Summary ALL A LEVEL MACROECONOMIC TOPICS - QUESTIONS AND ANSWERS
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Course
Macroeconomics
Institution
PEARSON (PEARSON)
This can be used for any A level economics exam board
contains all macroeconomic a level topics
Each topic is colour coded and contains various short answer questions and answers (includes statistics, graphs and keywords)
Very useful revision material
Macroeconomics questions + answers
1) economic indicators
1.1) economic growth
Q: What is economic growth?
A: the increase in the market value of goods and service produced in an economy over
time, typically measured by GDP.
Q: What is the difference between GDP, GNP and GNI?
A: Gross Domestic Product – total value of goods and services produced within a
country’s borders
Gross National Product – total value of goods and services produced by a country’s
citizens regardless of where they are produced
Gross National Income – total income earned by a country’s residents regardless of
location.
Q: What is the difference between ‘total’ and ‘per capita’?
A: total – sum of all individuals
Per capita - total divided by the total population size (average per individual)
Q: What is the difference between ‘real’ and ‘nominal’?
A: real – values are adjusted for inflation (or changes in purchasing power)
Nominal – expressed in current pounds, without adjusting for inflation,
Q: What is ‘purchasing power parity’? What does it mean if GDP is adjusted for
PPP?
A: measurement of prices of the same goods but in different count5ies to compare the
absolute purchasing power of the country’s currency. If GDP is adjusted for PPP, GDP
figures have been converted to a common currency based on the relative purchasing
power of each country.
Q: What are the strength and limitations of the different ways to measure
economic growth?
A: GDP is quantifiable / internationally recognised / often reflects living standards /
standardised
GDP does not consider what is being produced (negative externalities) / does not
consider well-being and happiness / does not show internal inequalities / does not
show underground economy
1.2) Inflation
Q: What is meant by the ‘price level’?
A: Overall level of prices for goods and services in an economy at a given time.
Q: Can you define the following terms:
a. Inflation?
A: sustained rise in the average price level
b. Deflation?
A: a fall in the average price level
c. Disinflation?
A: a reduction in the rate of inflation (still inflation)
d. Hyperinflation?
A: A phase of extremely rapid and high inflation (usually because the
government mass prints money which ends up destroying the currency’s
value)
Q: What is the consumer price index (CPI)? How many items are in it? How many
prices are collected? How often? Why does the content of the basket change
over time?
A: A measure of the average change in the prices of goods and services purchased by
households over time. Around 720 representative goods and services are found in the
‘shopping basket’. These change over time to match behaviour and preference
,changes, the weights of goods and services change over time as the costs associated
with them change.
1. expenditure survey carried out
2. a ‘consumer basket’ of most popular goods and services is formed with average
prices attached
3. prices of these goods/services are weighted based on % of income (0-1)
4. weighted prices are added to give total weighted price of the basket
Q: What is mean by a ‘price index’?
A: statistical measure tracking the changes in prices over time. The base year index =
100 (starting year)
Q: What is meant by a ‘weight’? Why do weights change over time?
A: weights are based on the relative importance of the product to households. the
weights of goods and services change over time as the costs associated with them
change.
Q: Can you calculate a simple price index using weights and index numbers for
items within in? Can you then use the price indices to calculate inflation?
current number
A: index= ×100
base number
Where number = given price level
new index− previous index
change ∈inflation= ×100
previous index
Q: What is the retail price index (RPI)? How is it different to the CPI?
A: RPI was used before CPI and it uses the Carli formula which did not account for
changes in shopping behaviour if prices rose. RPI overestimates inflation by 0.8%.
Q: Do you know the UK’s current rate of inflation? Do you how it has change over
the past 10 years or so? How does it compare to the rest of the world?
A: 10.4% (Feb 2023) / disinflation from 2013-15 / inflation 2015-17 / disinflation 2017-
2020 / inflation 2020-23. Very high inflation currently relative to Eurozone and US.
1.3) Unemployment
Q: What is unemployment?
A: people able, available and willing to work at the going wage but cannot find a job
despite active search for work.
Q: What is the difference between being economically active and inactive?
A: active – individuals who are employed or seeking employment
Inactive – individuals who are not apart of the labour force and are not seeking work
(retired / severely disabled)
Q: How do you calculate the unemployment rate?
, unemployed population
A:unemployment rate= ×100
labour force
Q: How to you calculate the employment rate? Why does it tell you something
different to the unemployment rate?
number of employed individuals
A: employment rate= ×100
working age population
This is different to the unemployment rate because it uses the working age population
regardless of if there are people apart of that population who are economically
inactive.
Q: What is the labour force survey? What are its advantages and disadvantages?
A: a survey of 41,000 households to determine whether they are employed,
economically inactive or unemployed.
Advantages – provides detailed information about participation rates / large sample
size / consistent methodology allows for global comparisons / helps inform policy
making / frequent
Disadvantages – sample size not necessarily representative / people may lie / data lag
/ seasonal variations
Q: What is the claimant count? What are its advantages and disadvantages?
A: record of people claiming unemployed-related benefits
Advantages – helps evaluate welfare systems in policy making / simple and easy to
calculate / monthly basis
Disadvantages- excludes those who are unemployed but are not collecting benefits /
includes people who are employed but claiming benefits (claimant count rose during
pandemic)
Q: What is underemployment? How is it different to unemployment?
A: a situation where a worker is employed but their skills, education or experience is
not being fully utilised within their job. In this case, the economy is not utilising its
resources efficiently.
Q: What are the 4 different types of unemployment?
A: structural unemployment – mismatch between skills and jobs available
Cyclical unemployment – caused by fluctuations in business cycle
Real wage unemployment – wages are set above equilibrium creating a surplus supply
of labour
Frictional unemployment - people are between jobs or searching for new / first job
Q: What is youth unemployment?
A: young people typically 18-24 are without work and seeking employment could be
caused by lack of skills and education in demanded services / recession /
discrimination / lack of opportunities / demographic problems
Q: Do you know the UK’s current unemployment? Do you how it has change over
the past 10 years or so? How does it compare to the rest of the world?
A: current unemployment rate = 3.7%. 2013-19 decreased unemployment rate /
2019-2021 increased / 2021-2023 decreased. Mid compared to other countries –
below France but above US/Gernmany
2)Aggregate Demand & Supply
2.1) circular flow of income
Q: What is the circular flow of income (CFOI)?
A: a model that shows the flow of money between firms and households
Q: What is the role of households and firms in this model?
A: households pay for goods and services and provide factors of production
Firms produce goods and services and pay rewards for the factors of production
Q: What are the conditions necessary for equilibrium in this model?
, A: closed economy – money only flows between residents in this economy / The total
value of production or output must be equal to the total value of expenditure in the
economy.
Q: What are the three ways of measuring national income in this model and why
are they all (in principle) equal?
A: income approach – sum of income earned by factors of production
Output approach – sum of value of goods and services produced in an economy
Expenditure approach – sum of total spending on goods and services
All three methods of measuring national income are equal because they are simply
different ways of looking at the same thing. In a closed economy (i.e. one that does
not engage in international trade), every dollar spent on goods and services must be
earned by someone as income, either as wages, profits, or rent. This means that the
total value of all goods and services produced (output approach) must be equal to the
total income earned by the factors of production (income approach), which must also
be equal to the total spending on those goods and services (expenditure approach).
Q: What is meant by the terms ‘injections’ and ‘withdrawals? What are the 3
injections and 3 withdrawals from the CFOI?
A: injections – new money entering the CFOI (investments / exports / govt spending)
Withdrawals – money leaving the CFOI (savings / imports / taxation)
2.2) Aggregate Demand (AD)
Q: What is AD? What is the formula for calculating it?
A: Aggregate Demand is the total expenditure on an economy’s goods and services at
any given price level
AD=C+ I +G+ X −M where C = Consumption / I = Investment / G= Govt. spending / X-M
=Net exports
Q: What is mean by an AD curve? Can you draw it?
A: the AD curve represents the total level of demand for goods and services in an
economy at different price levels.
Q: Why is the AD curve downward sloping? Can you explain using the 3 following
reasons:
a. Income effect
A: as the price level decreases, the purchasing power of income increases,
so ad rises because consumption rises
b. Trade effect
A: there is a decrease in the quantity of exports and increase in the
quantity of imports if there is domestic inflation, this decreases net
exports, and thus AD falls.
c. Interest rate effect
A: changes in the IR affect AD as at high price levels, interest rates are
high and spending falls
Q: What is the difference between a movement along and shift in the AD curve?
A: movement – change in price level
Shift – change in the quantity demanded of GDP resulting from a change in any other
factor affecting AD (besides the price level)
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