Edexcel AS/A Level Economics revision

Economic growth  GDP (Gross Domestic Product) is the total value of goods and services produced in one year in an economy. It is also equivalent to the total income in the country at the time, so can be calculated by adding up the population's incomes for that year.  This means it is a good indicator of economic growth.  GDP per capita is the value of GDP divided by the population which gives us the average income.  We can use the rate of change of GDP over time (  [(Current GDP - Old GDP) / Old GDP] x 100 = % change) to observe how much an economy has grown between any two periods.  Real GDP is GDP adjusted for inflation  whereas  nominal GDP is GDP that is left unadjusted.  Value - the monetary value of all goods and services produced in one year (so price x quantity)  Volume - the number of goods produced in the country in a given year.  An alternative measure of national income is Gross National Income (GNI). GNI differs from GDP in that it includes

Economics as a social science A social science is one concerned with society and the relationships between individuals and society.  Social scientists face challenges that other fields of science do not during experiments. In carrying out an experiment, scientists typically follow the following steps: 1. Propose hypothesis Human behaviour is very varied and unpredictable, so it is hard for social scientists to come up with a hypothesis that yields true for all human behaviour.  2. Experiment + collect data The ability to create a valid experiment is limited as controlling variables is very hard due to the complexity of the real world. Additionally, economists often collect qualitative data, which is hard to interpret.  3. See if results support/reject hypothesis 4. Repeat (with new hypothesis)  In order to carry out experiments, economists often use models to simply the real world. These models are a simplified version of reality that can yield testab

Inflation   Inflation is the rate of increase in the average price level of an economy, causing a decrease in the purchasing power of consumers.  Deflation is the negative inflation. It is the decrease in the average prices in an economy.  Disinflation is a fall in the rate of inflation. Note that inflation is still occurring during disinflation, just at a slower rate.  Calculating inflation    Inflation is calculated using the  consumer price index (CPI). This is a weighted price index that measures the general level of prices in the UK by measuring the prices of a bundle of consumer goods and services (representative of overall consumption) at different points in time. In doing so the percentage change in CPI over time provides an estimate of the rate of inflation.  Yet there are limitations to using CPI as a measure of rate of inflation: - CPI doesn't take into account changes in the quality of goods/services that may be why products have risen in pri

Output gaps and the business cycle The fluctuation of real GDP around an underlying trend is a phenomenon known as the business cycle.  Output gap  - difference between the actual output of an economy and its potential output.  There are two types of output gap, trend and  potential.  Trend growth is the estimated rate of growth of an economy.  Trend output gaps:  Business cycle diagram A negative trend output gap is when real GDP is below trend GDP. The economy is producing below its trend.  e.g If real GDP is £1.8 trillion and trend GDP is £2 trillion then the negative output gap is £0.2 trillion.  Here the economy is in a bust  period. This is characterised by an expansion in GDP, high employment and high confidence. Price levels often rise, meaning inflation occurs.  A positive trend output gap is when real GDP is above trend GDP.  Here the economy is in a recession  (bust). This is characterised by a contraction in GDP, high unemployment and lo

Public expenditure  Capital expenditure - government spending on capital (things that make things) and infrastructure such as roads, schools, prisons, etc.  Current expenditure - spending on recurred state-provided goods and services. For example wages for those working in the NHS and funding for state schools.  Transfer payments - welfare payments such as JSA, state pensions and benefits put in place to ensure a basic level of welfare for all.  

Taxation  Average rate of tax - percentage of an individual's income that goes to the government (so total tax paid/total income x100)  Marginal rate of tax - percentage of tax paid on each additional dollar of income.  Progressive taxes - where the marginal rate of tax rises as the amount subject to taxation rises. For example, income tax.  As the amount of income increases, the rate of tax on each additional pound earned goes up, increasing the average rate of tax.  - Good for reducing inequality.  Regressive taxes - where the marginal rate of tax  decreases as the amount subject to taxation rises. For example, excise duties (on tobacco/alcohol, etc.)  As the amount spent on these goods increases, the rate of tax decreases, as a smaller percentage of the income is spent on tobacco/alcohol. The average rate of tax is lower for those with higher incomes. Therefore these taxes often are of a greater burden to the poorer and may increase inequality.  Proportio

Subsidies  A subsidy is a grant (usually provided by the government) to encourage producers to increase the production of a good or service, resulting to a reduction in its price. The subsidy is usually paid directly to the producers, reducing their costs of production and therefore creating producer benefit. Some of this benefit is passed onto the consumer as the price of the good or service is lowered as the quantity produced increases. The supply curve shifts out because of the increase in production.  Subsidy As with taxes, the distribution of consumer and producer benefit depends on the PED and PES of the good or service. In the case of inelastic PED, the price of the good is markedly reduced, meaning there is greater benefit for the consumer. Conversely, the more elastic the PED, the more the producer is able to benefit from the subsidy by keeping more of it. The area between 30 and 16 on the above diagram marks the total government expenditure on the subsidy. 

Taxes  An indirect tax is a tax on good and services rather than on income or profits (which is direct tax). It increases the cost of production of a good or service.  Indirect taxes come in two forms:  Specific tax - a tax charged as a fixed amount per unit of a good. (e.g 10p per cigarette)  Ad valorem tax - a tax charged as a percentage of the price of a good. (e.g 20% VAT)  The tax increases the cost of producing a good, and this increase in the cost of production shifts in the supply curve. With specific tax it shifts in a fixed amount at all points, so the amount of the tax can be measure by the vertical distance between the initial supply curve and the new supply curve.  Specific tax With ad valorem tax the supply curve shifts in a greater amount as you move further up the supply curve.  Ad valorem tax Both the consumer and producer are made worse off by the tax - they both have to pay, and the amount which they have to pay is the incidence.