Economcs Unit 2 Edexcel complete notes

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Unit 2 Summary notes ­ Matthew Mavin
Measurements of economic performance
Economic growth
Two meaning of the term economic growth:
- Actual growth, increase in real incomes or GDP
- Potential growth, increase in the productive capacity in a country
Real values are adjusted to remove the effects of inflation.
Nominal values are current incomes that are not adjusted
For GDP to have any significance in terms of standards of living, figures must be given per head (or per capita).
E.g. If incomes increase by 10% but population increases by 20% people are worse off per head.
Important distinction, look at value not volume when measuring economic growth. E.g. Germany biggest
exporter in the world in terms of value whereas china exports a lot more in terms of volume.
How is GDP measured?
GDP is the sum of all goods and services produced in a country in a year. It is also the sum of all incomes
earner in a year and the sum of all expenditure in one country in a year.
Increase in GDP is a sign that a country is experiencing increasing incomes, outputs and spending. (Not always
right, e.g. if you earn more you may work long hours, be under pressure, depression etc.)
Problems of comparison:
- Subsistence, barter and the black economy. Farmers consume their own output, goods traded
without price system, goods paid for and not declared (to dodge tax)
- Currency values. Knowing whether to use official value of currency or purchasing power of a currency
- Income distribution.
- Size of public sector. If much of the spending in the economy is by government it might or might not
improve welfare for the population.
- Consumer and capital spending. Spending on investment goods may lead to increased standard of
living in future at the price of standard of living today and GDP does not take future into account.
Better if figures are broken down to look at the investment elements.
- Quality issues. E.g. spending on schools may be high but how do we measure quality, are rising
results enough to prove rises in standard of living.
The rate of increase in productive possibilities is the rate of potential economic growth. More capacity in
economy (because of increased supply of labour, investment or increased productivity). It can be used to show
how an economy is preforming relative to its output capacity. Differences between the two are known as the
output gap. (The difference between the actual output of an economy and the output it could achieve when it
is most efficient or at full capacity)
Inflation is a sustained rise in general price level. General Price level measured using an index such as the CPI.
Reason for using index is that percentage changes can be shown easily and it makes effective comparison

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Unit 2 Summary notes ­ Matthew Mavin
Two surveys need to be undertaken:
- The expenditure and food survey. Collecting info from nearly 7,000 households. Self-reported diaries.
Used to calculate weighting of spending (e.g. 10% spent on food, 10% of money is for food)
- Price survey. Basket of goods. Collected once a month. Price changes multiplied by weighting to give
price index. Measure inflation = % change in index
Target for CPI: 2 % +/- 1 %
CPI does not include housing costs, e.g.…read more

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Unit 2 Summary notes ­ Matthew Mavin
Types and costs of unemployment:
Classical view: there are only unemployed people who are not able and willing to work at the going wage rate.
I.e. if people were willing to accept lower wages they would not be out of work. If people accept lower wages
cost of living will fall as firms do not need to charge as much so workers will find lower wages acceptable. Also
called "real wage" unemployment.…read more

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Unit 2 Summary notes ­ Matthew Mavin
Trade in goods measures the movement of tangible products across international borders.
Trade in services measures movement of intangible output.
Investment income is a measure of interest, profit and dividends that are rewarded for capital investments in
another country. E.g. If a British person buys shares In the USA they will not appear on the current account but
any dividends will appear as a positive figure on the UK current account.…read more

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Unit 2 Summary notes ­ Matthew Mavin
Problems of HDI
- No indication of distribution of income (human poverty index may be more useful as it records what
people go without rather than what they have)
- life expectancy is easy to measure but gives no indication of quality of life
- Years of schooling may be unreliable if it means people are resitting years as they can't make
progress.…read more

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Unit 2 Summary notes ­ Matthew Mavin
Importance of multiplier is that if there is any change in spending in the economy the final impact on incomes
will be much greater than the initial impact. Greater the leakages, the smaller the multiplier. Formula is based
on how much of any extra pound earned is repent within the economy: that is the marginal propensity to
If injections = leakages economy is in equilibrium.…read more

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Unit 2 Summary notes ­ Matthew Mavin
Aggregate supply
Aggregate supply is the amount that firms are willing to produce at various price levels. Largely influenced by
productivity, which in turn is influenced by factors such as the costs of production, the level of investment, the
availability and efficiency of factors of production and supply-side policies.
Two views of AS:
- Classical.…read more

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Unit 2 Summary notes ­ Matthew Mavin
- Regulation changes. Many regulations in U.K economy which have been imposed to try to maintain a
disciplined economy, for example in the postal and telecommunications services. However such
industries have been increasingly deregulated over the past two decades to increase competition,
which in turn imposes its own form of discipline. The net effect is that parcel postage and phone
services, costs faced by all firms, have reduced in real terms, shifting AS to the right (or down).…read more

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Unit 2 Summary notes ­ Matthew Mavin
loan is reduced further. The market then becomes a missing market, in the sense that there is no
equilibrium price credit where buyers and sellers can agree a rate of interest.
- Government instability. Where governments are incompetent or lack transparency or strong political
backing, the economy cannot attract inward investment and the currency might be unstable. The
government may have a fiscal deficit which means that it has little power to spend money to
encourage growth.…read more

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Unit 2 Summary notes ­ Matthew Mavin
· A more equal distribution of income
· Protection of the environment
Conflicts between objectives
Inflation and unemployment:
- A shortage of labour in a specific field can cause wage pressures to build up. The net effect in the
wider economy is that, as wages go up, people start spending more, the costs of production increase
because labour is a major production cost, and inflation begins to rise.…read more


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