F582 The National & International Economy Notes

Notes on module F582 for OCR AS Level Economics.

HideShow resource information
  • Created by: im7
  • Created on: 21-04-12 15:56
Preview of F582 The National & International Economy Notes

First 515 words of the document:

Aggregate Demand
Aggregate demand (AD) is the total demand for all goods and services produced in an economy in a given
price level and time period.
AD = C + G + I + (X ­ M)
C means consumer expenditure. This makes up the majority of AD in most countries (about 65% of the
total). I means investment in capital goods from firms, and this is the most volatile component of AD. This
typically accounts for 15-20% of GDP, and the majority (75%) is from private sector businesses. G means
government spending on state-provided goods and services. Transfer payments (state benefits) do not
count because these payments are not producing an output ­ they are a transfer of money from one
group to another. X means exports; M means imports. Exports are goods sold to overseas countries and
imports are what the UK buys from foreign countries.
(X ­ M) represents net exports. If this is positive, there is a trade surplus which adds to AD. Conversely, a
negative net exports value means there is a trade deficit, which reduces AD.
Consumer Expenditure
Consumer expenditure is influenced by...
The amount of real disposable income is the main influence on consumer expenditure. Households and
economies with more disposable income tend to spend more in total than poorer ones. The proportion of
income that is spent is called the average propensity to consume (APC).
Wealth (the value of a stock of assets) affects C. Wealthier people tend to spend more. Wealth can be
spent and can be used to borrow against. It also results in greater consumer confidence. For example, an
increase in house prices will make homeowners feel more wealthy, and this encourages them to spend
Consumer confidence and expectations have a significant influence on consumer spending. When
consumers feel optimistic about the future (expecting good wages and job prospects), then they tend to
spend more. This is why sometimes; a rise in income also raises the proportion of income spent.
Interest rates are also important albeit less significant than consumer confidence. A fall in interest rates
should encourage spending because the cost of borrowing is reduced and there is a lower incentive to
save money. People paying back mortgages and loans will pay back less interest and will have more
money to spend. Net savers (people who save more than they borrow) lost out.
Population demographics (mainly age) affects consumer spending. It is generally thought that the elderly
and young people spend a higher proportion of their income.
Income distribution ­ poorer people spend a higher percentage of their income than richer people.
Government measures that redistribute income from the rich to the poor (e.g. through income tax) are
likely to increase total consumer spending.
Inflation can affect consumer spending. If consumers expect price rises, they may buy more now.
Saving ­ this is not a component of AD but it influences it.

Other pages in this set

Page 2

Preview of page 2

Here's a taster:

Increased real disposable income can result in households saving a higher proportion of income ­ their
average propensity to save rises. Rising interest rates encourage saving by offering a greater reward for
it. Reduced consumer confidence or increased uncertainty of the future can also result in increased
savings. The age and structure of the population also affects savings.
Firms invest when they expect returns from the capital goods they buy. Investment is generally
proportional to the anticipated profitability of a certain project/venture.…read more

Page 3

Preview of page 3

Here's a taster:

Net Exports
Real disposable income abroad affects net exports. An increased income abroad is likely to increase
exports due to the increased demand. The US is a major trading partner to the UK; if incomes in the US
rise, they will buy more goods and services ­ some of these from the UK.
In real disposable income at home rises, exports may fall as firms could divert some products from the
export market to the home market to meet the rising demand.…read more

Page 4

Preview of page 4

Here's a taster:

Aggregate Supply
Aggregate supply (AS) is the total output of goods and services that producers in an economy are willing
and able to supply at different price levels in a given time period.
In the long run (LRAS), the aggregate-supply curve is assumed to be vertical. It is closely linked with the
production possibility curve. In the short run (SRAS), the aggregate-supply curve is assumed to be upward
sloping.…read more

Page 5

Preview of page 5

Here's a taster:

Changes in the government's fiscal policy relating to taxation and subsidies have effects on producers.
Increased taxation (could be through VAT or corporation tax) will cause an inwards shift in SRAS due to
the higher cost of production.
Long Run Aggregate Supply
Most supply-side policies are intended to improve the long term performance of the economy, but they
usually have short term effects too. LRAS is assumed to be independent of price level ­ other factors
affect this.…read more

Page 6

Preview of page 6

Here's a taster:

The result of this is that the price level will increase if AD
increases. This is shown on the diagram to the right.
Macroeconomic equilibrium shifts to a point where a
greater quantity of goods and services are produced at a
higher price level. But the increase in price level will be
much greater than the increase in quantity due to the
inelasticity of the SRAS.
Anything that shifts AD or AS will cause a change in the
macroeconomic equilibrium.…read more

Page 7

Preview of page 7

Here's a taster:

In most economies, both AD and AS will change over time. If an AS increase can match an AD increase,
the effect on price level of the two changes will cancel each other out, meaning that the output increases
without affecting the price level, thus reducing
inflationary pressures.
However, if AD grows more rapidly than productive
capacity, inflation will occur. The higher output
comes at a cost of inflation, and this is
unsustainable. The economy is overheating.…read more

Page 8

Preview of page 8

Here's a taster:

This can also be illustrated on a PPC shifting outwards ­ a greater number of goods can be produced.
Benefits of economic growth
An increase in GDP per capita (total GDP divided by the population) increases the living
standards. Strong economic growth can reduce poverty levels in developing countries.
Economic growth decreases unemployment and raises employment.
Economic growth increases government revenue via taxation, which allows more government
spending on health, infrastructure and education.…read more

Page 9

Preview of page 9

Here's a taster:

Point `A' barely represents the necessities. If a poor country tries
to increase production in capital goods by shifting from A to C,
there is a reduction in the number of consumer goods available.
This can be damaging to a country already suffering from a lack of
basic essentials.
The richer people will benefit as they can invest in the increased
production. This may increase the gap between the rich and poor.…read more

Page 10

Preview of page 10

Here's a taster:

survey totals all people who have looked for work in the past month and are able to start in two weeks.
The figure also includes those who have found a job and are waiting to start in the next two weeks.
On average, the labour force survey has exceeded the claimant count by about 400,000 in recent years.
This may be due to a sampling error in the data.…read more



This 28 page document details AD, AS, macroeconomic indicators, government policy and international trade. It is an excellent resume that students can use as their notes or to create their own revision resources.




I'm resitting my AS F582 economics exam and I've legit been looking for something like this... this is absolutely heaven sent!!!

Similar Economics resources:

See all Economics resources »See all resources »