Theme/Unit 2 Revision notes that can be used to create flashcards and memorise key knowledge/theory that will help you get an A/A*. These notes cover all aspect of this theme and are very detailed, so you will know every specification point there is.
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YOUR NOTES
A Level Economics A Edexcel
2. The UK Economy – Performance & Policies
CONTENTS
2.1 Measures of Economic Performance
2.1.1 Economic Growth
2.1.2 Inflation
2.1.3 Employment & Unemployment
2.1.4 Balance of Payments
2.2 Aggregate Demand (AD)
2.2.1 The Characteristics of AD
2.2.2 Consumption (C)
2.2.3 Investment (I)
2.2.4 Government Expenditure (G)
2.2.5 Net Trade (X-M)
2.3 Aggregate Supply (AS)
2.3.1 Characteristics of AS
2.3.2 Short-run AS
2.3.3 Long-run AS
2.4 National Income
2.4.1 National Income
2.4.2 Injections & Withdrawals
2.4.3 Equilibrium Levels of Real National Output
2.4.4 The Multiplier
2.5 Economic Growth
2.5.1 Causes of Growth
2.5.2 Output Gaps
2.5.3 Trade (Business) Cycle
2.5.4 The Impact of Economic Growth
2.6 Macroeconomic Objectives & Policies
2.6.1 Possible Macroeconomic Objectives
2.6.2 Demand-side Policies
2.6.3 Supply-side Policies
2.6.4 Conflicts & Trade-offs Between Objectives & Policies
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2.1 Measures of Economic Performance YOUR NOTES
2.1.1 Economic Growth
Economic Growth
Gross Domestic Product (GDP)
National income accounting measures the economic activity within a country and
provides insights into how a country is performing
One of the main methods to determine economic activity is to measure the rate of change
of output in an economy
The output of an economy is called gross domestic product (GDP)
GDP is the value of all goods/services produced in an economy in a one-year period
It can be measured using the following approaches
The expenditure approach: adds up the value of all the expenditure in the economy
This includes consumption, government spending, investment by firms and net
exports (exports - imports)
The income approach: adds up the rewards for the factors of production used
Wages from labour, rent from land, interest from capital and profit from
entrepreneurship
Both approaches should provide the same figure as one party's expenditure is another
party's income
The value of GDP is different to the volume of GDP
The value is the monetary worth
The volume is the physical number
The Distinction Between Real, Nominal & Per Capita GDP
In economics, the use of the word nominal refers to the fact that the metric has not been
adjusted for inflation
Nominal GDP is the actual value of all goods/services produced in an economy in a one-
year period
There has been no adjustment to the amount based on the increase in general price
levels (inflation)
Real GDP is the value of all goods/services produced in an economy in a one-year period
- and adjusted for inflation
For example, if nominal GDP is £100bn and inflation is 10% then real GDP is £90bn
GDP per capita = GDP / the population
It shows the mean wealth of each citizen in a country
This makes it easier to compare standards of living between countries:
For example, Switzerland has a much higher GDP/capita than Burundi
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Exam Tip YOUR NOTES
When an exam question uses the phrase 'at constant prices' it is referring to real
GDP. For example, a question may read, 'Explain what is meant by a rise in GDP at
constant prices'. This requires you to define real GDP and then explain the rise.
Gross National Income
GDP may not be the best metric to measure a country's output or wealth
GDP measures the value of production within a country's borders
It does not consider the income earned by its citizens while operating outside of the
country
Gross national income (GNI) measures the income earned by citizens operating outside
of the country + the GDP
Many citizens employ their resources outside of a country's borders - and then send
the income home
Gross national product (GNP) takes it one step further
GDP + income from abroad - income sent by non-residents to their home countries
GNP/capita provides a much more realistic view of a country's wealth than GDP/capita
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Growth Comparisons Between Countries YOUR NOTES
National income statistics are useful for making comparisons between countries
They provide insights on the effectiveness of government policies
They allow judgments to be made about the relative wealth and standard of living
within each country
They allow comparisons to be made over the same or different time periods
For example, the growth of the Asian Economies in the last 15 years can be
compared to the growth of the European Economies in the 1990s
Using real GDP is a better comparison than nominal GDP
One country may have a much higher rate of economic growth, but also a much higher
rate of inflation. Real GDP provides a better comparison
Using real GDP/Capita provides better information than real GDP as it takes population
differences into account
Using real GNI/capita is a more realistic metric for analysing the income available per
person than GDP/capita
Using real GNP/capita provides information on the income that is actually within a
country's borders
This value can be significantly different from GDP/Capita
Exam Tip
When studying national income data that has been provided for data response
questions, you will often see a generalised pattern emerge
Developed countries will have a smaller gap between their GNP and GDP
Developing countries often have a higher GDP than GNP - as much as 6%
The reason for this is usually linked to multinational companies involved in resource
extraction, who then send income/profits home
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