A LEVEL MACRO ECONOMICS
Chapter 1 - 2.1
2.1.1 - Measuring Economic Output and Growth
GDP (Gross Domestic Product) as a measure of economic growth
Measures the output of all goods and services in a country in a year, given as a level of output
in the local currency.
Can also be measured as the sum of all incomes and the sum of expenditure
Benefits of using GDP as a measure of growth
Increasing GDP = rising production, incomes and spending
Leads to a higher standard of living in the country
International comparisons = all developed countries use GDP to measure the size of their
economy, a useful way to compare different growth rates between countries.
Comparisons over time = the gov can track the success of its economic policies by looking at
how GDP has changed over time
GNP (gross national product) and GNI (gross national income)
GNP = GDP + net income earned abroad by citizens
GNI = GDP + net taxes and dividends received from investments abroad by people and
businesses
When using any of these we need to know:
- How many people there are to share it out
- The currency’s spending power
- Changes since previous measures or countries
Nominal and Real values
Nominal value- e..g a person’s income level in a year in terms of £s earnt, ignoring inflation.
Real income- takes inflation into account to work out how much income a person will receive.
Eg. Wages grow by 5%, and inflation increases by 2%
Real income has an increase of 3%
Nominal income rises by the full 5%
Total and Per Capita Values
A total value of GDP is the value of goods and services that a country records in a year.
- Eg looking at China. China’s economy rivals that of the USA, but the USA has around a
third of the citizens.
, - Looking at the values per capita takes the population into account.
Value and Volume figures
Value figure- expressed in a currency, with a monetary value.
Volume figure- the amount of units or items of a product that are made.
Purchasing Power Parity (PPP)
- Measures how many units of one’s currency are needed to buy exactly the same goods
in another country with a different currency.
- It takes cost of living into account, so countries with a higher cost of living, it is
important to lower their GDP per capita.
- PPP converts an amount of money in an economy to reflect the cost of living so
meaningful comparisons can be made, it indicates a currency's spending power.
Comparison of rates of growth between countries overtime
Growth of an economy depends on:
➔ How large the economy is in the first place
➔ How trustworth the GDP is in that country (hidden sectors are considered)
➔ Reliability of the data
➔ Relative exchange rates
Eg. Country A - GDP of 800bn, grows by 2%, which is 16bm
Eg. Country B - GDP of 50bn, grows by 12%, which is 6bn.
So country A has the larger monetary increase, yet country 2 has the larger % increase.
Drawbacks of GDP as a measure of Growth
- Earning more money requires working longer hours, so less leisure time. This can cause
more stress.
- Earning more money means people often get bigger mortgages for houses, but this can
lead to more stress through commitment to high loan repayments.
- As output increases, so does pollution, leading to health problems and strain on the
NHS.
- Overall income rises causes more inequalities in income and wealth distribution which
isn’t shown by GDP.
- Doesn’t measure political freedom, freedom of speech or gender equality, so may
overstate the country’s standard of living.
- Doesn’t take subsistence, barter and the hidden economy into account. Thi is when
goods aren’t declared for tax.
- The informal economy isn’t recorded because it isn’t bought or sold, eg. charity
volunteers.
- Currency values- should output be measured in a country’s currency or in terms of
purchasing power.
, - Quality issues - eg if there is a poor health care system, GDP may overstate the value of
economic activity
National happiness
In response to the issues with using GDP as a measure, a move has been made away from just
economic variables, taking into account wellbeing of the population. It looks at:
Good governance
● Culture
● Environment
● Socio-economic fairness
2.1.2 Inflation
Inflation- the sustained ride on the general price level
Deflation- a sustained fall in the general price level
Disinflation- when prices rise more slowly than in the past.
Calculating inflation using CPI:
Requires 2 surveys:
Prices:
- Government collects data each month about how the price has changed for 600 of the
most commonly bought goods and services.
- The prices can vary from shop to shop so a selection of prices are analysed
What people buy:
- Known as the Office for National Statistics for Living Costs and Food Survey.
- It involved asking 400 households to record how much they spend on all purchases, eg.
eating out.
- It looks at the proportion of income that is spent on each item to include weighting.
- The price changes are then multiplied by the weights to give an overall weighted price
index known as the CPI.
Problems to do with the CPI include:
- Doesn’t include housing costs, mortgage repayments or rent, which is a big outgoing to
households
- Only measures the standard of living for the average household, not including the top
or bottom 4% or pensioners
- Sampling problems- only 57% of households respond to the survey so this may not be
accurate
- The items as part of the survey is only changed once a year but tastes and fashion
changes and it isn’t reflected in this.
, - Doesn’t represent people who don’t have typical spending patterns, such as people
who don’t drive
- Doesn’t reflect the quality of goods, eg. the new iphone will be more expensive than
the last (with a price rise more than inflation) as customers perceive it to have a better
quality than the previous one bought.
The RPI:
Benefits:
- More inclusive than the CPI as it includes housing costs, such as mortgage interest
payments so it is a more accurate representation of the cost of living
Drawbacks:
- The CPI is more commonly used in other countries, so it isn’t useful when making
international comparisons.
- As it includes mortgage interest payments, it means that RPI is directly affected by the
interest rates set by the Bank of England.
The 3 causes of Inflation:
Demand pull inflation
➔ If overall levels of demand for: investment, exports, goods and services rise in the
economy, then AD is said to have risen.
➔ This means that the AD curve shifts to the right and then the price level moves up along
the AS curve, which is inflation.
Cost push inflation
➔ Increased production costs eg. costs of im[orted materials and components will shift the
AS curve to the left.
➔ This also causes the price level to move up and along the AD curve so prices are higher,
which is inflation.
Growth of the money supply:
➔ Monetarist economists believe that inflation is caused by increases in the money supply
that are greater than the increase in the real output of the economy.
➔ This means that households have more money to spend on goods and services, causing
a rise in AD, pushing up the inflation.
The effects of inflation
For consumers:
- The real value of savings falls as prices rise. It means fewer goods can be purchased for
the same amount of money. It isn’t a problem if interest rates are higher than inflation
but this usually is not the case.
Chapter 1 - 2.1
2.1.1 - Measuring Economic Output and Growth
GDP (Gross Domestic Product) as a measure of economic growth
Measures the output of all goods and services in a country in a year, given as a level of output
in the local currency.
Can also be measured as the sum of all incomes and the sum of expenditure
Benefits of using GDP as a measure of growth
Increasing GDP = rising production, incomes and spending
Leads to a higher standard of living in the country
International comparisons = all developed countries use GDP to measure the size of their
economy, a useful way to compare different growth rates between countries.
Comparisons over time = the gov can track the success of its economic policies by looking at
how GDP has changed over time
GNP (gross national product) and GNI (gross national income)
GNP = GDP + net income earned abroad by citizens
GNI = GDP + net taxes and dividends received from investments abroad by people and
businesses
When using any of these we need to know:
- How many people there are to share it out
- The currency’s spending power
- Changes since previous measures or countries
Nominal and Real values
Nominal value- e..g a person’s income level in a year in terms of £s earnt, ignoring inflation.
Real income- takes inflation into account to work out how much income a person will receive.
Eg. Wages grow by 5%, and inflation increases by 2%
Real income has an increase of 3%
Nominal income rises by the full 5%
Total and Per Capita Values
A total value of GDP is the value of goods and services that a country records in a year.
- Eg looking at China. China’s economy rivals that of the USA, but the USA has around a
third of the citizens.
, - Looking at the values per capita takes the population into account.
Value and Volume figures
Value figure- expressed in a currency, with a monetary value.
Volume figure- the amount of units or items of a product that are made.
Purchasing Power Parity (PPP)
- Measures how many units of one’s currency are needed to buy exactly the same goods
in another country with a different currency.
- It takes cost of living into account, so countries with a higher cost of living, it is
important to lower their GDP per capita.
- PPP converts an amount of money in an economy to reflect the cost of living so
meaningful comparisons can be made, it indicates a currency's spending power.
Comparison of rates of growth between countries overtime
Growth of an economy depends on:
➔ How large the economy is in the first place
➔ How trustworth the GDP is in that country (hidden sectors are considered)
➔ Reliability of the data
➔ Relative exchange rates
Eg. Country A - GDP of 800bn, grows by 2%, which is 16bm
Eg. Country B - GDP of 50bn, grows by 12%, which is 6bn.
So country A has the larger monetary increase, yet country 2 has the larger % increase.
Drawbacks of GDP as a measure of Growth
- Earning more money requires working longer hours, so less leisure time. This can cause
more stress.
- Earning more money means people often get bigger mortgages for houses, but this can
lead to more stress through commitment to high loan repayments.
- As output increases, so does pollution, leading to health problems and strain on the
NHS.
- Overall income rises causes more inequalities in income and wealth distribution which
isn’t shown by GDP.
- Doesn’t measure political freedom, freedom of speech or gender equality, so may
overstate the country’s standard of living.
- Doesn’t take subsistence, barter and the hidden economy into account. Thi is when
goods aren’t declared for tax.
- The informal economy isn’t recorded because it isn’t bought or sold, eg. charity
volunteers.
- Currency values- should output be measured in a country’s currency or in terms of
purchasing power.
, - Quality issues - eg if there is a poor health care system, GDP may overstate the value of
economic activity
National happiness
In response to the issues with using GDP as a measure, a move has been made away from just
economic variables, taking into account wellbeing of the population. It looks at:
Good governance
● Culture
● Environment
● Socio-economic fairness
2.1.2 Inflation
Inflation- the sustained ride on the general price level
Deflation- a sustained fall in the general price level
Disinflation- when prices rise more slowly than in the past.
Calculating inflation using CPI:
Requires 2 surveys:
Prices:
- Government collects data each month about how the price has changed for 600 of the
most commonly bought goods and services.
- The prices can vary from shop to shop so a selection of prices are analysed
What people buy:
- Known as the Office for National Statistics for Living Costs and Food Survey.
- It involved asking 400 households to record how much they spend on all purchases, eg.
eating out.
- It looks at the proportion of income that is spent on each item to include weighting.
- The price changes are then multiplied by the weights to give an overall weighted price
index known as the CPI.
Problems to do with the CPI include:
- Doesn’t include housing costs, mortgage repayments or rent, which is a big outgoing to
households
- Only measures the standard of living for the average household, not including the top
or bottom 4% or pensioners
- Sampling problems- only 57% of households respond to the survey so this may not be
accurate
- The items as part of the survey is only changed once a year but tastes and fashion
changes and it isn’t reflected in this.
, - Doesn’t represent people who don’t have typical spending patterns, such as people
who don’t drive
- Doesn’t reflect the quality of goods, eg. the new iphone will be more expensive than
the last (with a price rise more than inflation) as customers perceive it to have a better
quality than the previous one bought.
The RPI:
Benefits:
- More inclusive than the CPI as it includes housing costs, such as mortgage interest
payments so it is a more accurate representation of the cost of living
Drawbacks:
- The CPI is more commonly used in other countries, so it isn’t useful when making
international comparisons.
- As it includes mortgage interest payments, it means that RPI is directly affected by the
interest rates set by the Bank of England.
The 3 causes of Inflation:
Demand pull inflation
➔ If overall levels of demand for: investment, exports, goods and services rise in the
economy, then AD is said to have risen.
➔ This means that the AD curve shifts to the right and then the price level moves up along
the AS curve, which is inflation.
Cost push inflation
➔ Increased production costs eg. costs of im[orted materials and components will shift the
AS curve to the left.
➔ This also causes the price level to move up and along the AD curve so prices are higher,
which is inflation.
Growth of the money supply:
➔ Monetarist economists believe that inflation is caused by increases in the money supply
that are greater than the increase in the real output of the economy.
➔ This means that households have more money to spend on goods and services, causing
a rise in AD, pushing up the inflation.
The effects of inflation
For consumers:
- The real value of savings falls as prices rise. It means fewer goods can be purchased for
the same amount of money. It isn’t a problem if interest rates are higher than inflation
but this usually is not the case.
