Economics Unit 2 Revision notes

I haven't read through these recently and they may have some spelling errors etc but hope they're useful 

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Economics-Unit 2 revision
1. Economic growth(GDP and business cycle)
2. HDI( advantages and disadvantages)
3. Inflation(RPI, CPI)
4. Balance payments and current account
5. Unemployment
6. Aggregate demand + Aggregate supply
7. Macroeconomic Objectives
8. Income inequality
9. Supply Side policies
10.Demand side policies
11.The budget
Economic growth
Sustainable growth: growth in productive potential of economy today which does not damage
potential of growth for future generations in the UK, this is around 2-2.5% GDP growth per year.
Why would a country not always want maximum economic growth?
Don't want to get too expensive
Keep inflation steady
Sustainable growth: so as not to have a boom and bust section
The Business cycle
Business cycle: a phenomenon whereby GDP fluctuates around its underlying trend, following a
regular pattern
Output gap: difference between ACTUAL GDP and POTENTIAL real GDP.
Boom= positive output Recession= negative output
Why does the business cycle happen?
Confidence: people are too confident in boom times, leading to a bust a few years later

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Political cycle: Just before elections the government lowers taxes and increases spending.
Time lag from government policy: When governments make policies, they should look at
what the economy will be doing in 2/3 years, not in the present situation as the policy
only has a real effect after this time.
Factors determining economic growth
Factors affecting economic growth & factors improving and worsening them:
Labour: immobility of labour, education, emigration.
Capital: high credit availability, lack of infrastructure, lack of foreign currency.…read more

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Economic Growth: Growth of the output of the economy over time, measured by GDP
Gross domestic product: total value of all final goods and services produced in an economy over a
one year period
Presenting GDP data:
TOTAL GDP: measured in terms of volume or value
GDP per capita: GDP per person
REAL GDP: value taking into account changing prices over time(Inflation)
NOMINAL GDP: Value based on current prices, taking no consideration of changing prices
over time.…read more

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How is HDI measured?
1. Longevity: life expectancy
2. Knowledge:
a. Mean years of schooling
b. Expected years of schooling
3. Standard of living: GNI per capita (PPP US$)
Gross domestic product: total value of all final goods and services produced in an economy over a
one year period
Gross national product: GDP+ Net property income from abroad
Gross national income: GNP+ NET cross-country income (e.g.…read more

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Productivity: how much output you can produce per unit of input
Minimise input+ maximise output= Maximum production+ Profit
Measured in terms of labour
Productivity= Output per period (unit) ÷Number of employees at work
Conflicts of growth with other objectives: Inflation, Income inequality, Environment,
Balance of payments
Inflation: the rate of change of the average price level in an economy
Wages keep pace with inflation
Low inflation: Value of money is stable and holds its value.…read more

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Loss of international Reduces real interest rate: cost of Reduces growth of
competitiveness borrowing falls and real value of economy and increases
the debt of those with mortgages risk of deflation
Redistribution of income: Those on Firms can make more profits: Redistribution of income
fixed incomes lose out whereas increased prices shows firms can may help economies
those on index-linked ones will not make more money, which could suffering from debt as it
result in more investment. erodes the value of
liabilities.…read more

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Weights: Goods which are more frequently bought are assigned a higher weighting in the basket
of goods, giving a more accurate portrayal of consumer consumption patterns.
How can it be measured?
CPI: current preferred method
1. Family expenditure survey to 7000 households
2. Basket of 650 goods
3. Goods given weighting ( common goods= higher weighting)
4.…read more

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Financial account
Current account:
Trade in goods: Physical
Trade in services: untouchable
Investment income: dividend payments
Transfers: money being sent
Marginal propensity to consume: likelihood of buying goods
What can be done to reduce trade deficit?
Subsidise exports
Tax imports
Limit imports
Weaken exchange rate(increases people wanting your exports, makes imports more
Is the UK Current account deficit a cause for concern?
Not if the deficit is caused by a large number of capital goods being imported as this allows for
further growth in…read more

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International labour organisation measure: labour force survey of households around the
country.…read more

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Supply side policies: labour market reforms etc...
What are the economic costs of unemployment?
Loss of earnings for those unemployed
Unemployed have more difficulty finding work in the future( hysteresis effect)
Increase in government borrowing and deficit as they have to pay more benefits and receive less
through income tax
Lower GDP for economy as it is not working at full capacity, this leads to lower output and incomes
Increase in social problems. Areas with high unemployment will have higher crime and vandalism.…read more


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