Pearson Edexcel AS/ A Level Unit 2 The UK Economy - Performance and Policies Full Detailed Notes covering all chapters of the unit. Graphs, key terms, and detailed explanations included
Unit 2: The UK Economy –
Performance and Policies
Chapters 22-24
Aggregate Demand
It is the total demand for goods and services within a particular market.
‘Aggregate demand’ in economics means a ‘total’ or ‘added up’ amount. It is
the total of all demands or expenditures in the economy at any given price.
National expenditure is one of the 3 ways of calculating national income,
usually measured as GDP.
National expenditure is made up of:
• Consumption – This is spending by households on goods and services
• Investment – This is spending by firms on investment goods.
• Government Spending – This includes current spending, for instance
on wages and salaries
• (Exports – imports) – Foreigners spend money on goods produced in
the domestic economy. Households, firms and governments also
spend money on goods produced abroad.
AD =C + I + G + (X- M)
Aggregate Demand = Consumption + Investment + Government Spending
+ (Exports – Imports of balance of trade.)
Price
Level
AD
RGDP
0 Y Y1
A change in the price level will cause a movement against aggregate demand.
,Price
Level
AD1
AD
RGDP
0 Y Y1
A change in any other component of aggregate demand will cause a shift in
aggregate demand.
The horizontal axis can show two things:
- Real GDP – Economic Growth
- Level of Unemployment
AD Curve
The Bank of England sets interest rates
PL = > IR
C I THEREFORE AD
PL LEADS TO FALL IN AD
The aggregate demand curve shows the relationship between the price level
and the level of real expenditure in the economy. The price level is put on the
vertical axis whilst real output is put on the horizontal axis. The price level
is the average level of prices in the economy. Governments calculate a
number of different measures of the price level.
Measures of Economic Performance
Comparisons are done to look at how an economy is doing over time and or
against other countries.
,GDP = Gross domestic Product = Value of goods and products produced in
a country.
GDP per Capita = Value of goods divided by the number of people.
Real GDP = It is adjusted for inflation. It reflects the value of all goods and
services produced by an economy in a given year, expressed in base-year
prices, and is often referred to as a constant-price.
Inflation = It is a sustained rise in general price levels. Generally, low
inflation is considered to be better than high inflation. It also can disrupt
knowledge of prices in a market.
Unemployment = Someone who is willing and able to work but doesn’t have
a job.
Unemployment is a major problem in society because it represents a waste
of scarce resources. Output could be higher if the unemployed were in work.
Fast – growing economies tend to have low unemployment are more
workers are needed to produce more goods and services. Low levels of
economic growth tend to be associated with rising levels of unemployment.
Under employment = Not using your best skills – It is difficult to compare
unemployment with other countries.
Labour Force survey = Polls about unemployment
Consumption
Consumption = Is the use of goods and services by households over a period
of time.
Consumption expenditure is influenced by the rate of interest in the
economy. When prices increase, consumers need more money to buy the
same number of goods and services as before.
Marginal Propensity to consume = Proportion of additional income to be
spent.
MPC = Change in Consumption
Change in Income
, Average Propensity to Consume = The average amount spent on
consumption out of total income
APC = Consumption
Income
Richer people have a lower MPC.
Durable Goods = Although bought at a point in time, continue to provide a
stream of services over a period of time.
Non-Durable Goods = Goods and services which are used immediately or
over a short period of time.
Consumption Function = The relationship between consumption and the
factors which determine how much a household consumes.
Interest Rates = Households rarely finance expenditure on non-durables
such as food or entertainment by borrowing.
Consumption and Income
Keynesian Income Rule = Keynesians suggested that as income rose,
households would prefer to save more and so average propensity to
consume would decline.
Disposable Income = Household income over a period of time, including
state benefits and less direct taxes.
Confidence
Short Term / Long Term = Depending on what causes the change in
confidence, it could be short lived or long lasting.
Durables / Non-Durables = Confidence is likely to have a greater decision to
purchase durables rather than non-durables.
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