Edexcel A-level Economics Theme 2 questions with 100% correct answers

Macroeconomics The study of the economy as a whole, including inflation, growth and unemployment. Aggregate demand The total amount of goods / services demanded in an economy at a given time at a given price level. Aggregate supply Total amount of goods and services supplied in the economy at a given time at given price level. What is GDP? Gross Domestic Product = the total value of all goods and services produced in an economy in a given time period. What does % change in GDP show? The rate of economic growth in an economy Difference between real GDP and nominal GDP? Real = adjusted for inflation. Nominal = A monetary amount not adjusted for inflation Difference between total GDP and GDP per capita? Total GDP = Total GDP in an economy. GDP per capita = Total GDP/Total Population What is Gross National Income (GNI)? The total amount of money earned by a country's people and businesses plus net overseas interest payments and dividends. Who has the 3 biggest GDPs in the world? 1st = USA, 2nd = China, 3rd = Japan Disadvantages of using GDP to compare economic growth? (4) 1. Inaccurate data (black markets/ tax avoiding sectors) 2. Doesn't show inequality in income distribution (Gini coefficient could help) 3. Doesn't compare quality of goods/services 4. Difficult to compare countries due to exchange rates Benefits of economic growth on consumers (3)? 1. Higher disposable income 2. Standards of living increase 3. Price of goods may fall and quality increase. Benefits of economic growth on firms (2)? 1. Higher revenue/profits = more investment 2. Benefits from more sales (due to higher disposable incomes) Benefits of economic growth on the government (2)? 1. Increase in tax revenue (pay off debts/spend) 2. Wins votes Positive impacts of economic growth on economy as a whole (2)? 1. Country wealth increases 2. Standards of living increase Negative impacts of economic growth on an economy (4)? 1. Pollution = Transport/manufacturing 2. Unsustainable (will reach full capacity) 3. Hyper inflation due to demand driven growth 4. Potential increased inequality Purchasing power parities An exchange rate of one currency for another which compares how much a typical basket of goods in one country costs compared to that of another country. How is the UK's national well-being measured? A national well-being report (started in 2010) asks people 4 questions about satisfaction, happiness, anxiety and worthwhileness. Its updated quarterly. How has the UK's national well-being changed from ? Satisfaction, happiness and worthwhile all increased (due to rising GDP and falling unemployment). Anxiety did fall but is rising again due to fears over global security. What is the relationship between real incomes and subjective happiness? They are positively related at low incomes (eg: if you are poor and your income rises, then your happiness will increase. However, higher incomes are not necessarily related to higher happiness levels). Define Inflation A sustained rise in the price level. (Erodes the purchasing power of money). Define deflation A persistant fall in the price level. (Money can buy more, caused by a lack of spending) Define disinflation When the rate of inflation decreases. (Prices are still rising just not as quickly) Define hyper inflation Large increases in the price level Impacts of inflation on consumers/workers? (3) 1. Purchasing power declines (especially if inflation rises faster than wages). 2. Savings are eroded (especially if inflation rate is higher than interest rate) 3. Value of loans decreases Impacts of inflation on Firms (4)? 1. Goods become more expensive compared to foreign competitors so exports decline. 2. Uncertainty = lack of investment etc 3. Increased revenue so potentially more profit (but costs rise too). 4. Wage increase may be below inflation (so real wage costs fall for firms). Impacts of inflation on the government (3)? 1. Income redistribution (fixed incomes become worse off). 2. Reduced value of debt in real terms. 3. Makes people spend now before prices rise (so more tax revenue etc) What inflation rate does the Bank of England target? 2%. (Too high would make people spend more before prices rise and hyper-inflation would occur)(Too little and disinflation could occur) Consumer Prices Index (CPI) A measure of the price level used across the European Union and used by the Bank of England to measure inflation against its target. How is the Consumer Price Index (CPI) calculated? -Calculated using a basket of 650 goods (chosen on an annual survey from 7000 households). -Uses index based on 1996 (Prices in 1996 = 100) -Measures percentage change based on 1996 index/ Problems with CPI (4) 1. Doesn't include housing costs 2. Basket only adjusted annually (tastes change quicker) 3. Doesn't account for quality changes 4. Surveying issues What is the Retail Price Index (RPI)? Similar to CPI but includes housing costs. Alternative measure of inflation but is not used and is not used for international comparison. Been used for 60 years in the UK. What is the consumer price index including owner-occupiers' housing costs (CPIH)? Uses a technique called 'rental equivalence' to estimate costs faced by owner-occupiers. However, doesn't have a direct measure of mortgage costs. Causes of inflation (3) 1. Cost-push inflation 2. Demand-pull inflation 3. Growth of the money supply Define Cost-push inflation A cause of inflation whereby increases in in the costs of production in the economy result in increase prices. (AS falls = Price level rises) Define demand pull inflation Inflation caused by excess demand in an economy (AD increases pushing price level up) How does growth of money supply lead to inflation? When firms/consumers have greater access to money they have more to spend on the same amount of goods so prices must rise. Define employment The number of people in paid work Define economically active People who are actively seeking work Define discouraged worker Someone who was looking for a job but has since stopped looking (due to lack of skillset/lack of jobs). Define unemployed People who are economically active but are not in employment. Define workforce Number of people who are economically active Define unemployment rate The % of workforce who are seeking employment but are not employed. Define employment rate Number of people in work as a % of the workforce. What are the 2 measures of employment in the UK? 1. The claimant count 2. The International Labour Organisation (ILO) and UK Labour Force Survey Define Claimant Count Number of people claiming the jobseekers allowance. 2 disadvantages of using claimant count 1. Some who are not actually economically active may claim jobseekers allowance. 2. Retired people may not need/want jobseekers allowance. Describe the ILO and UK labour force survey Labour force survey carried out by ONS surveys over 40,000 people in households. Classes people as employed (1hr+ work per week), unemployed (looking for job in past 4 weeks) or inactive (not seeking employment). Compare claimant count and LFS Claimant count includes people in hidden economy and fraudulent claimers. You can't claim if your partner is in work, you study and want to work, or you are around pension age. Therefore LFS is usually higher as it does account for those people. Why do both claimant count and LFS underestimate unemployment? Doesn't include: sick/disabled people, people who are part time but want full time, people in training/ education who want employment. Describe underemployment Underemployment = Part time/ zero hour contract/ self employed people who would like to be full time employees. Also includes people who are working below their skill level (graduates working as bartenders). Not included in unemployment statistics. Effects of an increase in inactive population (2)? Fall in productive potential of a country. Lower tax and lower GDP. What is frictional unemployment? The unemployment which exists in any economy due to people being in the process of moving from one job to another. Not serious as it is short term.