Economics - Macroeconomic Indicators

Mind map for Unit 2 Economics on the National Economy AS level on AQA

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  • Created by: Clodagh
  • Created on: 10-04-13 11:19
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  • Macroeconomic Indicators
    • Economic Growth
      • Measured by gross domestic product (GDP) which measures the total value of output produced in a year within that country
        • TIP: A recession occurs when GDP falls for two successive quarters (6 months)
      • Historically the UK economy has experienced growth of 2% to 3% per annum. It's target is 2%
      • Short-run economic growth usually arises from increases in AD that lead to macroeconomic equilibrium at a higher level of real GDP
        • AD = C + I + G + (X - M)
      • Long-run economic growth usually arises from factors that increase LRAS
      • Digrammatically, economic growth can be shown on a Production Possibility Frontier (PPF)
      • Economic growth is a government target because higher real GDP means more wants are satisfied and the population has higher living standards
        • BUT, what effects does growth have on the environment?
        • BUT, is the growth sustainable or are scarce resources being used up?
        • BUT, is growth leading to greater inequality of income and wealth?
      • When the actual growth is below trend, is likely to mean that there are lower than expected levels of output and higher levels of unemployment. This is known as a negative output gap
      • DEFINITION: The capacity of the economy to produce more goods and services over time
        • It represents an increase in the economy's productive capacity
      • Benefits include an increase in the number of jobs, more exports, a boost in consumer confidence, higher revenues and greater consumer choice
        • Drawbacks include negative externalities such as pollution, high inflation, a strong currency leading to fewer exports and an unequal distribution in wealth
    • Inflation
      • Measures the rate at which prices are increasing
        • It can also be defined as a fall in the value of money, as a given sum of money buys fewer products after a period of inflation
      • A monthly survey records changes in prices paid by consumers for representative cross-sections of goods and services
      • There are two separate measures of inflation used...
        • The Retail Prices Index (RPI) is based on a representative cross-section of products purchased by a typical UK household. In October 2012 RPI inflation was 2.6%
        • The Consumer Price Index (CPI) is more closely comparable to measures used throughout the European Union. It excludes costs associated with home ownership. In October 2012 CPI inflation was 2.2%
          • The government's target is to have CPI inflation at 2% per annum
          • The UK experienced inflation of 23% CPI in the 1970's
      • High inflation is undesirable as it reduces UK competitiveness of products and so exports fall and imports rise. It also distorts spending patterns and redistributes the distribution of income and wealth. It hits the poor more than the rich
      • Deflation is considered to be more of a problem. When prices fall, people postpone consumption and firms cut investment and so AD falls
      • Types of inflation
        • Demand-pull inflation is caused by an increase in AD
          • An economy that has a negative output gap will benefit from an increase in AD
        • Cost-push inflation is caused by a fall in AS. It can arise from higher wages or increased raw material costs. Decreased productivity increases average costs. Monopoly power is also often cited as a cause of cost-push inflation
      • Controlled through the Bank of England through interest rates. Inflation causes higher interest rates
    • Unemployment
      • There are two measures of unemployment
        • The claimant count (the main measure until 1997) which measures the number of people claiming Job Seeker's Allowance
        • The International Labour Office (ILO) measure which includes people who may be seeking work but who are not entitled to Job Seeker's Allowance
      • It is directly linked to output and so decreased output from lower AD causes unemployment. However decreased AS also causes unemploymenttoo
      • Types of unemployment
        • Cyclical: Arises from low AD. It tends to follow the economic cycle, with high unemployment during recessions
        • Frictional: Economic changes mean that there are constant movement between jobs
        • Seasonal: Some industries such as tourism, agriculture and construction have seasonal patterns of demand so fewer workers will be required at certain times
        • Structural: Caused by the declines of jobs in specific industry. This might be caused by demand-side factors, such as lower demand for coal. Where jobs are replaced by capital equipment, the term technological unemploymentis often used
        • Voluntary: If workers are unwilling to accept jobs because of low wage rates
      • It is undesirable because it represents a waste of labour so prevents an economy from reaching its capacity and it lasts for an extended period so workers often lose their skills. It also reduces income and therefore spending - the government increases expenditure on welfare benefits
      • In reality, full employment cannot be achieved
      • Falling unemployment is likely to to increase inflationary pressure
    • Balance of Payments
      • Records transactions between UK residents and the rest of the world.
      • The governments main concern is with the current account
        • Current account: The balance of trade in good and services, investment income flows, current transfers
          • These added together make up the current account
          • The 'balance of trade' is the visible exports minus the visible imports
            • Exports are an injection into the circular flow of income and boost the level of national income
      • In the UK the current account is usually negative as we import more than we export
        • The BoP on the current account for the 12 months to 30 June 2012 was minus £52.3 million
        • A positive balance of payments is a sign of a strong economy
      • As the BoP is responsible for the currency, the government must manage currency flows arising from the balance of payments
      • Low inflation and high productivity both lead to lower prices for UK products, boosting exports
        • TIP: Remember the term "SPICED" meaning Strong Pound, Imports Cheaper, Exports Dearer
      • Continued deficits on the current account mean that the UK earns less foreign currency than the sum required to finance its imports
        • The deficit can be covered if capital flows are positive, but this means UK assets overseas are being sold. This will lead to less income from overseas investments in the future
          • OR, the government can use its foreign currency reserves or borrow from other countries, but these approaches will cause problems if foreign currency is needed in the future
      • A balance is where the value of exports equals the value of imports
        • A surplus is where the income from exports exceeds expenditure od imports
        • A deficit is where more is spent on imports than is earned from the sale of exports

Comments

James Ellis

Very comprehensive!

Tess Creighton

Thank you!! Is this and the other economics sheet pretty much all we need to revise for macro??

davidsalter

This is a comprehensive mind map with a great deal of detail on all the macroeconomic indicators. Students can adapt it or use to check their understanding of all the strands.

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