macro

• what sections is the balance of payments split into

  • current account
  • financial account
  • capital account
• what does the current account relate to

  foreign trade
• in the current account, what does the UK have a deficit/ surplus of?

  • surplus on balance of trade of services
  • deficit on balance of trade for goods
  • overall deficit
• when are index numbers useful

  • comparisons are made over periods of time
  • it is the size of changes in variables that need to be highlighted
• how is inflation rate measured

  through the annual % change in the CPI
• what is CPI meant to represent

  spending patterns of a typical average UK household
• what are issues with CPI

  • based on an imaginary typical household, so it never reflects anyone’s exact spending patterns
  • basket includes many goods and services that people do not consume
  • improvement in quality is not taken into account
• main uses of national income data

  • to determine economic growth
  • to estimate likely tax revenues
  • to estimate likely welfare expenditure eg unemployment benefits
  • to assess inflationary pressure
• limitations of national income

  • distribution of income
  • composition of GDP
  • shadow economy
• why is the AD curve downwards sloping

  • at lower price levels, the value of assets increases so may lead to wealth effect
  • a lower price level should increase UK exports as they become price competitive- may lead to domestic goods being cheaper than imported goods
• what is the wealth effect

  an increase in the value of a households assets that may cause them to feel wealthier and therefore spend more of their income
• what consumption factors affect AD

  • interest rates
  • consumer confidence
  • taxation
  • wealth
  • unemployment
• how do interest rates affect consumption

  • if interest rates rise, consumption decreases
  • this is because it reduces the desire for households to borrow
  • it also increases the reward for savings so level of consumption decreases
• how does consumer confidence affect consumption

  if consumers are uncertain about the future then consumption levels are likely to decrease
• how does taxation affects consumption

  if income tax increases, consumers will have less disposable income so consumption will decrease
• how does wealth affect consumption

  if household wealth increases, the wealth effect will also increase, meaning that overall consumption increases
• how does unemployment affect consumption

  if more people are unemployed, more are likely to claim unemployment benefits and therefore consumption will decrease
• what investment factors affect AD

  • interest rates
  • business confidence
  • tax
  • technology
  • accelerator theory
• how do interest rates affect investment

  increase in interest rates will raise the cost of borrowing and will reduce profitability
• how does business confidence affect investment

  if businesses expect sales to rise in the future they are more likely to spend money on investment goods to increase productive capacity to accommodate to future demand
• how does tax affect investment

  if corporation tax decreases then businesses will have more of their profits available so investment will increase
• how does technology affect investment

  new technology will increase efficiency of production, so businesses will invest more in technology
• what is the accelerator theory

  where increases in national income leads to firms increasing investment, to expand their capacity to exploit the rising income
• what is the budget balance

  the difference between government spending and tax revenue
• what is the budget balance normally in

  a deficit
• what are net exports affected by

  • exchange rate
  • foreign growth
  • UK growth
  • relative inflation
  • relative productivity
• productivity

  measures how much output is produced by each unit of labour

  • labour productivity- measures output of workers
  • capital productivity- efficiency of machinery and equipment