Economics - Mod 2 - Unit 1

Question	Answer
Define Gross Domestic Product.	Gross Domestic Product (GDP) is the total output of goods and services produced and consumed within the economy which determines employment and living standards.
What is involved in the primary sector of the economy?	This is the sector involved in the production of raw materials, e.g.: ~Farming - food ~Fishing - within the Eurozone ~Mining - coil, oil, shale gas ~Forestry - Northern Europe ~This is all mostly imported~
What is involved in the secondary sector of the economy?	This secctor involves suppliers who turn raw materials into finished goods: 1) Manufacturing e.g. cars, defence, aeroplanes and high-tec goods. 2) Construction.
What is involved in the tertiary sector of the economy?	This sector includes suppliers who provide any type of service: Education, Healthcare, Financial, Legal, Law enforcement, Armed forces, Retail & wholesale, Tourism, Media and Personal.
Define economic growth.	Economic growth is the increase in the productive capacity of the UK economy and this is measured by the change in real GDP.
When is economic growth positive?	When the value of GDP growth is above 0, implying the output of the economy has increased over the quarterly period.
When is economic growth negative?	When the value of GDP growth is below 0, implying the output of the economy has decreased over the quarterly period.
When does a recession occur?	When GDP growth is negative for two consecutive quarters or a period of six months.
Describe the recession of 1990/91.	The economic recession of 1990/91 began in the 3rd quarter of 1990, and lasted for 5 quarters (15 months). Over this period, the economy contracted by a total of approximately -2.3%.
Describe the economic recession of 2008/09.	The economic recession of 2008/09 began in the 2nd quarter of 2008, and lasted for 5 quarters (15 months). Over this period, the economy contracted by a total of approximately -6.2%.
Why was the 2008/09 recession worse than the recession of 1990/91?	The recession of 2008/09 lasted the same time, but the economy contracted deeper by approximately -3.9%.
Define the economic cycle.	The fluctuating changes in real GDP in the phases of growth, recession, upturn, downturn, boom and slump.
What is the boom phase of the economic cycle?	Economic growth is growing above its trend rate of growth (which for the UK has been calculated at about 2.5%. This means output is above a level that the economy can be sustained over the long term.
What is the slump phase of the economic cycle?	A slump or depression is a prolonged recession where GDP shrinks by more than 10%.
When did the UK last experience an economic slump?	During the 1930’s an economic slump lasted for all of this decade and only came to an end as a result of World War 2 (1939). The Wall Street Crash was a signal that the global economy was entering a severe downturn.
What is the upturn phase of the economic cycle?	An upturn means economic growth is accelerating and productive capacity (output) is growing at an increasing rate. A rise from 0.5% to 1.5% quarterly growth is an example.
What is a downturn phase of the economic cycle?	A downturn means economic growth is slowing down and output is growing at a decreasing rate. A fall in growth from 2.4% to 1.1% is an example. The economy is still growing but at a slower rate.
What is a double-dip recession?	A double dip recession means that two periods of negative growth have occurred one after the other without the economy returning to its trend rate of growth for a sustained period in between.
What are the 2 types of goods that are used to classify output?	a) Consumer goods such as food, clothing and shelter that satisfy human demand. b) Capital goods such buildings and machines that produce consumer goods.
How is economic growth and an economic recession illustrated on the PPF?	-Economic growth is illustrated by an outward shift of the PPF, showing an increase in the productive capacity. -Economic recession is illustrated by an inward shift of the PPF, showing a decrease in the productive capacity.
What does economic growth imply?	That the productive capacity of the economy has risen, meaning an increase in output, employment and living standards. Therefore, economic growth is desirable because it generates benefits for consumers, producers and society.
How does economic growth benefit individuals?	-Higher supply of capital good will result in more consumer goods. -More jobs in the economy leading to higher wages, salaries and living standards. -More disposable income to spend on consumer durables such as property.
How does economic growth benefit firms?	-Technological improvement will result in better quality goods at cheaper prices. -Firms benefit from higher profits which can be used to finance new investment.
How does economic growth benefit the state?	Higher tax revenues for the state will allow higher spending on merit goods such as health and education.
Define GDP per capita.	GDP per capita is calculated by dividing GDP by population, and is a more accurate measure of the increase in living standards because it provides a crude monetary measure of how resources are divided amongst the population of that country.
In theory, how does economic growth affect GDP per capita?	A rise in economic growth should mean a rise in GDP, and therefore a rise in GDP per capita.
Why has GDP per capita not risen significantly since 2008 despite a growth in the economy?	This is due to the significant population growth which has grown quicker than Real GDP. Factors contributing to population growth are immigration, a rise in the birth rate and a fall in the death rate.
Define inflation.	Inflation is a measure of the average rise in prices. It is calculated by comparing the price of a basket of goods and services over a period of time, including a selection of goods and services that the typical family buy on a regular basis.
How is inflation measured in the UK?	In the UK, an index called the consumer price index (CPI) is used to measure changes in the average price level.
How is the value of total output calculated?	% Change in GDP - % Change in Inflation. Therefore, the value for real GDP or economic growth will have been adjusted for the increase in prices that will have taken place during this period.
What is the difference between nominal and constant GDP?	Nominal - GDP NOT adjusted for inflation, and is valued using current prices for that period. Constant - GDP adjusted for inflation, and so must be expressed according to a base year.
How is Real GDP calculated using nominal GDP?	Real GDP = Nominal GDP / Infation Index (as a decimal.)
How is GDP growth calculated as a percentage?	GDP Growth = Growth / Base Real GDP x 100%. E.g. - £20bn / £110bn x 100% = 18%.
How is index calculated?	1. Select a base year e.g. 2010 (£625bn). 2. Use the formula for each year: Current GDP / Base GDP x 100 E.g. 2012 - 667 / 625 x 100 = 107%. 3. Precentage of annual growth = % Change / Previous Index x 100 E.g. 2012 - 4 / 103 x 100 = 3.9%.
What is considered to be the indicator of a healthy economy?	National output is considered the key indicator to the health of the economy. A healthy economy is one when the national output is growing while an unhealthy economy is one when national output is contracting.
Define the circular flow of income.	This is the model used to illustrate the flow of income between households and firms, where the output from one is the input for another.
How is income exchanged between households and firms regarding factors of production?	Households own the factors of production such as land, labour and capital which they supply to firms. In return, the firms supply the household with an income in the form of wages, rents and dividends.
How is income exchanged between households and firms regarding goods and services?	Firms produce all the goods and services by hiring or renting factors of production from households, to whom they also supply to. Households use their income to buy finished goods and services from firms.
What 3 flows can be measured from the circular flow model?	a) The output of goods/services from firms. b) The income of households. c) The expenditure by households on goods and services. Income = Expenditure = Output
What are the 3 injections into the circular flow?	Injections encourage economic growth: 1. Investment spending. 2. Government spending. 3. Exports.
What type of goods to firms invest in?	Investment spending by firms is on capital goods such as: -Factories and warehouses -Equipment and machinery -Buildings and offices.
Give examples of areas where the government is likely to spend on.	Education, healthcare, defence, welfare, defence, public order, housing and infastructure.
What are exports?	Exports which are goods produced in the UK but sold abroad and therefore bring in income such as: Food and drinks Alcohol, tobacco and oil Cars and aeroplanes Drugs and medicine.
What are the withdrawals from the circular flow?	Withdrawals discourage economic growth: 1. Savings 2. Taxes 3. Imports
What are savings?	Savings is the part of disposable consumer income that households choose not to spend, but is invest in ways such as banks, shares, pensions and bonds.
Which taxes does the government use to withdraw income from the economy?	Tax is that part of gross household income that the government takes and can be in the form of: Excise tax (alcohol and tobacco) Value Added Tax (VAT) Council tax, road tax and income tax Corporation tax.
What are imports?	Imports are that part of household income that is spent on goods produced outside the UK and therefore is not received by UK firms. Almost every item The UK exports can also be imported.
Which ways are used by the Office for National Statistics (ONS) to calculate the value of quarterly GDP growth?	-Information on sales collected from companies. -Data collected from government departments. -This method is considered the most accourate in the short term.
How many compaines does the ONS collect sales information from?	Information on sales is collected from: -6,000 companies in manufacturing -25,000 service sector firms -5,000 retailers -10,000 companies in the construction sector.
How do ONS collect data on economic activity from government departments?	Government departments cover activities such as agriculture, energy, health and education. This is augmented by a wide range of sources which ensure that activity in the economy is well covered.
How does the department of Revenue and Customs provide a measure of national income?	From information calculated on tax receipts such as income tax and VAT. However, this measure is not able to provide a quarterly calculation of GDP because the self-employed and firms pay their tax annually.

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Economics - Mod 2 - Unit 1

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