Summary
edexcel alevel economics unit 2 summary
- Course
- Institution
A concise summary of all the content needed for edexcel (A) A-level for the macro year 12 spec, therefore all of unit 2
[Show more]
Seller
Follow
emiliekennell
Content preview
AGGREGATE DEMANDAggregate demand is the total demand for all goods and services in an economy.
AD= C+I+G+(X-M)
GLOSSARY:
Durable goods are long lasting like appliances and cars
non durable goods are for immediate consumption
Disposable income is the money that we have after paying tax and receiving transfer
payments like benefits (which explains why for low income families gross income can be
lower than disposable)
Gross income includes interest, dividends,rent, wages etc
Discretionary income is the income available to spend after tax and necessary bills like
rent/food
Unsecured borrowing is loan not tied to anything else eg credit cards
Secured borrowing is when there is an asset benign used as collateral eg mortgages
Capital investment is spending on infrastructure (roads, sewers, ports etc)
Gross investment, total amount invested (spent)
Current spending is on public services like NHS, army, schools
Capital spending is on infrastructure like motorways, hospital machines etc
Social protection is things like benefits, free school meals, social care etc
Trade surplus means there's more exports than imports, increasing AD
Trade deficit means there's more imports than exports, decreasing AD
COMPONENTS:
Consumption: spending on goods and services
- 65% of aggregate demand
- Wealth is your stock of assets and these can be traded in for money when the
economy is doing well which increases consumption. This in turn raises confidence.
- When interest rates are high borrowing is less accessible because repayments are
higher so saving is encouraged because it's more profitable.
- When prices rise, people's wealth falls (the assets and savings are worthless) so
consumption falls too.
- so as tax falls consumption rises because disposable rises
- When consumer confidence is high people are feeling secure in their income (won't
lose their job), shares and house price so spending is high
- If there's persistent deflation (prices dropping) people will stop consuming because
they're waiting for prices to drop which is why 2% is a good target. Opposite to
inflation.
Investment: purchasing capital goods to improve the productive potential of the economy
because it allows more goods and services to be made, especially technology.
- Investment is an injection in AD which improves GDP but it may leak out via imports
- New capital boosts productivity which improves long run AD but there may be a time
lag between when the actual improvement is seen
- It creates extra demand and employment but it can cause unemployment if
machinery replaces labour
, - If growth is high, consumption is high, so firms will have more revenue and profit to
invest. It also signals there's demand so it's a good time to invest for the future.
- The accelerator effect is when an increase in GDP results in a proportionately larger
rise in capital investment.
- If business confidence is high firms expect a better return so invest more now. Same
with societal/political expectations
- Animal spirits is the emotional/instinctive side of humans which influences spending
and risk taking when they are “Strong”
- When the demand for exports is strong (e.g. when the pound is weak) firms expect
more sales and invest more to match the extra production needed for the future
- Investment is from savings or borrowing so when interest rates are high there's less
investment, less access to credit and the opportunity cost of interest on savings.
They also know there may be a fall in consumption
- When interest rates are high, new projects become less profitable
- When corporation tax is lowered firms keep more profit which can be used to invest,
but some regulations increase the cost of production which lowers profits and
investment. Subsidies are also encouragement
pr a Investment shifts AD to the right and causes
ic s growth because the new equilibrium is at a
e higher output level but sadly it also pushes up
prices
p
a
1p
a d
y y d GD
1
1 P
Government spending:
- If government spending increases by the same amount as tax rises there's no overall
increase in demand as people have less disposable income.
- The economy is doing worse (negative output gap) more money is invested in capital
to prepare for growth but when the economy peaks (positive output gap) tax revenue
is high so more money can be used for current spending.
- The fiscal policy is the way that the chancellor decided the budget, where the money
goes and where its from
- If there's an ageing population, working age people have to work harder to support
these people and the government has to spend more on social care/pensions
- if government spending is raised without raising taxes, the budget surplus (earning
more than spending) will shrink and shift AD right. opposite for when spending is cut
without raising taxes
Net trade: exports-imports
- Increased real incomes increases demand which increases imports, more deficit.
But, it depends on the MPS and if the growth was export led (which increases AD)
- A strong pound means that exports are expensive but imports are cheaper because it
costs more to buy pounds with the local currency, decreasing the net trade. But this
depends on the price elasticity.
, - If the performance of foreign economies improves, their people have more income.
Therefore they demand more British goods.
- Protectionism is an attempt to stop British producers from suffering against foreign
producers (that already have a price advantage of production) via tariffs and quotas
that make it harder for foriegn producers to sell in britain. This can decrease exports
because it raises prices but can also decrease imports if other countries retaliate.
- If british goods are higher quality or better marketed the demand for exports will rise
and they become inelastic
- The more innovative a country is (making products that cannot be bought elsewhere)
their net trade will likely be more of a surplus
- Rising prices of uk goods compared to other countries means that exports will fall,
especially if the UK inflation rate is higher than elsewhere.But If uk workers are more
productive they can make more stuff for less money which decreases prices again. it
depends on the elasticity, too high could mean net trade falls again.
pr
Rise in Ad1
ic
price to
e
p levels Fall in ad2,
causes price an Ad1
2p p to
a levels outw
1 contracti causes ard ad3,
p anAD2
on in an shift A
3
AD, less expan of A D inwar
youtput
y y in D d
sion y ygrowy1 gd
2 1 3 3 shift p
AD, 3 1th 2
more of
deman fallin
d g
Causes of shifts:
inward outward
Fall in exports Depreciation of currency
Fall in government spending Tax cuts
Higher interest more borrowing and credit
Falling household wealth (lower wages and Lower interest rates
more unemployment )
RATIOS:
The household savings ratio is calculated by dividing household savings by household
disposable income and a higher ratio indicates more saving
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller emiliekennell. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $8.30. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
76799 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now