UK Macroeconomics Revision
Economic Growth – Defined as an increase in real GDP. This is an increase in the real value of goods
and services produced in an economy in a given time. This can be through increased quantity and
quality (increasing real value).
GDP is usually calculated on an annual or quarterly basis and is given as a growth rate. If real GDP is
growing then the value of goods and services being produces is rising. Therefore, ceteris paribus,
incomes and standards of living are rising.
Goods and services need to be distributed among people, and therefore a better measure of
economic strength is real GDP per capital, GPD divided by the population.
Purchasing Power Parity – an additional exchange rate adjustment that equalises the price of
internationally traded goods across countries.
Abitrage – if it si cheaper to buy goods in one country at a certain exchange rates, then business wil
buy goods in a cheaper country and then sell in another for profit. Arbitrage forces prices and
exchange rates to align over time (increased demand in the cheaper country will lead to increased
demand which will signal an increase in price to ration scarce resources. Therefore the price will
increase the gap will close. In the long term there will should be no arbitrage.
Purchasing Power Parity exchange rate remain fialry constant year round, so it can be easily
compared. Exchange rates will get closer to PPP as time passes and in the long term they should be
equal to each other. PPP allows for exchange rate relationships to be tracked and predicted, and can
also be used to examine relative living conditions of different countries.
National Income – defined as the total value of goods and services produced in an economy in a
given time period. It is the same as GDP. Higher GDP is often correlated with higher incomes and
higher standard of living. National income data can be used to see whether people are generally
getting richer over time or not.
National income data is a good starting point to compare standards of living but two countries could
the same GPD but a country with a larger population will have a lower GDP per capita.
Inflation – Two countries could have the same level of GDP but their cost of living could be higher in
one of them. Therefore the same income buys fewer goods and services and quality of life is poorer.
Real GDP should therefore be used to remove inflationary impacts. Adjusting Real GDP for PPP will
help compare standard of living in different countries.
Some countries such as developing countries have poor data collection agencies which means the
quality of the GDP data is weak. The shadow economy also creates GDP but is not recorded. In some
countries the shadow economy may be larger than others and therefore comparison of GDP will
understate GDP of the country with the larger shadow economy, where actual income is actually
higher.
National income is an aggregation of the countries entire output, but often there can be
geographical and social variations.
GDP of two countries can be the same put one could be comprised more of capital and healthcare
education and investment spending while the other could be on the consumption of goods with
negative consumption externalities which reduce the economy’s future capacity. In high income
countries future consumption may be a greter priority due to sufficient provisions of necessities,
, while in low income countries current consumption may be prioritised, leading long term divergence
in quality of life.
GDP also measures total value of goods and services but doesn’t take into account the cost of
producing the output. If a country uses up all of its raw materials to produce or there are negative
production externalities, then the production is unsustainable, and future production, quality of life
and national output may be compromised.
If a country can produce the same amount of goods and services as another in a shorter time period
then it is more productive and workers get greater leisure time. GDP only measures goods and
services not sold at a market price (household economy)
GDP doesn’t take into account externalities
National income data Alsop doesn’t measure national happiness with welling influenced by factors
such as relationships, security, and health. There is therefore not automatically a positive correlate
on between wealth and happiness with happiness being subjective. Equality if income distribution
seems to be seen as fair and leads to a happier society.
Inflation is defined as a persistnet increase in the general price level over a given time period. Most
inflation figures are given on an annual basis. THE most common measures for inflation are CPI and
RPI. They are calculated by measuring the changes in the value of a weighted basket of goods and
services.
Inflation is an indicator of the strength of the economy is because high and unexpected inflation
would mean goods and services are becoming unaffordable as the purchasing power of income falls.
Low inflation therefore leads to greater stability providing conditions for sustainable economic
growth. In the UK the Office for National Statistic calculates the inflation weight by collecting prices
on basket of around 700 goods and services representative of household spending. Each item is
weighted in the basket according to the % of household income spent on them. A higher weight
means if the price of that item changes it has a larger impact on the overall value of the CPI and
inflation. The basket is updated once a year to reflect changing consumer consumption behaviour.
Index numbers are ways of expressing economic data. Index numbers make processing and
comparing economic data easier. Index numbers are calculated using a base year, which every other
thing is compared to. The base year index number is equal to 100.
Disinflation – a decrease in the rate of increase in prices
Deflation – a persistent decrease in the general price level over a given time period
Inflation – a persistent increase in the general price level over a given time period.
Causes of inflation
Cost-push inflation – inflation caused by an increase in the price of inputs. Due to a rise in the costs
of production causing firms to push up the final price of goods and services to maintain profit.
1. National Minimum wage
2. Trade Union wage
3. World Commodity price increase such as oil price increase
4. Indirect tax
5. Corporation tax
Economic Growth – Defined as an increase in real GDP. This is an increase in the real value of goods
and services produced in an economy in a given time. This can be through increased quantity and
quality (increasing real value).
GDP is usually calculated on an annual or quarterly basis and is given as a growth rate. If real GDP is
growing then the value of goods and services being produces is rising. Therefore, ceteris paribus,
incomes and standards of living are rising.
Goods and services need to be distributed among people, and therefore a better measure of
economic strength is real GDP per capital, GPD divided by the population.
Purchasing Power Parity – an additional exchange rate adjustment that equalises the price of
internationally traded goods across countries.
Abitrage – if it si cheaper to buy goods in one country at a certain exchange rates, then business wil
buy goods in a cheaper country and then sell in another for profit. Arbitrage forces prices and
exchange rates to align over time (increased demand in the cheaper country will lead to increased
demand which will signal an increase in price to ration scarce resources. Therefore the price will
increase the gap will close. In the long term there will should be no arbitrage.
Purchasing Power Parity exchange rate remain fialry constant year round, so it can be easily
compared. Exchange rates will get closer to PPP as time passes and in the long term they should be
equal to each other. PPP allows for exchange rate relationships to be tracked and predicted, and can
also be used to examine relative living conditions of different countries.
National Income – defined as the total value of goods and services produced in an economy in a
given time period. It is the same as GDP. Higher GDP is often correlated with higher incomes and
higher standard of living. National income data can be used to see whether people are generally
getting richer over time or not.
National income data is a good starting point to compare standards of living but two countries could
the same GPD but a country with a larger population will have a lower GDP per capita.
Inflation – Two countries could have the same level of GDP but their cost of living could be higher in
one of them. Therefore the same income buys fewer goods and services and quality of life is poorer.
Real GDP should therefore be used to remove inflationary impacts. Adjusting Real GDP for PPP will
help compare standard of living in different countries.
Some countries such as developing countries have poor data collection agencies which means the
quality of the GDP data is weak. The shadow economy also creates GDP but is not recorded. In some
countries the shadow economy may be larger than others and therefore comparison of GDP will
understate GDP of the country with the larger shadow economy, where actual income is actually
higher.
National income is an aggregation of the countries entire output, but often there can be
geographical and social variations.
GDP of two countries can be the same put one could be comprised more of capital and healthcare
education and investment spending while the other could be on the consumption of goods with
negative consumption externalities which reduce the economy’s future capacity. In high income
countries future consumption may be a greter priority due to sufficient provisions of necessities,
, while in low income countries current consumption may be prioritised, leading long term divergence
in quality of life.
GDP also measures total value of goods and services but doesn’t take into account the cost of
producing the output. If a country uses up all of its raw materials to produce or there are negative
production externalities, then the production is unsustainable, and future production, quality of life
and national output may be compromised.
If a country can produce the same amount of goods and services as another in a shorter time period
then it is more productive and workers get greater leisure time. GDP only measures goods and
services not sold at a market price (household economy)
GDP doesn’t take into account externalities
National income data Alsop doesn’t measure national happiness with welling influenced by factors
such as relationships, security, and health. There is therefore not automatically a positive correlate
on between wealth and happiness with happiness being subjective. Equality if income distribution
seems to be seen as fair and leads to a happier society.
Inflation is defined as a persistnet increase in the general price level over a given time period. Most
inflation figures are given on an annual basis. THE most common measures for inflation are CPI and
RPI. They are calculated by measuring the changes in the value of a weighted basket of goods and
services.
Inflation is an indicator of the strength of the economy is because high and unexpected inflation
would mean goods and services are becoming unaffordable as the purchasing power of income falls.
Low inflation therefore leads to greater stability providing conditions for sustainable economic
growth. In the UK the Office for National Statistic calculates the inflation weight by collecting prices
on basket of around 700 goods and services representative of household spending. Each item is
weighted in the basket according to the % of household income spent on them. A higher weight
means if the price of that item changes it has a larger impact on the overall value of the CPI and
inflation. The basket is updated once a year to reflect changing consumer consumption behaviour.
Index numbers are ways of expressing economic data. Index numbers make processing and
comparing economic data easier. Index numbers are calculated using a base year, which every other
thing is compared to. The base year index number is equal to 100.
Disinflation – a decrease in the rate of increase in prices
Deflation – a persistent decrease in the general price level over a given time period
Inflation – a persistent increase in the general price level over a given time period.
Causes of inflation
Cost-push inflation – inflation caused by an increase in the price of inputs. Due to a rise in the costs
of production causing firms to push up the final price of goods and services to maintain profit.
1. National Minimum wage
2. Trade Union wage
3. World Commodity price increase such as oil price increase
4. Indirect tax
5. Corporation tax
