economics theme 2

• Economic growth - an increase in the productive capacity / output of an economy

  • Measured by percentage change in real gdp per annum
• GDP - refers to total value of goods and services produced in an economy over a period of time

  real gdp - adjusted for inflation
• Barriers to economic growth:

  • Weak infrastructure
  • Conflict / wars and colonialism
  • Lack of skilled workers - Lack of immigration, bad education
  • E.g. Cuba is locked out of tradesystems due to embargo meaning less immigration
  •  Volatile currency
  • Lack of technological advancements
  • Landlocked - hard to invest in trade due to no sea ports
  • Corruption - foreign direct investment unlikely as investors unsure if their funds will go into feeding corrupt government
• Sources of growth for emerging/ developing countries

  • Remittances - money sent home by migrant workers
  • Makes up 40% of mexico GDP, 56% turkmenistan gdp
  • FDI / foreign direct investment
  • ODA - overseas development assistance - loans from the world bank, IMF etc
• Purchasing power parity (PPP) - exchange rate of one currency to another

  • Used to compare how much a typical basket of goods in one country costs compared to another
  • Accounts for cost of living
• Pros of GDP to measure economic growth

  • Applicable to all countries - comparative
  • Living standards through GDP per capita
  • Real gdp is adjusted for inflation - so can show impact of inflation on economic growth
  • Gives monetary value of economic growth
  • Shows position on economic cycle
• Cons of GDP to measure economic growth

  • Inaccuracy of data e.g. informal economy is 15-20% of GDP which is not counted in official GDP estimates
  • Does not account for quality of goods + services
  • Doesn’t show inequalities in different sectors
  • Currency not accounted for
  • Some Gov spending may improve GDP but not standard of living
  • Qualitative factors not included: sustainability, QOL, public service access, environmental cost
  • Charity, volunteering not included
• Easterlin Paradox 

  • more consumption of material goods = more happiness if basic needs are not met
  • more consumption of material goods ≠ more happiness if basic needs are met
• Inflation - sustained increase in general price level causing money to lose value
• Deflation - a fall in the general price level
• Disinflation - reduction in the rate of inflation / when the rate of inflation decreases
• Measures of inflation:

  Retail price index - includes housing costs

  Consumer price index (CPI) - excludes housing costs

  Measuring inflation - calculate change in price of a basket of goods with some goods weighted different to others
• Limitations of CPI:

  • Not fully representative as all households are different
  • Spending patterns i.e. demographic
  • Change in quality of goods and services
  • Basket changes yearly so basket is slow to respond to new goods
  • Doesn’t include housing costs
• Demand pull inflation - inflation caused by excessive demand
• 1. Cost push inflation - inflation caused by higher cost of production for firms
• Unemployed - person is able, available and willing to work but cannot find a job despite actively searching for work
• Measuring unemployment - 

  claimant count - number of people receiving benefits for unemployment 

  • Doesn’t include unemployed that aren't eligible for benefits, benefit fraud increases count

  Labour force survey - samples of around 40000 households to find out about employment status

  • Not representative of whole UK
• 1. Real wage unemployment - wages not allowed to fall to their natural equilibrium levl so wages are raised too high - excess supply due to too high min wage
• Cyclical unemployment - lack of demand in economy - economy operates below full capacity
• Frictional unemployment - time delays in finding new employment in free market
• Structural unemployment - mismatch of skills in labout market 
• Seasonal unemployment - occurs between seasons of work e.g. farming
• AD = C+I+G+(X-M)

  Consumption (60%)  Investment(15-20%)   Gov spending (18-20%)   Net trade (5%)
• Consumption - spending on consumer goods and services over a period of time

  disposable income (Y) - money consumers have left to spend after tax and benefits
• Marginal propensity to consume (MPC) - proportion of increase in income that a person is likely to spend on consumption rather than save : MPC = (change in C / change in Y)
• Factors affecting C - gov spending, wealth (wealth effect), interest rate, level of disposable income, inflation, household composition (demographic), taxes
• Investment - acquisition of capital
• Accelerator effect - rate of GDP growth results in a proportionally larger rise in investment 
• Keynesian animal spirits - psychological and emotional factors influencing economic decision making
• Gov expenditure - spending by government to keep up with fiscal policy e.g. :

  • Provide goods and services for citizens
  • To adjust demand over the trade cycle
• budget surplus: gov revenue ＞gov spending

  Budget deficit: gov revenue＜ gov spend9ing
• Current expenditure - depending on day to day costs of public sector e.g. teacher salaries, buying pharmaceutical products for NHS

  Capital expenditure - spending on investment for longer term effects - schools, bridges

  Transfer payments - payments from tax rev with no returns in production, transfer of money (UC)
• SPICED - Strong Pound Imports Cheaper Exports Dearer

  • Pound appreciates - decreased net trade 

  WIDEC - Weak pound Imports Dearer Exports Cheaper

  • Pound depreciates - increased net trade
• Aggregate supply - quantity of goods and services that producers in an economy are willing and able to supply at a given level of prices

  SRAS = relationship between planned national output and GPL

  LRAS = productive potential of economy / highlights trend of economic growth
• Output gap - difference between actual GDP and estimated long term value of GDP

  Positive output gap - actual output ＞long term Trend of growth (boom), low spare capacity

  Negative output gap - actual output ＜ long term Trend of growth (recession), high spare capacity
• Factors affecting LRAS - tech advances; changes in productivity, education, gov regulation (including competition policies); demographic / migration
• circular flow of income

  1. Households provide firms with factors of production (labour)
  2. Firms create goods and services for households
  3. Households spend on goods and services
  4. Firms produce income fromgoods and services - factor income (wage, rent ,dividends)
• Leakages / withdrawals: S+T+M  = (savings, tax, import spending)

  Injections: I+G+X = Investment, gov spending, exports
• Multiplier effect - Initial injection into circular flow causes a bigger final increase in real national income

  Negative multiplier effect - initial leakage leads to knock-on effects and bigger final GDP drop
• causes of economic growth

  • Increase in quality and quantity of FOP (land, labour, capital, entrepreneurship)
  • Increase in exports (export led growth)