Economics exam theme two
1. Circular flow of income
shows a simplified model of the whole economy, assuming that households
own all the
factors of production, and they sell these factors to firms in order to earn rent
for their
land, wages for the use of labour, and profit for the use of capital that they
have invested,
all money earned is then spent on the goods and services produced by firms)
Withdrawals/leakages: savings, taxes, imports
Injections: investment, government spending, exports
2. GDP (the total value of goods and services produced in an economy)
Ways to measure GDP: the income, the output, the total expenditure
Purchasing power parities (PPPs) is a way to measure the costs of living and
prices at
different locations and countries, which is an exchange rate that removes price
level
differences between countries
* Gross domestic product (GDP) in purchasing power standards measures the
volume of
GDP of countries or regions. it is calculated by dividing GDP by the
corresponding
purchasing power parity (PPP), which is an exchange rate that removes
price level
differences between countries.
* Nominal GDP reflects the raw numbers in currency unadjusted for inflation.
Real GDP
adjusts the numbers by fixing the currency value, thus eliminating any
distortion
caused by inflation or deflation
3. Inflation (an increase of average price of goods and services in an economy)
Deflation (a decrease of average price of goods and services in an economy)
Disinflation (average price of goods and services in an economy is rising at a
falling rate)
Shrinkflation (producers reduce the size of a product while maintaining its
sticker price)
Stagflation is a combination of high inflation and economic stagnation. Inflation
drives
prices up but purchasing power down
Ways to measure inflation: consumer price index (CPI), retail price index (RPI)
A) Consumer price index measures the overall change in consumer prices based
on a
representative basket of goods and services over time, it does not include
mortgage
, repayment. The weight of each item of the basket is in proportion to how they
are sold
B) Retail price index includes mortgage interest payments, The RPI tracks
changes in the
cost of a fixed basket of goods over time, and it is produced by combining
about
different price quotes for different representative items
* The UK is now using the consumer price index
Causes of inflation: demand-pull, cost-push
A) Demand-pull, is where the rise in aggregate demand causing a rise in price
level
B) Cost-push, is where the costs of production increase, and aggregate supply
falls in a
short-run, leading to a rise in price level
4. Unemployment (when someone is willing and able to work but does not have a
paid job)
Ways to measure unemployment: Claimant count, UK Labour Force Surgery
(more
accurate as not every unemployed people receive JSA)
A) Claimant count, measuring the number of people receiving job seeker
allowance or
benefits for being unemployed
B) UK Labour Force Survey, asking people about personal circumstances and
activity in the
labour market
Types of unemployment
A) Frictional unemployment, it is due to people moving between jobs, it is a
short-term
unemployment as people take time to locate and gain a job that they are
willing to accept
after leaving previous job
B) Structural unemployment, it is where there is a long-term decline in demand in
an
industry leading to reduction in employment, regional sectoral and
technological
unemployment are also structural unemployment
C) Seasonal unemployment, it is where the industries only demand a large
number of
workers at specific time,
D) Cyclical unemployment, it is due to a general lack of demand of goods and
services within
, the country, also called ‘demand deficit’ unemployment
Migration and unemployment
A) Jobs, the rise in migration may lead to fewer jobs available for domestic
citizens, however
it depends on the average education level and how skilful the jobs are
B) Wages, as the supply of workers increase, the average wages would fall
C) Economic growth, as the supply of workers increase, FOP rises, this may lead to
a short-
term growth, if immigrants send the money back to the countries where they
came from,
there may be a fall in economic growth in a long term as more money is
leaking out of the
economy
D) Public services, greater population may lead to a great strain in public services
like public
education and public healthcare service
E) Social factors, this may bring multi-cultures
5. Balance of payments (a record of a country’s flows of money with rest of the
world, it is
broken into the three accounts)
The three accounts: the current account, the financial account, the capital
account
Current account contains balance of trade (value of goods/services imported
and
exported), profits and income payments and transfer payments
Trade in goods: net goods exported
Trade in services: net services exported
Profits and income payments: inward flows from profits of British companies
aboard,
outward flows of foreign companies’ profits
operating in UK
Transfer of wages/income: British people working abroad and sending money
back
home and vice versa
Transfer payments: money transferred between governments
6. Aggregate demand AD=C+I+G+(X-M)
Four main components: consumption, investment, government spending and
net trade
Reasons why AD is downward sloping
A) Income effect, when people have less income, the purchasing power of
consumers'
wealth declines and consumption decrease as consumption is a component of
AD,
