2.1

• GDP

  Measures the quantity of goods and services produced in an economy
• Economic growth leads to higher living standards and more employment opportunities
• If the economy grew by 4% since last year, but inflation was 2%, real economic growth was 2%
• GDP per capita

  The value of total GDP divided by the population of the country, measures the average output per person in an economy
• Value of GDP

  The monetary value of GDP at prices of the day, calculated by volume times current price level
• GDP does not give any indication of the distribution of income, which can lead to different living standards in countries with similar GDPs per capita
• Gross National Income (GNI) is the sum of value added by all producers who reside in a nation, plus net overseas interest payments and dividends
• Large hidden economies, such as the black market, are not accounted for in GDP, making comparisons misleading
• Real GDP


  The value of GDP adjusted for inflation
• Nominal GDP


  The value of GDP without being adjusted for inflation
• Total GDP


  The combined monetary value of all goods and services produced within a country’s borders during a specific time period
• Economic growth occurs when there is a rise in the value of Gross Domestic Product (GDP)
• Gross National Product (GNP) is the market value of all products produced in an annum by the labour and property supplied by the citizens of one country
• Volume of GDP

  GDP adjusted for inflation, the size of the basket of goods and the real level of GDP
• A rise in economic growth means there has been an increase in national output
• Purchasing Power Parity (PPP) estimates how much the exchange rate needs adjusting so that an exchange between countries is equivalent according to each currency’s purchasing power
• GDP gives no indication of welfare, other measures like the happiness index might be used to compare living standards
• GDP may need to be recalculated in terms of purchasing power to account for international price differences
• Happiness and income tend to be positively related at low levels of income, but higher income does not necessarily lead to increased happiness once basic needs are met
• The UN happiness report found that factors affecting national well-being include real GDP per capita, health, life-expectancy, social support, freedom, and generosity
• Government macroeconomic objective in the UK is for inflation to be at 2% to maintain price stability
• Disinflation is the falling rate of inflation, where goods and services are relatively cheaper now than a year ago
• Limitations of CPI when measuring inflation: Basket of goods is only representative of the average household, different demographics have different spending patterns
• Inflation is the sustained rise in the general price level over time
• Happiness and income tend to be positively related at low levels of income
• Consumer Prices Index (CPI)


  • Survey is used
  • Weighted basket of goods
  • Measures average price change of the goods
  • Updated annually
• Once basic needs are met, higher income does not lead to increased happiness
• Retail Price Index (RPI)

  • Alternative measure of inflation
  • Includes housing costs
  • Excludes the top 4% of earners and low income pensioners
  • Does not account for consumer behavior changes
• The higher the GDP per capita

  The higher the average life satisfaction score
• Calculating the inflation rate in the UK

  1. Using the Consumer Prices Index (CPI)

  2. Measuring household purchasing power with the Family Expenditure Survey

  3. Creating a basket of goods weighted according to spending patterns

  4. Updating the basket annually
• Deflation is the opposite of inflation, where the average price level in the economy falls
• Extreme increases in the money supply usually cause hyperinflation, when the rate of inflation is incredibly high and uncontrollable
• Measures of unemployment in the UK

  • The Claimant Count
  • The International Labour Organisation (ILO) and the UK Labour Force Survey (LFS)
• The effects on individuals, such as firms, consumers, or workers, are microeconomic impacts whilst the inflation figure itself is a macroeconomic impact- this shows how the macro-economy has microeconomic effects
• Firms

  • Low interest rates mean borrowing and investing is more attractive than saving profits
  • Workers might demand higher wages, which could increase the costs of production for firms
  • Firms may be less price competitive on a global scale if inflation is high
  • Unpredictable inflation will reduce business confidence
  • If firms face higher costs, there could be more redundancies
• Significance of changes in the rates of Employment and Unemployment

  • If consumers are unemployed, they have less disposable income and their standard of living may fall as a result
  • With a higher rate of unemployment, firms have a larger supply of labor to employ from
  • With unemployment, there is a waste of workers' resources
• The International Labour Organisation (ILO) and the UK Labour Force Survey (LFS) directly ask people if they meet specific criteria
• Measures of unemployment are usually difficult to accurately measure
• The government

  • The government will have to increase the value of the state pension and welfare payments because the cost of living is increasing
• If the money supply increases at a faster rate than real output

  It is only inflationary