Economics Edexcel Theme 2.1 Detailed Summary

Economic Growth This is an increase in real or potential GDP. This will lead to higher living standards and high levels of employment. GDP Gross Domestic Product Gross Domestic Product This is the value of all the goods and services produced in an economy in a year. Real Gross Domestic Product This is measured at constant prices adjusted for inflation. Nominal Gross Domestic Product This is measures at current prices including inflation. Total Gross Domestic Product This is the combined monetary value of all the goods and services. Gross Domestic Product Per Capita Gross National Product per head of the population. Gross National Product This is the value of all the goods and services produced in an economy in a year plus all the goods produced in other countries, contributing to a country, minus any outflows to other countries. Gross National Income This is the sum of all producers who reside in a nation plus product taxes and receipts of primary income. Purchasing Power Parity This is a theoretical exchange rate that equalize a bundle of goods in one country with that of another. This will minimise misleading comparisons. Limitations Of Gross Domestic Product Size of the Public sector Exchange rates Consumer and Capital spending Income Distribution Informal economy National Well-being The national statistics association is trying to improve how we measure happiness. Currently 91% of the UK said they were happy with their family life. The Relationship Between Gross Domestic Income and Subjective Happiness In general terms the higher Gross National Product per capita the higher the average satisfaction score is. However the UK grew by 5% from 2007 to 2014 with no change in the level of satisfaction. Inflation This is a persistent increase in general price level. HyperInflation This is when inflation reaches a very high level that is uncontrollable and unsustainable. Disinflation This is a slowdown in the rate of inflation. Deflation This is a persistent decrease in general price level. CPI Consumer Price Index Calculating The Consumer Price Index This is calculated through the use of two surveys. The first survey is the family expenditure survey. Over 7000 households will receive a survey and each members of the household will fill it in. These will then be assigned a weighting. For example of 30% is spent on food, 30% of the weighting will be on food. This will make up the basket of goods. The second survey is the monthly price survey. This where civil servants gather the average price for the basket of goods. This is for around 650 products. After prices are gathered in high and low cost shops they will be multiplied by the weightings. This difference in CPI is called CPI inflation and this is done annually every January. Limitations of Consumer Price Index It is only an average household Does not account for atypical spending It does not account for housing It is slow to respond to changes Retail Price Index The retail price index is an alternative measure to the consumer price index. This accounts for housing costs and so it will have higher values. Types of Inflation Demand Pull Cost Push Money Supply Demand Pull Demand pull inflation is unsustainable inflation caused by an increase in demand in the economy, usually at full employment level. Causes of Demand Pull Inflation Depreciation of sterling causing imports to be dearer and so factor costs increase. Fiscal stimulus means that the government will cut tax and increase spending and so income and consumption will rise. Low interest rates will make saving less attractive and so borrowing and consumption will increase. Growth in export markets will lead to the multiplier effect increasing exports further and price level. Cost Push Cost Push Inflation is a sustainable inflation caused by rising factor input costs. Causes of Cost Push Inflation If factor input costs increase then businesses will increase price to retain profits. If the Labour market increases in value I.e. the national minimum wage than business will experience higher costs and so prices will rise. If people expect inflation then they may ask for higher wages again causing inflation. Indirect taxes on goods will increase the price for consumers, causing inflation. A depreciation of the exchange rate will make imports dearer and so costs will increase. If there are monopolies in an economy than they may increase prices to take advantage. Money Supply If interest rates are low and the Monetary policy becomes ineffective and they can't decrease any further then inflation can't rise. Therefore we use quantitative easing. This allows banks to generate a money supply to buy government bonds as an asset. This then allows the government to buy bonds from investors allowing money into our circular flow of income. This will increase aggregate demand and cause hyperinflation. Effects on the Consumer Those on low fixed incomes will be hardest hit, due to its regressive effect. This means the cost of living will rise and the purchasing power parity fall and so spending power falls. However loans repayments will be lower as the real value of a debt decreases with inflation. Effect on Firms With decreased interest rates borrowing and investing becomes more attractive rather than saving. But consumers may want higher wages and so costs will increase. From an international perspective they may become less competitive, this will reduce business confidence as it is unpredictable. Effect on the Government The government will be require to pay more pensions and welfare benefits as the real value of these will of increased. Effect on Workers If inflation rises then real incomes will fall. Furthermore their will be an increase in redundancies as business may not he able to keep on all their staff. Measures of Unemployment Unemployment can be measured by; The claimant count The international Labour organisation The Claimant Count This counts the number claiming unemployment related benefits. I.e. Job Seekers Allowance. Here they must prove they are actively seeking work. Evaluation of the Claimant Count Not everyone eligible for JSA claims it, as there is often problems or discrimination in some form with; Females Under 18's Early retirements Time lags Stigma Therefore it is likely and underestimate of unemployment. The International Labour Organisation The ILO is a measurement performed through interviews and over the phone. They will ask if; They have been out of work for 4 weeks If they are willing to work in 2 weeks Whether they will commit to at least 1 hour per week. Part time staff are included in the measurement and so the figures are likely to be much higher.