation provides a more certain business environment to allow investment and growth

Question 44

When does good deflation occur

Answer 44

When aggregate supply is increasing (eg. due to lower oil prices or higher productivity) This should be good for the economy as there is growth in the economy and a more internationally competitive export sector

Question 45

When does bad deflation occur

Answer 45

When aggregate demand is falling which is associated with falling growth and rising unemployment

Question 46

2 main measures of inflation

Answer 46

- Retail Price Index (RPI) and related measures - Consumer Price Index (CPI)

Question 47

RPI

Answer 47

Traditional measure of the price level and is used to index state pensions and benefits RPI itself is the headline rate of inflation RPIX is the RPI excluding mortgage repayments so that policymakers can see changes in the price level without including volatile and distorting elements of the RPI RPIY is the RPI excluding mortgage repayments and indirect taxation to allow policy makers to see how prices are changing in the wider economy

Question 48

CPI

Answer 48

It is the EU measure and therefore allows comparisons to be made between EU countries

Question 49

Differences between CPI and RPI

Answer 49

- CPI excludes a number of items RPI includes mainly relating to housing costs eg. council tax, mortgage interest payments, house deprecation and housing fees - CPI is a geometric mean whereas RPI is arithmetic, making CPI generally lower than the RPI figure just due to this statistical difference

Question 50

When will CPI be lower than RPI

Answer 50

In times of a housing boom the CPI will be lower than RPI as housing costs rise at a faster rate than other items

Question 51

When will the RPI be lower than the CPI

Answer 51

With very low interest rates, mortgages repayments and housing costs, the RPI figure will be much lower than the CPI figure such as in 2009

Question 52

How is the rate of CPI inflation calculated

Answer 52

How much on average a representative basket of goods and services costs in the UK 1. Price surveys are needed to find out much goods and services have cost in each shop 2. The annual family expenditure survey allows us to see how much households are spending on each good or service 3. All this information is then used to construct a weighted price index.

Question 53

Limitations of using CPI to measure inflation

Answer 53

- Inflation is only an average figure - ones personal rate of inflation may be higher or lower than this - The weightings are fixed each year and therefore may not be accurate during the entire year - The weightings of goods this year is different to previous years, which affects the ability to compare prices across time periods

Question 54

How to calculate inflation using a weighted index ## Footnote Do a question

Answer 54

calculate index number by adding percentage change to 100 Multiply index number by the percentage weight given Inflation can be calculated as a percentage change in the two final weighted price indices

Question 55

Demand pull inflation

Answer 55

An increase in the general price level, specifically caused by higher AD in the economy

Question 56

Cost-push inflation

Answer 56

An increase in the general price level, specifically caused by higher costs of production

Question 57

When does cost-push inflation occur

Answer 57

- Higher commodity prices - Higher unit labour costs - Increases in indirect taxation - A fall in the exchange rate

Question 58

Money supply

Answer 58

The total amount of money in circulation or in existence in a country

Question 59

What happens to costs for firms if the price level rises

Answer 59

There is a risk of a wage-price spiral. As inflation is higher due to a higher money supply, workers need to bargain their wages higher too. This then leads to cost-push inflation, as wages are a cost of production. This then leads to businesses raising prices and so the process can continue

Question 60

Effects of inflation on consumers

Answer 60

- Redistribution of income: as high inflation will reduce the real value of incomes, savings and debt therefore inflation will: benefit borrowers: as the value of the best they owe has reduced in real terms - Hurt savers as the value of their savings decrease - Hurt those on fixed incomes as the value of their incomes have fallen and they cannot negotiate wages to follow inflation

Question 61

Effects of inflation on firms

Answer 61

- Reduced confidence and investment: as inflation is no longer low and stable. Therefore there is greater uncertainty for businesses which could reduce investment as they are unsure where their expansion plans will be profitable - Reduced international competitiveness: rising UK inflation relative to other countries could mean the UK exports are more expensive on international markets - Demand pull inflation indicates higher profits for firms as consumers demand is high - Cost push inflation indicates lower profits as costs are higher

Question 62

Effects of inflation on workers

Answer 62

- Rising inflation reduces the real value of incomes earned by workers - Employment prospects - Demand pull inflation indicates better job prospects as consumer demand is high and therefore businesses may be more willing to expand employment and wages - Cost push inflation: indicates lower profits as costs for firms increase so they may consider wage freezes and redundancies to offset rising costs

Question 63

Effects of inflation on government

Answer 63

- A rising in inflation will have an effect on other macroeconomic objectives: - economic growth may be low as there is a lack of consumer confidence but in times of demand pull inflation AD is high so economic growth may be high - Unemployment: there is generally a trade off between unemployment and inflation. Demand pull inflation could improve employment prospects - Balance of payments: rising inflation can lead to a lack of international competitiveness of UK businesses and therefore could reduce exports ad widen the UK's trade deficit

Question 64

Employment

Answer 64

The total number of people with a job (working for firms or other organisations or are self employed)

Question 65

Unemployment

Answer 65

People who are without a job but who are able and willing to work at current wage rates (i.e economically active)

Question 66

Economically inactive

Answer 66

Those people of working age who are not looking for work, for a variety of reasons (such as students, those who have retired and the disabled)

Question 67

When does employment rise

Answer 67

If more people are gaining jobs then losing jobs then employment rises and unemployment falls

Question 68

When does unemployment rise

Answer 68

If more people are losing jobs than gaining jobs employment falls and unemployment rises

Question 69

how to calculate rate of employment, unemployment and economic inactivity

Answer 69

rate of .. = numbers employed, unemployed or economically inactive divided by population of working age (or Uk workforce for unemployed) times 100