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MACRO Unit 2 The UK Economy
The performance of the economy can have a major impact upon peoples lives. It
will influence the type of jobs people have and the goods and services available to
them, and whether they can afford to buy them.

The government has 4 macro-economic objectives:…

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However the simple circular flow, as depicted in Figure 7, is too simplistic to be of
any real use. In the open economy there are 3 injections into the circular flow.

Investment by firms (I)
Government spending (G)
Exports (X)

Each represents an autonomous addition to the circular flow income.…

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(income), there must be an output produced, and equally something must be spent
(expenditure). The government measures all three money flows, goods & services,
expenditure and income and they should be identity be equal.

The preferred measure is the expenditure method which takes spending by
consumer (C), government spending (G),…

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HDI is an index which measures national socio-economic development developed by
the United Nations. Up until 2009, it was based on measures of life expectancy,
educational attainment and was adjusted for real per capita income.
The HDI combined three basic dimensions:

Life expectancy at birth, as an…

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If a countrys output is rising, this suggests that a countrys citizens are experiencing
higher living standards. The most common indicator of economic growth is a rise in
real GDP.

Actual and Potential Growth

An increase in the productive capacity of an economy increases the potential
growth, whilst…

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Growth below the trend growth rate, where AD and so actual growth is
below LRAS and the economys potential growth rate. This leads to a negative
output gap and so unemployment and downward pressure on prices.

GDP Measurement Problems

1. Black Economy: This exists because when the output of some…

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Increased Tax Revenue: Greater economic growth could result in higher
tax revenue allowing the government to increase spending on health,
education or whatever else is seen to be a priority.

Higher Employment: Economic growth can result in greater demand and
therefore greater employment.

Increased investment as confidence improves, or due…

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Inflation can be defined as a sustained rise in the agreed general price level.

A low and steady inflation rate allows business to maintain confidence in the
economy. A high level of inflation, in excess of a countrys main trading partners can
create problems in competitiveness resulting in a…

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Other measures of inflation

RPI X: This measure is the RPI minus mortgage interest payments. There are 2
arguments for excluding mortgage interest.

1. For comparison purposes a number of other countries do not include it

2. Mortgage interest payments are influenced by changes in interest rates, so a

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Causes of Inflation

There are two main causes of inflation:
Demand-pull inflation -
This occurs when AD increases (due
to greater consumption, investment,
government spending or net exports),
pushing against the limits imposed by
the AS curve at full employment. In
the diagram (left), as AD shifts from
AD to…


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