Over 140 flashcards for Edexcel A level Economics Theme 2. These are the flashcards I personally use and would really boost your chances of an A/A*. These are exported into text form from an application called Anki. These can be imported back directly into Anki to give you the exact same flashcards...
What is GDP? How do you calculate it - GDP measures the total output of goods
and services over a period of time<br><br>- it can be calculated via: 1) total
value added from firms 2) total income earned and 3) total expenditures<br><br>-
all 3 should give a similar result but these are averaged out<br><br><br><u>Formula
for calculating via expenditure</u><br><br><b>Aggregate Demand / GDP = C + I + G +
(X-M)<br></b><br>C = consumption<br>I = investment<br>G = government
spending<br>(X-M) = exports - imports<br>
what is economic growth? - economic growth is the increase in real value of
goods and services produced. It is measure by annual %change in GDP<br><br>- its a
long run increase in a country's productive capacity/potential output<br><br>-
<b>the increase in a country's capacity to produce goods and services</b>
what is Real GDP/Capita and Real Disposable income <b>Real GDP/Capita: </b>real
income per head of population expressed at constant prices<br><br><b>Real
Disposable Income: </b>income after deduction of taxes + benefits and adjusted for
effects of inflation<br><br>- per capita is useful to compare across countries
which may have varying populations
what is GNI? how does it compare with GDP - GNI is GDP + Net property income from
overseas<br><br>- remittance transfers are included in GNI and are important for
some lower + middle income countries<br><br>- countries with good net inflows of
remittances and other incomes will see their GNI rise (e.g pakistan, nepal,
phillipines)<br><br>- better than GDP as more accurately reflects income of
citizens as included remittances
What is the difference between real and nominal - measurements that are made using
current prices at the time (without taking into account price changes eg inflation)
are <b>nominal values</b><br><br>- <b>real values</b> are measurements taken
when price changes such as inflation are taken away<br><br>e.g if nominal wages
increase by 2% but inflation is 5% then the real wages decrease by 3%<br><br>e.g
nominal GDP is the GDP at current prices whilst real GDP takes inflation into
account and adjusts for changes in price level
what is the formula for price index? 100 x nominal GDP / real GDP = price
index<br><br>- so you can use a price index and nominal GDP to find real GDP
what are index numbers and its formula? - index numbers help to make
comparisons between data<br><br><b>Index number = raw number in period / raw number
in base period X 100</b>
what is PPP? - PPP stands for purchasing power parity and compares the
spending power between two nations<br><br>- PPP measures how many units of one
country's currency is required to buy the same basket of goods + services as can be
bought with a given amount of another currency<br><br>- i.e accounting for exchange
rates, two currencies are in equlibrium if a basket of goods is priced the same in
both countries
what is the big mac index (like PPP) - the big mac index compares the US
dollar price of Big Macs across countries in order to assess how under/overvalued
the local currency is against the US Dollar<br><br>- it is an indicator as the
purchasing power of an economy. The big Mac is used as its available in almost
every country and manufactured in a standardised size, composition,
quality<br><br>- prices vary because of differences in taxes, rents, wages, price
of ingredients .etc. Countries with a higher cost of living would in general have a
Big Mac Index
what indicator is used to measure the standard of living? - the main indicator for
the standard of living is <b>real GNI / capita expressed at Purchasing Power Parity
</b>(so when the purchasing power is at equilibrium)<br><br>- but there a debate of
whether GNI.capita is an accurate + reliable measure of improvements in standard of
living and economic well being for a bulk of the population<br><br>- living
standards improve when a country sustains a rise in per capita incomes (GNI) and
when the benefits are widely spread across the population (inclusive growth)
benefits of Real GDP to asses living standards - easy to make comparisons over
time (ie looking at percentage change of economics growth)<br><br>- easy to compare
different countreis<br><br>- correlates with other living standard measurementds
like HDI<br><br>- higher income = being able to buy more goods + services (like
,eduation, housing)
what are some limitations of GDP being used to compare living standards
<u>Inaccurate data</u><br>- GDP tends to understate income/capita due to
presence + growth of shadow economy and unpaid work done by volunteers<br><br>-
shadow economy includes illegal activities like drug production, prostitution,
theft, tax evasion<br><br><u>other</u><br>- doesnt account for remittances like
GNI<br><br>- not per capita so can vary with population sizes
what is inflation? - inflation is a sustained increase in the cost of living
or <u>overall price level</u> of an economy. Leads to a fall of real
purchasing power of money<br><br>- the first step to measure it is to measure the
average price level in the economy<br><br>- inflation can then be measured by the
percentage rate change of prices over time
what is deflation and disinflation <u>Deflation</u><br>- deflation is negative
inflation<br><br>- it is where average price levels fall<br><br>i.e inflation would
go from 2% to -1%<br><br><u>disinflation<br></u>- this is a fall in the rate of
inflation but not enough to cause deflation<br><br>- so prices are still rising but
at a lower rate<br><br>i.e inflation goes from 3% to 2%
what is CPI and how can it be used to calculate inflation? "- The consumer price
index (CPI) is the main measure of inflation in the UK and EU<br><br>- a base year
for prices is selected and a expenditure survey is carried out. <br><br>- The
survey covers 1000s of households and tracks what people of buying. A basket of
700+ goods and services is used with weights attached to each item<br><br>- the
weights are then multiplied by price changes and then totalled to calculate
inflation rate<br><br>BUT: does not take into account housing
costs <br><br><img src=""paste-
4330f827b0ab9b302c7c5e9d443ce0ca10218584.jpg"">"
what are some limitations on using CPI for inflation - the CPI is not fully
representative and will be inaccurate for the non typical household. The measured
cost for a low income family might be different to a high income household<br><br>-
doesnt account for regional differences in cost of living. The monthly cost of
living could be different in London compared to Cardiff for example<br><br>-
Although the price of a good/service may rise, this may be accompanied by
improvements in qualiy/performance of product
what is employment? the state of being paid by a company or organisation
what is economically inactive - those of working age who are neither in work nor
seeking work. Include students, retired, sick, looking after family members
what is unemployed? what are discouraged workers? - the unemployed are those
who are of working age, willing and able to work, are looking for work but
who are without jobs<br><br>- discouraged workers are people out of work for a long
time who give up on job searching and become economically inactive in the labour
market. A cause of hidden unemployment
how does labour and employment affect goods and services? - labour is a factor of
production. The amount of hours worked therefore partly (alongisde other factors of
production) determines the amount of goods and services that can be
produced<br><br>- the number of people in work influences the amount consumers can
spend on goods and services (as workers are consumers). Therefore influences
profitability of business and investment decisions
what is full employment and why it is a core macroeconomic policy - full
employment is when there are enough unfilled job vacancies for all the unemployed
to take work<br><br>- it is a core macroeconomic objective as having large number
of people unemployed means the economy isnt making best use of labour resources and
is sacrificing potential output that could be produced<br><br>- it is also
undesirable from perspective of unemployed people
what is the ILO labour force survey and hows it used to measure unemployment - the
official unemployment measure in the UK is based on the LFS based on the approach
recognised by the ILO<br><br>- this is a quaterly survey of 60k households to self
classify as employed, unemployed or economically inactive<br><br>- to class as
unemployed a person must be 1) of working age 2) without a job, wanting a joob,
having looked for a job within the last 4 weeks and able to start within next 2
, weeeks<br><br>- OR having found a job after being out of work and waiting to start
within next 2 weeks
what are adv/disadv of the labour force survey method? "<b
style="""">+</b><br>- same methodology used in many countries so allows for inter
country comparisons<br><br>- criteria for unemployment has changed little so can
compare across time periods / series<br><br><b style=""""><i
style="""">-</i></b><br>- survey of 60k households so will be sampling errors and
not all unemployed will be counted. Will have a margin for error (%)<br><br>-
costly and time consuming"
what is the claimant count measure for unemployment? - counts the number of people
registered as being unemployed and receiving benefits (Job Seeker
Allowance)<br><br>- Are those who are registered as able, available and willing to
work at a going wage rate in a suitable job but cannot find employment so are
registered for benefits
adv/disadv for claimant count? <b>+</b><br>- accurate as an exact num of
people who claim unemployment benefit can be calculated. Makes it
inexpensive<br><br>- easy to classify whether someone is actively seeking work or
not<br><br><b>-</b><br>- some unemployed people may not reach criteria for
benefits. E.g may have high savings or a partner on high income or Under
18<br><br>- people may be too proud to claim benefits => part of the problem on
calculating hidden unemployment<br><br>- weak at picking up underemployment. Many
ecnonomists regard CC as a poor barometer of this
what is <b>underemployment</b>? <u>under-employment is when people are counted
within the LFS as:</u><br><br>- looking for an extra job or actively seeking for a
new job with longer hours to replace their current job<br><br>- preferring to work
longer hours in their current job<br><br><u>under-employent means workers can be
underutilised based on abilities, qualifications, experience (e.g doctor working at
mcdonalds)</u><br>- under employment can rise despite unemployment
declining<br><br>- can make official unemployment figure look better than it is
What is <b>Aggregate Demand</b>? What is its formula? "- <b>Aggregate
Demand:</b> <u>the amount of goods + services demanded within the
economy at a given time + price level<br></u><br>- AD determines how the economy
performes at a macroeconomic level<br><br><font style=""""><font
color=""#0000ff""><b>AD = C + I + G + (X - M)<br></b></font>C: consumption<br>I:
investment<br>G: government spending<br>X-M: exports - imports </font>"
What is the AD curve like? "<img src=""ad_curve_2020_2.jpg""><br><br><u>Make
sure to label ""General Price Level"" and ""Real GDP"" as it is macro and not
""price"" and ""quantity"" like micro</u><br><br>- The AD curve shows the
relationship between AD and price level<br><br>- Formally its shows the total
amount of goods and sevices demanded in an economy at any given overall price
level"
What are reasons for the AD curve sloping downwards? "1) <u style=""font-weight:
bold;"">Real income / wealth effect:</u> Changes in price level affect real
values of wealth and income. Lower price level means real wealth/income increases
and consumers can demand for more goods and services<br><br>2) <u style=""font-
weight: bold;"">International trade effect:</u> If domestic price levels
increase whilst price levels in other countries stay same then exports become more
expensive for foreign buyers so exports decrease. Goods and services produced in
other countreis also become cheaper so domestic buyers import more. Higher price
levels lead to lower net imports which causes low AD. Causes AD to be downwards
sloping<br><br>3) <u style=""font-weight: bold;"">Interest rate
effect:</u> Increase in price level = more demand for money so interest rate
rises. Higher interest = higher cost of borrowing so less borrowing financed
consumption so lower AD. So downwards sloping"
What are some causes of shifts in the AD curve? "<img src=""paste-
33606332046e85a51989d0baf38ea1d286dd3d72.jpg""><br><br><b>will change when there is
a change in C, I, G, (x-m)</b><br><br><u>FALL in AD</u><br>- Fall in net exports (M
> X)<br>- Cut in real government spending<br>- Higher interest rates<br>-
Decline in household wealth / confidence<br><br><u>RISE in AD</u><br>- Depreciation
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