Edexcel A-Level Economics Notes | 2.1

Last updated on Oct 20, 2024

Macroeconomics is about the UK economy as a whole.
The 4 main macroeconomic objectives are economic growth, stable prices (2% inflation), low unemployment (below 4.5%) and a stable balance of payments on current account.
Economic growth is measured by the rate of change of GDP.
Rate of change (percentage difference) = (new - old)/ old x 100%
GDP: the value of all goods/services produced in an economy in a one-year period.
GNI: the total income earned by a country's residents and businesses, both domestically and abroad.
Real: adjusted for inflation. Nominal: not adjusted for inflation.
Per capita: divide by the population.
Value: monetary worth. Volume: physical quantity.
Purchasing Power Parities (PPPs): exchange rates that equalize the purchasing power of different currencies for a common basket of goods e.g. if the exchange rate suggests that 1 USD equals 100 Japanese yen, but the PPP-adjusted exchange rate is 1 USD equals 110 yen, it means that the yen has greater purchasing power in Japan.
Limitations of using GDP to compare living standards: doesn't account for inequality, quality, hours worked, environmental damage.
We can also measure Happiness e.g. National Happiness Index/ World Happiness Report. 😄there are higher incomes are associated with increased happiness up to a point. 😦 it may be subjective, and income and happiness only relate to a certain extent.

Inflation is a rise in average price level.
Deflation is a fall in average price level.
Disinflation is a fall in the rate of inflation, above 0%.
Consumer Price Index (CPI): tracks prices of an average household basket of 700 goods/services. Each item has its own weighting. 😦 assumptions about average basket which can change, changes in quality/ sizes can be ignored.
Retail Price Index (RPI) is another measure of inflation in the UK that includes housing costs and is usually higher than CPI.
The three causes of inflation: demand-pull inflation, cost-push inflation, and growth of the money supply.
Demand-pull inflation is caused by an increase in aggregate demand.
Cost-push inflation is caused by an increase in costs of production causing a decrease in short-run aggregate supply. Firms then have to raise prices.
Growth of the money supply (lower interest rates) can also cause inflation.
Inflation is bad if wages do not rise accordingly. If consumers ask for higher wages, the firm could lay-off workers or raise prices even further. This can lead to a Cost of Living crisis.
Inflation can also lead to firms paying higher wages, more disposable income and further consumption.
Deflation is bad as: it can lead to people expecting lower prices in the future. Consumer confidence and demand will fall. This can also affect business confidence and leads to a fall in wages. Deflation is difficult to come out of as real interest rate values increase.

The main UK measures of unemployment are the claimant count and the Labour Force Survey.
Unemployment is the number of people who are willing and able to work but cannot find a job.
Underemployment is when someone is working lower hours or in a lower skilled job than they want.
Employment rate: % of working age population who are working.
Unemployment rate: % of people who are willing and able to work (economically active) but cannot find a job.
Inactivity: % of people who are not willing or able to work e.g. retired/ student/ disabled.
Structural unemployment occurs when there is a decline in demand for goods and services in a particular industry.
Seasonal unemployment occurs during particular times or seasons.
Cyclical/ demand-deficient unemployment is caused by a lack of aggregate demand in an economy, during a recession.
Real wage inflexibility: unemployment caused by excess supply if the minimum wage is above the market equilibrium.
Migration can lead to increased demand and create more jobs but can also increase the supply of labour so wages can fall.
High unemployment leads to low disposable incomes and poor living standards for consumers, and workers can lose skills. Firms may get less demand and lower profit. They may have to choose low skilled workers, but they can lower the wage offered. The government would collect less tax revenue and pay more benefits.

The balance of payments is a record of all transactions between anyone from one country and all other countries.
Imports are when goods and services enter and money leaves.
Exports are when goods or services leave and money enters.
The balance of payments is made up of the current account, and the capital and financial account (savings/ investments).
The current account includes the trade in goods, trade in services, and income and current transfers (interest/ dividends).
A current account surplus is when exports are greater than imports.
A current account deficit is when imports are greater than exports.
A current account deficit could be linked with high AD as consumers have high incomes and may import luxury goods/ go on holiday, but it could also lower AD because AD = C + I + G + (X-M).
Economies are becoming more connected with migration and more technology.