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Economics Edexcel Theme 2 Notes - The UK economy - Performance and Policies
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Detailed notes for theme 2 edexcel economics a level. All content which you need for your a levels including examples and application.
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Theme 2, Measures of Economic Activity
GDP- value of the output of goods and services produced within a country in a given period of time, often called nominal GDP and
measured in current prices
- Measured on a quarterly basis
- Estimated from income, output or expenditure related to the current flow of income
Gross national product- value of output of goods and services produced by FOP belonging to a country in a given period of time
Value / nominal - current prices Volume / real - adjusted for inflation
Difference between GDP and GNI is net factor income from abroad
GDP>GNI due to activity done by other capitals e.g. USA/UK (not all FOP belong to a country)
WHY MEASURE GDP?
1. Policy makers need accurate info to base decisions on - accurate and timely sense of economy activity, composition, changes in
levels and splits helps to facilitate management of the economy
2. Informs economic performance- key objectives and measures for judging the overall well being of a country
3. Real GDP increases = economic growth in short run. Real GDP decreases for 2 consecutive quarters = recession
4. Real GDP measures standard of living
5. Info on activity level and split into components is used for business in planning activities
6. Economists use data to formulate models of behaviour to predict future
PROBLEMS MEASURING GDP
1. Output method - only the value of the final output (or added at each stage of primary,secondary and tertiary activity) should be
included to avoid double counting
2. Income method- only incomes generated by FOP in production of goods and services should be counted
3. Expenditure method- remember to add exports spending from abroad and subtract imports
4. Take into account effect of inflation to understand underlying level of real activity. GDP deflator
5. Quarterly data needs to be seasonally adjusted to be used to compare due to natural variations in no. of days and spending patterns
6. Sampling errors, incomplete data and timing issues = different results from each of 3 methods
PPP exchange rates - purchasing power parity 2022 - annual growth forecast - 3.8% (due to increases in
-10% - 2020 cost push inflation) and planned that there could be a
7.4% - 2021 annual growth rate increased but due to low base from 2020 recession in october due to rising costs of living and oil and
gas prices
, PROBLEMS INTERPRETING REAL GDP
1. Size of informal economy varies (black market)
2. Unpaid activity - homemaking by housewives, DIY activities or subsistence farming (not included in GDP estimates)
3. Valuing public services is problematic (e.g. output of NHS)
4. Avg numbers don’t speak to distribution amongst households or composition of GDP (between cons and cap goods)
5. Exchange rate to equate common currency should be PPP exchange rate not spot exchange rate (that equalises purchasing power
by comparing the cost of identical baskets of power)
6. External costs aren’t taken into account
7. No consideration of stock assets and whether it is reduced by producing outputs
8. Differences in measurement procedures - countries expected to use UN’s SNA (highest growth rates are usually in the secondary
stage whereas primary countries do not grow as much therefore to grow they need to industrialise e.g. from FDI, govt policy etc.) -
better to use GNI
GDP/ capita - £31,400. Econ activity rate - 21.4%
79% services, 14% manuf, 1% ag, 6% construction - unbalanced economy - vulnerable to shocks e.g. tourism/ hospitality sector in covid
Circular Flow of Income
- Describes the movement of income and spending between sectors within an
economy
- Keynesian model - no AS
ASSUMPTIONS:
1. Households own all FOP
2. Closed economy: no govt or financial sector
FIRMS: HOUSEHOLDS: BANKS:
- Hire FOP to produce - Don’t always spend - - Take deposits for loans
- Receive profit and save - Middle party between
revenue from household - Use income from factor people who have money
spending payments only to fund and borrowing
- Loans finance I
, HAPPINESS AND WELLBEING (subjective happiness):
→ feelings of wellness/ satisfaction
- Link to real incomes (the purchasing power of money income or nominal income adjusted for inflation)
If real income falls = subjective happiness falls due to less spending on luxury goods
If real income falls = subjective happiness falls due to stress from paying back loan payments etc, may worry about state of personal
finances
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