edexcel as economics complete revision unit 2

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Edexcel AS Economics ­ Managing the Economy
There are four main goals of macroeconomics:
Sustained Economic Growth
Low Unemployment levels
Low Inflation
A Healthy Balance of Payments (Imports and Exports)
Economic Growth
There is a standard definition of output based on the UNs measure which is used by
countries around the world to calculate their output. Using a standard definition allows output
to be compared between countries and over time. This measure of output is called gross
domestic product or GDP. Economic growth is generally considered to be desirable
because individuals prefer to consume more rather than less goods and services. This is
based on the assumption that wants are infinite. Higher economic growth is therefore better
than lower economic growth. Periods when the economy fails to grow at all, or output shrinks
as in a recession, are periods when the economy is performing poorly. A recession is 2
consecutive quarters of a fall in GDP.
Gross domestic product (GDP), gross national product (GNP) and national income (NI) are
broadly similar and refer to the value of goods and services produced by a country in a year.
GDP can also be viewed as the total income of everyone in the economy, or as the total
expenditure on the economy's output of goods and services.
Methods of measuring GDP:
The expenditure method involves summing together all the major expenditures in the
economy. It is calculated as follows:
Consumers expenditure (C)
+ Public authorities' current expenditure on goods and services (G)
+ gross domestic fixed capital formulation
+ Value of physical increase in stocks (I)
+ Exports (X)
imports (M)
= GDP at market prices
+ subsides
Indirect taxes
= GDP at factor cost.
+ Net property income from abroad (income flows on the current account)
Depreciation ­ capital equipment becomes less efficient (the wear and tear of machinery
and factors of production discarded)
= National Income
This method is particularly useful because the key elements of aggregate demand are
identified: C + I + G + X ­ M.

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The income method involves adding together all forms of income in the economy, such as
wages, profits, rent and interest. The output method entails valuing the economy's output of
goods and services for one year. There are problems in measuring the output of an economy
though. For example, in the case of government spending, money is spent on public
services, such as defence, which are not sold on the market.…read more

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Changes in any of the above mean that comparisons of living standards over time or
between countries are likely to be inaccurate if they are solely based on GDP.
Transfer Payments (Double Counting) not all types of income are included in the final
calculation of national income. Some incomes are received without there being any
corresponding output in the economy. For instance, the government pays National Insurance
and social security benefit to individuals, but the recipients produce nothing in return.…read more

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Goods are assigned weights based on how important they are in total expenditure of
the family. One good might be 4 times more important than another, and thus have
the weight of 4 (compared to 1).
b. Multiply the weight of the good by the index number (in the base year, the index
number of always 100). This gives you the weighted index number.
4. Revalue the basket in the current year.
a.…read more

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In the next period (year 2) ­ the index number of each commodity is simply the price of the
commodity in year 2 expressed as a percentage of its price in year 1. So we see that the
price of commodity A in year 2 is 150 per cent of its price in year 1, and so on.…read more

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Known as the core rate of inflation, excludes indirect taxes and the council tax on the inflation
rate. By stripping out the effect of these taxes, the government can establish the core change
of prices within the economy. Cynics would argue that it is just another way of reducing the
headline rate .i.e RPI without any reductions.…read more

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For example,
people over 60 are not entitled to claim unemployment benefit.
The International Labour Organisation is a measure of unemployment that is drawn from
research into employment called the Labour Force Survey (LFS). This is a quarterly survey
based on a random sample of 60,000 households from across the UK of which private
households account for 99%. Headline results are published monthly for the average of three
consecutive months.…read more

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Where imports exceed exports, there is a current account deficit.
The balance of payments account is a record of all financial dealings over a period of time
between economic agents of one country and all other countries. Balance of payments
accounts can be split into two components:
The current account, where payments for the purchase and sale of goods and
services are recorded.
The capital and financial account, where flows of money associated with saving,
investment, speculation, and currency stabilisation are recorded.…read more

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The exchange rate may change. A rise in the exchange rate will tend to increase
imports and reduce exports and vice versa.
The price in national currencies of goods and services may change. E.g. a rise in
domestic inflation will cause the firm's costs to rise. As for example, the price of raw
materials will go up, pushing up the cost of the product, making the firm less
competitive against foreign suppliers.…read more

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Some measures of economic
development do not grow in direct proportion to economic growth (e.g. GDP per head if infant
mortality is falling dramatically with small increases in income), and some far outpace it
(increase in life expectancy with the advent of injections).
As well as this, other measures of development include:
The percentage of adult males employed in agriculture. As GDP rises, this % tends to
fall. As labour is replaced by capital.…read more


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