2.1 measure of economic growth

• The balance of trade is the difference between a country's total exports and its total imports of goods and services over a given period, usually a year.
• Balance of Payments (BoP)


  A record of all the financial transactions that occur between a country and the rest of the world
• If the current account balance is positive

  Then the capital/financial account balance is negative (and vice versa)
• UK Current Account Balance For 2017

  • Net trade in goods (exports - imports) £-32.9bn
  • Net trade in services (exports - imports) £27.9bn
  • Sub-total trade in goods/services £-5bn
  • Net income (interest, profits & dividends) £-2.1bn
  • Current transfers £-3.6bn
  • Total Current Account Balance £-10.7bn
  • Current Account as a % of GDP 3.7%
• Building products like cars requires a high level of interconnectedness between multiple economies
• Current Account deficit occurs when

  The value of the outflows is greater than the value of the inflows
• Export-led economic growth would help the UK Current Account become positive
• The world is highly interconnected through trade
• If the Current Account is running a deficit

  It has a negative impact on aggregate demand (AD)
• Terms related to Current Account components

  • Goods (visible exports/imports)
  • Services (invisible exports/imports)
  • Net income consists of income transfers by citizens and corporations
  • Current transfers are typically payments at government level between countries
• Rising imports push the UK Current Account balance towards a deficit
• Money flowing into the country is recorded as a credit (+) and money flowing out as a debit (-)
• Components of the Balance of Payments

  • Current account
  • Financial & capital account
• Current Account surplus occurs when

  The value of the inflows is greater than the value of the outflows
• Disruptions in one part of the world can cause widespread problems in others
• To correct the current account deficit

  The government could raise tariffs
• The current account should balance with the capital/financial account and be equal to zero
• The Current Account balance is often expressed as a % of GDP
• There is a distinction between UK Government Budget deficit and Current Account deficit
• Reducing the current account deficit may lead to increased inflation in the economy
• The UK government aims to get their Current Account balance as close to equilibrium as possible
• Current Account

  • Often considered the most important account in the BoP
  • Records the net income that an economy gains from international transactions
• The global value of exports theoretically equals the global value of imports
• Inflation is the general rise in the price level over time
• Deflation is the fall in the price level of the economy = negative inflation
• Disinflation is the fall in the rate of inflation = inflation still occurring but at a slower rate
• Indices


  Nominal figures are changed into real figures to make comparisons. A base year is chosen, and other figures are adjusted into equivalent figures
• Indices used in the UK

  • Retail Price Index (RPI)
  • Consumer Price Index (CPI)
• Consumer Price Index (CPI)

  The ONS collects prices on 710 goods and services from 20,000 different shops and 141 locations, online sites. Consumer spending on goods and services from Living Costs and Food Survey are considered. These basket of goods from consumers are weighted accordingly to how much they spend on their basket of goods over time. This allows an average household spending pattern to be concluded to produce an overall price index - if we spend more on a certain good than another, then the change in price of that good is likely to cause a bigger impact on overall rate of inflation
• Limitations of CPI: Not totally representative as different households spend different amounts on each good, not every single good sold in the country can be considered, not a proper representation of inflation as prices of housing have increased, difficult to make comparisons with historical data, slow response to new goods and services
• Retail Price Index (RPI) includes CPI + housing costs, mortgage interests, council tax. Excludes top 4% of earners and low-income pensioners. RPI is no longer considered for national statistic status but is still calculated monthly
• Causes of inflation


  • Demand pull
  • Cost push
  • Growth of money supply (printing money)
• Demand pull


  Caused by an increase in aggregate demand, leading to a price change
• Cost push


  Caused by rising costs for businesses, resulting in price increases to maintain profit margins
• Growth in money supply

  If there is too much money in the economy, people will have more money to spend, leading to price increases
• Inflation affects consumers by

  If incomes don't rise with inflation, consumers have less to spend, savings lose value, debtors benefit while creditors suffer, psychological effects may decrease spending
• Inflation affects firms by

  Less likely to invest, higher costs of production, decreased competitiveness in exports, difficulty in planning for the future, need to adjust menus, prices, and costs
• Inflation affects the government by

  Increased state pensions and welfare payments due to the rising cost of living
• Inflation affects workers by

  If income doesn't rise with inflation, real income falls, deflation may cause job losses
• Synoptic point


  Firms, workers, government, and consumers are microeconomic concepts, whereas inflation is a macroeconomic concept, showing that the macroeconomy has microeconomic effects