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Economics Revision

Government policy objectives:
1. Steady + Sustainable economic growth
2. Inflation (target 2.0)
3. Low unemployment
4. Balance of payments (high exports, low imports)

1. Economic Growth: Short run increase in real GDP. Long run increase in productive
capacity (maximum output the economy can produce).

GDP: the value…

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Potential environmental benefits ­ richer
countries have more resources

Human capital: Increase in
education and training so
workers have more skills to
produce more

Measuring economic growth:
1. Income method ­ all incomes (wages, rent, interest, profit) are all totaled
2. Output method ­ measures output produced by all industries…

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Anticipated inflation ­ government can prepare for it
Unanticipated inflation ­ cant take precautions

Inflation rate: A sustained rise in price level measured in percentage terms

Measuring inflation:
1. CPI: a measure of changes in the price of a representative basket of consumer goods and

2. RPI: a measure…

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Shoe leather costs, walking from bank
to bank to withdraw/move money and find
highest interest rate
Administrative costs, staff time to
adjust accounts
Wealth costs, redirects wealth to those
in strong bargaining position or with
physical assets
Fiscal drag
Inflationary noise

3. Unemployment: where people are out of work but…

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Causes of unemployment:
Frictional unemployment: short term unemployment occurring when workers are
inbetween jobs
Seasonal unemployment: unemployment caused by seasonal changes in labor supply and
demand during the year
Search unemployment: not accepting the first job that comes along, seeking better pay
Casual unemployment: frequently out of work between periods…

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Firms are able to expand May lead to antisocial activities such as
theft and violence
Skills can become rusty
Producing inside the PPC
Reduces the output of goods and services
Less revenue
Spend more on unemployment benefits
(opp cost involved)
Increased burden on NHS

4. Balance of Payments: Record of…

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o Fall in exchange rate
o Fall in inflation rate
o Rise in labour productivity
o Rise in quality of products
o Rise in income abroad
o Fall in domestic income

Consequences of a ..
CA surplus CA deficit

Banks have more money = Reduce AD
increase in lending Lowers…

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Budget deficit: government spending > tax revenue
Budget surplus: government spending < tax revenue


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