Economics Edexcel Theme 2.1 Detailed Summary

This is an increase in real or potential GDP. This will lead to higher living standards and high levels of employment.

Gross Domestic Product

This is the value of all the goods and services produced in an economy in a year.

This is measured at constant prices adjusted for inflation.

This is measures at current prices including inflation.

This is the combined monetary value of all the goods and services.

Gross National Product per head of the population.

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.

This is the sum of all producers who reside in a nation plus product taxes and receipts of primary income.

This is a theoretical exchange rate that equalize a bundle of goods in one country with that of another. This will minimise misleading comparisons.

Size of the Public sector Exchange rates Consumer and Capital spending Income Distribution Informal economy

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.

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.

This is a persistent increase in general price level.

This is when inflation reaches a very high level that is uncontrollable and unsustainable.

This is a slowdown in the rate of inflation.

This is a persistent decrease in general price level.

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.

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

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.

Demand Pull Cost Push Money Supply

Demand pull inflation is unsustainable inflation caused by an increase in demand in the economy, usually at full employment level.

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 Inflation is a sustainable inflation caused by rising factor input costs.

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.

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.

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.

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.

The government will be require to pay more pensions and welfare benefits as the real value of these will of increased.

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.

Unemployment can be measured by;

The claimant count The international Labour organisation

This counts the number claiming unemployment related benefits. I.e. Job Seekers Allowance. Here they must prove they are actively seeking work.

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 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.

It is internationally comparable.

This is when you are looking for work and actively seeking work, but you are not currently employed.

This is when you are employed, but you are not working to your productive potential and so you are working part time, whilst looking for full time employment.

Decreased employment will reduce the amount of disposable income in the economy and so the standard of living will decrease. This could result in psychological and mental effects on society.

For firms there will be reduced costs as the supply of the Labour Force will increase. Those with inferior goods will see a rise in profits and be able to retrain or take on more staff.

However consumers will have less income, which will decrease consumption and business confidence.

This will result in a waste of resources, as workers will lose their skills if they are not utilised.

This will mean the government will pay more benefits through job seekers allowance. Furthermore it will provide an opportunity cost as the money could be spent elsewhere. Furthermore their will be decrease tax gains as less people will be working and less people will be paying for goods with indirect taxes.

This will result in an opportunity cost as they could be used elsewhere. Furthermore it could result in negative externalities through the form of crimes.

This is when you are not actively looking for work. This is usually the elderly, disabled or children or those discouraged as they have not worked in such a long time. This will result in a decrease in potential labour force and a decrease in the productive potential of an economy.

There are 5 types of unemployment in the UK these are;

Structural Frictional Seasonal Demand deficient Real wage

This is a long term decline in demand, which costs the economy jobs. This occurs mainly in the manufacturing industry, as they replace humans with capital goods. This is known as technological unemployment. This was shown in the coal and shipping industries.

This type of unemployment is worsened by the immobility of labour, as if people do not have transferable skills then they will have no skill to contribute to employment. Furthermore globalization can also impact this as Labour costs will be cheaper in other countries.

This is the difference between the time between you leaving a job and getting another one. This is a temporary unemployment and so it is very common.

It is rare to get 100% employment, as people as always moving jobs.

At certain points of the year, usually around summer and winter there is more employment due to tourism and Christmas so unemployment falls, due to the increase demand.

This is when there is a lack of demand for certain goods and services. This occurs when the trade cycle is in a decline or recession. This forces businesses to trade off between closure and redundancies, due to the lower consumption. This is caused by an increase in productivity, as there will be excess supply.

If real wages are above the equilibrium level then there will be unemployment. However at equilibrium there will be full employment. By making society flexible and removing the national minimum wage more people will work as they will begin to except lower pay.

However removing the national minimum wage in low growth could cause major economic effects and a slowdown in the economy.

This is a record of transactions between one country and the rest of the world.

It states how much is spent on imports and the value of exports.

These are goods and services sold to foreign countries and are positive in the balance of payments, as they are an inflow.

These are goods and services bought from foreign countries, and are negative in the balance of payments, as they b are an outflow.

There are 3 parts of the balance of payments these are;

The current account The capital account The official financing account

This records a trade In goods, a trade in services, investment income and transfers.

This means there is a net inflow of money into the circular flow of income. The UK is in a surplus with services, but a deficit with goods.

This means the spending on imports from foreign countries is higher than exports to foreign countries.

If this is large and runs for a long time like the UK's then there may be financial difficulties financing the deficit.

The 7 Macroeconomic objectives are;

Balance of Payments Economic Growth Low inflation Income distribution Environment Full employment Balancing the deficit

This will result in higher income and increased consumption, so there will be more imports, which will worsen the current account. However economic growth will also cause investment which will increase productive efficiency, leading to an increase In quality and more exports, improving the current account.

When achieving low inflation interest rates will increase. This will attract hot money and so it will cause an appreciation in the exchange rate, reducing exports and increasing exports, worsening the current account. However these both work well together, as low inflation tends to lead to stable prices, leading to increase competitiveness, improving the current account.

The sum of all the countries current account should be zero, since what one country exports is another countries imports.

If the EU faces economic decline then demand for UK produced goods will fall as the EU can't afford their imports.

This means we are interdependent, as one countries conditions will affect another.