2.1

• Economic growth occurs when there is a rise in the value of Gross Domestic Product (GDP)
• GDP

  Measures the quantity of goods and services produced in an economy
• Economic growth leads to higher living standards and more employment opportunities
• Real GDP

  The value of GDP adjusted for inflation
• Real economic growth is calculated by adjusting GDP for inflation
• Nominal GDP

  The value of GDP without being adjusted for inflation
• Nominal economic growth can make GDP appear higher than it really is
• Total GDP

  The combined monetary value of all goods and services produced within a country’s borders during a specific time period
• GDP per capita

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

  GDP adjusted for inflation, representing the size of the basket of goods and the real level of GDP
• Value of GDP

  The monetary value of GDP at prices of the day, calculated by volume times current price level
• Ways to measure national income

  • Gross National Product (GNP)
  • Gross National Income (GNI)
• Purchasing Power Parity (PPP) estimates how much the exchange rate needs adjusting for equivalent purchasing power between countries
• GDP comparisons between countries over time may be limited due to income distribution, international price differences, and hidden economies like the black market
• GDP gives no indication of welfare, other measures like the happiness index might be used to compare living standards
• Factors affecting national well-being

  • Real GDP per capita
  • Health
  • Life-expectancy
  • Having someone to count on
  • Perceived freedom to make life choices
  • Freedom from corruption
  • Generosity
• The UK 'Measuring National Wellbeing' report includes questions about life satisfaction, anxiety, happiness, and worthwhileness
• The relationship between real incomes and subjective happiness is explored, showing that higher income does not always lead to increased happiness once basic needs are met
• The higher the GDP per capita

  The higher the average life satisfaction score
• Once basic needs are met, higher income does not lead to increased happiness
• Inflation is the sustained rise in the general price level over time
• Deflation is the opposite of inflation, where the average price level in the economy falls
• Disinflation is the falling rate of inflation, where goods and services are relatively cheaper now than a year ago
• 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
• Government macroeconomic objective for inflation in the UK is to be at 2% to maintain price stability
• Key points when answering an exam question on CPI

  • A survey is used
  • Weighted basket of goods
  • Measures average price change of the goods
  • Updated annually
• Limitations of CPI when measuring inflation: The basket of goods is only representative of the average household
• CPI is slow to respond to new goods and services, making historical comparisons difficult
• Causes of inflation

  • Demand pull
  • Cost push
  • Growth of the money supply
• Demand pull inflation occurs when aggregate demand is growing unsustainably, causing pressure on resources
• Causes of demand pull inflation include a depreciation in the exchange rate, fiscal stimulus, lower interest rates, and high growth in UK export markets
• Cost push inflation occurs when firms face rising costs due to factors like expensive raw materials or labour
• Causes of cost push inflation include rising raw material costs, expensive labour, expectations of inflation, indirect taxes, depreciation in the exchange rate, and monopolies exploiting consumers
• Growth of the money supply can lead to hyperinflation if extreme increases occur
• Effects of inflation on Consumers

  • Those on low and fixed incomes are hit hardest by inflation
  • If consumers have loans, the value of the repayment will be lower
  • The purchasing power of money falls, affecting those with high incomes the least
• Effects of inflation on Firms

  • Low interest rates make borrowing and investing more attractive
  • Workers might demand higher wages, increasing production costs
  • Firms may be less price competitive on a global scale
  • Unpredictable inflation reduces business confidence
  • Firms may face more redundancies when trying to cut costs
• Effects of inflation on the government

  • The government will have to increase the value of state pension and welfare payments
  • Real incomes fall with inflation, leading to less disposable income for workers
• Effects of inflation on Workers

  • Real incomes fall with inflation
  • If firms face higher costs, there could be more redundancies
• Measures of unemployment are difficult to accurately measure
• Measures of unemployment in the UK

  • The Claimant Count
  • The International Labour Organisation (ILO) and the UK Labour Force Survey (LFS)