2.1.1 Economic Growth
Economy – The state of a country/region in terms of the production and
consumption of goods and services. The state of an economy can be
measured by GDP.
GDP – Is the market value of all finished goods and services produced
within a country in a year.
Recession – An economy is considered to be in a recession if it has
contracted for two consecutive quarters.
Real GDP
- Value of GDP adjusted for inflation e.g. if economy grew by 5%, but
inflation was 2% then real GDP growth was 3%
Nominal GDP
- Value of GDP without being adjusted for inflation
GNP vs GDP:
- GDP includes goods/services of foreign owned firms in the UK
- Gross National product is the value of all goods/services produced
by British nationals/business
GDP (what is produced IN your country) GNP (what is produced by
YOUR country)
GDP
ADVANTAGES: DISADVANTAGES:
- Measured frequently and - Hidden economies
widely - Distribution of wealth
- Acts as an indicator of - Doesn’t measure quality of
economic productivity life
- Allows for comparison - GDP ignores living conditions
between countries such as pollution
- Some correlation between - GDP growth may not be
some aspects of standards of sustainable
living
Factors affecting Happiness:
- Family relationships
- Financial situation
- Work
- Community and friends
- Health
- Political freedom
- Religion/Values
,Purchasing Power Parity: More realistic comparison of GDP. It is
measured by finding the values of a basket of goods in each country and
then the GDPs are adjusted to reflect Purchasing power.
2.1.2 Inflation
Inflation – The sustained increase in the general level of prices or a fall in
the value of money.
Deflation – A decline in the general price level in an economy, signified by
an annual inflation rate below 0%
Disinflation - A fall in the rate of inflation e.g. from 5% to 2%. Prices are
still rising but at a slower rate
Inflation is measured by the CONSUMER PRICES INDEX (CPI). The CPI
calculates the cost of a typical basket of goods. The difference in price for
this basket, from one year to the next, gives the rate of inflation.
However, the limitations of Consumer Prices Index are that it is not fully
representative as there are only 1300 households involved in the survey
How is the Rate of Inflation Calculated:
1) A base year is selected, and a family expenditure survey is
carried out – the survey covers over 1,300 households.
2) A representative basket of goods and services is used, and
weights are attached to each item – based on these items’
importance in people’s expenditure as measured by the family
spending survey
3) Each month government officials collect 120,000 separate
price quotations in 141 locations of over 700 products.
4) Weights are multiplied by price changes – the weighted price
changes and then totalled to calculate the inflation rate.
, What Causes inflation?
- COST – Push factors – Costs push up prices
- DEMAND – Pull factors – Demand pulls up prices
Effects of inflation:
- Increased cost of supplies
- Cut back on investment.
- Less exports
- Menu costs
Cost of inflation
- Loss of purchasing power
- Effect on savings
- Effect in interest rates
- Effect on international competitiveness
- Uncertainty
- Labour unrest
What are Interest rates?
- Cost of Borrowing
- Reward for Savings
Index numbers – Are used to make comparisons over time. To generate
an index number, a base year is a chosen and given a value of 100.
2.1.3 Unemployment
Unemployment : People of working age that are able and willing to work
but cannot find a job despite an active search for work.
Unemployment covers people who are:
Economy – The state of a country/region in terms of the production and
consumption of goods and services. The state of an economy can be
measured by GDP.
GDP – Is the market value of all finished goods and services produced
within a country in a year.
Recession – An economy is considered to be in a recession if it has
contracted for two consecutive quarters.
Real GDP
- Value of GDP adjusted for inflation e.g. if economy grew by 5%, but
inflation was 2% then real GDP growth was 3%
Nominal GDP
- Value of GDP without being adjusted for inflation
GNP vs GDP:
- GDP includes goods/services of foreign owned firms in the UK
- Gross National product is the value of all goods/services produced
by British nationals/business
GDP (what is produced IN your country) GNP (what is produced by
YOUR country)
GDP
ADVANTAGES: DISADVANTAGES:
- Measured frequently and - Hidden economies
widely - Distribution of wealth
- Acts as an indicator of - Doesn’t measure quality of
economic productivity life
- Allows for comparison - GDP ignores living conditions
between countries such as pollution
- Some correlation between - GDP growth may not be
some aspects of standards of sustainable
living
Factors affecting Happiness:
- Family relationships
- Financial situation
- Work
- Community and friends
- Health
- Political freedom
- Religion/Values
,Purchasing Power Parity: More realistic comparison of GDP. It is
measured by finding the values of a basket of goods in each country and
then the GDPs are adjusted to reflect Purchasing power.
2.1.2 Inflation
Inflation – The sustained increase in the general level of prices or a fall in
the value of money.
Deflation – A decline in the general price level in an economy, signified by
an annual inflation rate below 0%
Disinflation - A fall in the rate of inflation e.g. from 5% to 2%. Prices are
still rising but at a slower rate
Inflation is measured by the CONSUMER PRICES INDEX (CPI). The CPI
calculates the cost of a typical basket of goods. The difference in price for
this basket, from one year to the next, gives the rate of inflation.
However, the limitations of Consumer Prices Index are that it is not fully
representative as there are only 1300 households involved in the survey
How is the Rate of Inflation Calculated:
1) A base year is selected, and a family expenditure survey is
carried out – the survey covers over 1,300 households.
2) A representative basket of goods and services is used, and
weights are attached to each item – based on these items’
importance in people’s expenditure as measured by the family
spending survey
3) Each month government officials collect 120,000 separate
price quotations in 141 locations of over 700 products.
4) Weights are multiplied by price changes – the weighted price
changes and then totalled to calculate the inflation rate.
, What Causes inflation?
- COST – Push factors – Costs push up prices
- DEMAND – Pull factors – Demand pulls up prices
Effects of inflation:
- Increased cost of supplies
- Cut back on investment.
- Less exports
- Menu costs
Cost of inflation
- Loss of purchasing power
- Effect on savings
- Effect in interest rates
- Effect on international competitiveness
- Uncertainty
- Labour unrest
What are Interest rates?
- Cost of Borrowing
- Reward for Savings
Index numbers – Are used to make comparisons over time. To generate
an index number, a base year is a chosen and given a value of 100.
2.1.3 Unemployment
Unemployment : People of working age that are able and willing to work
but cannot find a job despite an active search for work.
Unemployment covers people who are:
