Summary AQA economics paper 2

Macroeconomic objectives

 Low/stable inflation- 2%
 Sustainable economic growth- trend rate growth of 2.5%
 BOP on current account
 Low unemployment
1. Protection of environment
2. Equitable distribution of income and wealth

 Can be short run implications due to conflict on one another
 Chancellor sets budgets to improve economy
 Bank of England IR to target inflation
Measurements

Economic growth- increase in productive potential of economy
 Real GDP- value of goods/services produced by economy in specific period adjusted for
inflation
 Real GDP per capita- measures level of national income adjusted for inflation per person
 Measured by CFOI

Inflation-continuous and persistent rise in average price level overtime
 CPI(2%)- measure average price level of basket of goods/services. EU measure and allows
comparisons in EU countries.
 RPI- includes housing costs like mortgages or council tax
How to measure
 Price surveys to see how much goods cost in last month. 180k a month
 Annual family expenditure survey- see how much a family spend on each good
Weighted price index- FEX
 Current price/base year price x100 = index for new year
 Times that by weight
Problems
 Weighting change over time- weighting done every year but fashions change quicker
 Average figure- personal rate of inflation may be higher
 Sampling issues- depends on number of people

Unemployment- people who are able, available, and willing to work at current wage but cannot
find work despite actively looking
 Numbers unemployed/uk workforce x100
Claimant count measure
 Measured by numbers claiming JS
 Number of people claiming unemployment benefits
 18- retirement
 Registered at job centre, actively seeking
 Open to government manipulation- reduces unemployment count
 Not internationally recognise- hard for comparisons
 Unemployed don’t claim due to stigma


ILO- number of people aged 16-65 who’ve been out of work for 4 weeks but ready to start in 2

,  Measured by phone interview/survey
 Sampling issues
 6 weeks out of date when published

Differences
 Youth are unemployed in claimant count
 JSA harder to obtain
 Workers don’t get benefits but responds to ILO

Uses of national data for living standards
 Allows us to see if economic growth Is occurring- allows employment opportunities
 Nominal GDP can seem higher-misleading
Compare between countries
 GDP per capita can be used to see output per person
 No indication of distribution of wealth- dif SOL in dif countries
 Hidden economies making it hard to find exact GDP
Must use PPP- purchasing power parity
 Estimates how much exchange rate needs adjusting to allow equivalent rate
 Minimise misleading comparisons between countries

CFOI/AD/AS
 National income- measure monetary value of flow of output of goods/services produced in
an economy over period
 Real national income used to measure economic performance as increase in real output
means AD risen faster than inflation, economy experiences positive growth

CFOI measurement of GDP
 Shows movement of goods/services between households and firms and corresponding
payments in money terms

 Shows that households are
rewarded for their FOP such
as labour getting wages
 Goods and services produced
 These “rewards” spent on
goods/services



Withdrawals- not all wages go towards consumer expenditure
 Savings (S)
 Taxation (T)
 Imports- (M) spending money not in our economy
Injections- not only consumers spend money
 Investment (I)- spending on capital goods
 Government spending (G)
 Exports (X)- foreigners in our economy
Measuring EG
1. Injections more than withdrawals = EG increases as more money entering economy
2. Injections less than withdrawals= EG decreases
3. Same= macroeconomic equilibrium

, Measuring GDP
1. Output method- final value of all goods/services in a year
2. Income method- adding all factor incomes
3. Expenditure- adding all total expenditure of goods/services in a year
4. Output=income=expenditure

Aggregate demand
 Total spending on all goods/services in the economy
 Consumption+investment+government spending + net exports (x-m)
 Consumption 60% gov spending 25% investment 15%
 AD curve downwards as price falls, consumers and firms purchase more goods and can
afford more
Consumption
 Consumer expenditure on goods/services, including durable and non-durables
 Saving- part of disposable income consumers don’t spend
 Disposable income- net income over period of time
 Interest rate- reward of saving and cost of borrowing
Determinants
 Interest rate
 Wealth
 Consumer confidence- secure jobs more willing to spend
 Changes in income tax- more disposable
 Income
 Availability of credit
Marginal propensity to consumer/save
 How consumption/saving responds to changes in income
 Change in C/s divide by change in y
Multiplier effect
 Changes in components of ad lead to greater change in national output
 1/ 1-mpc
 Mpc depends on tax, interest (tend to save more)
 Initial increase in spending increase income for another person, increasing spending further.
 Higher mpc= higher accelerator as more spending on goods/services meaning higher income
for firms




Investment
 Spending by firms on capital goods used to produce goods/service
Determinants
 Subsidies- incentive to invest/more finance
 Business confidence- secure, higher spending
 Level of business profits
 Consumer spending
 Interest
 Business profits