Unit 2 - The UK economy - performance and policies
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Summary A Level Edexcel Economics A Theme 2 notes - The UK Economy, Performance and Policies
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Unit 2 - The UK economy - performance and policies
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Full and in depth notes covering theme 2 - The UK Economy, Performance and Policies for the A Level Edexcel Economics A course. Easy to understand explanations, current events and examples as well as clear, well illustrated graphs and diagrams with annotations and explanations.
Unit 2 - The UK economy - performance and policies
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A Level Edexcel Economics topic 2 macroeconomics
Economic Objectives
-Objectives are aims that the government would like to achieve.
-The UK government will be judges partly by how well it manages to achieve these objectives.
The measurement of macroeconomic performance
The main objectives of government macroeconomic policy are...
-Economic growth
-Price stability (inflation). Price instability is bad because it will cause consumers to be less
encouraged to purchase products, as they know prices are constantly fluctuating.
-Minimising unemployment
-A stable balance of payments on current account
Economic Growth: An increase in amount of goods and services produced (GDP) over a period of
time.
Short-run economic growth: "The actual annual percentage chance in real national output." It is a
fixed variable.
Long-run economic growth: "An increase in the potential productive capacity of the economy."
Variables can change.
How is Economic Growth measured?
The distinction between short-run and long-run is used again here.
Short-run: The annual percentage change in Real National Output OR Gross Domestic Profit (GDP).
Long-run: The maximum potential output of the economy using all factor resources as illustrated on
the Production Possibility Frontier.
Gross Domestic Product: The total value of the goods and services produced in the economy over a
period of time, typically a year.
Real Gross domestic product: The value of goods and services produced in the economy over a
period of time, taking into account the level of inflation. This allows more accurate comparisons due
to the inclusion of inflation.
Nominal Gross Domestic Product: The value of goods and services produced in the economy of a
period of time, NOT taking into account inflation.
Nominal and Real Values
-Nominal value is expressed in monetary terms.
-It does not take into account inflation (the average level of prices)
-Real value takes into account inflation
-Real National Output=Nominal National Output/Average Price Level
-Short-run economic growth is measured by the annual percentage change in real national output,
real national income or GDP.
Total and Per Capita Income
-Total national income is the value of all goods and services produced in a country.
-Per capita income is the total income divided by the number of people in the country.
,-We look at real national income in order to give a meaningful comparison when comparing the size
of economy of different countries.
-Real per capita income allows us to compare the overall standard of living od individuals within
each country.
Volume and Value
-We can distinguish between the volume and value output in a country.
-Volume looks at the quantity of goods and services produced in a country.
-Value looks at the quality, the monetary worth of the goods and services produced in a country.
Other National Income Measures
-The Gross National Product (GNP) of a country is the value of all goods and services produced by
domestic businesses both at home and abroad, so it includes overseas assets.
-The Gross National Income (GNI) of a country is its total level income.
-We can divide both by the population to get GNP and GNI per capita.
-This has limitations as a comparator because many jobs in low income countries are informal,
rather than official, therefore they are not given a financial record.
Purchasing Power Parities (PPP)
-This is a method that allows us to look at the relative values of different currencies.
-It takes real GDP and divides it by the number of people within the country.
-It then converts the income into dollars to allow a comparison between all countries around the
world.
-This allows us to see how much an individual from each country can purchase given the average
amount of income they have.
The Limitations of using GDP to compare living standards
-Real GDP per capita and economic growth are used to compare living standards between countries.
-However, problems arise in using it as a measurement:
• Accuracy of statistics e.g a constantly changing population
• The shadow economy is not included in measurements (money that is essentially illegally
earned cash in hand; no taxes paid).
• Transactions without a monetary value e.g housework.
• The negative externalities e.g pollution that economic growth can cause are not taken into
account.
• Economic growth can cause inequalities in income and wealth within a country.
Problems of comparison between developed and developing countries
-Accuracy of statistics can vary dramatically between developed and developing countries.
-Developing countries often consume what they produce and don’t offer it for sale on the market.
Therefore, it has no monetary value.
-Developed countries often increase incomes at the expense of quality of life. For example stress,
long working hours and congestion when travelling.
-Developing countries might wish to achieve growth at the expense of health and safety.
-Alternative methods of measuring the quality of life are available.
National Happiness
-The UN regularly publish a World Happiness Report.
-They have identified six factors that impact on happiness:
1. Real GDP per capita
, 2. Healthy life expectancy
3. Having someone to count on
4. Percieved freedom to make life choices
5. Freedom from corruption
6. Generosity
-Richard Layard, author of the influential "Happiness: Lessons from a new science" discusses the Big
Seven Factors affecting happiness:
1. Family relationships
2. Financial situation
3. Work
4. Community and friends
5. Health
6. Personal freedom
7. Personal values
-Happiness economics is fairly new branch of economics that looks at how content individuals are
with their life from a theoretical and scientific viewpoint.
-It has come about because standard measures of living standards do not take into account
contentment – money does not buy happiness.
-One can be rich and unhappy; poor but happy
-The Government now research national wellbeing (how happy one perceives themselves to be)
-There is a clear relationship between real income and subjective happiness e.g. being in debt can be
demoralising but there are other factors to take into account.
Inflation: A persistent rise in the general price level of an economy over a period of time. Inflation
reduced our purchasing power. To stop the reduction of purchasing power, wages must be
proportionate to inflation rates.
Inflation is measured by the UK government by use of RPI (Retail Price Index) and CPI (Consumer
Price Index).
CPI and RPI
CPI measures the average monthly change in the prices of goods and services. This is the figure the
Bank of England use when setting the interest rate. The difference between CPI and RPI is that the
CPI excludes housing costs such as rent and mortgages. The CPI is the official measure of inflation in
the UK.
How is CPI calculated?
1. The Government makes a list of products (basket of goods).
2. It checks the price with the list 1 year ago.
3. Then they get weighted and the percentage change is the inflation rate.
Other measures
-Retail Price Index – oldest measure and includes different items on the list. Often used in wage
negotiations.
-RPIX – Retail Price Index without Mortgage interest payments.
-RPIY – Retail Price Index without Mortgage interest and indirect taxes (e.g. VAT)
Causes of inflation
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