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AQA AS level Economics

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James Cullen

on 14 September 2017

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Transcript of AQA AS level Economics

AQA AS level Economics
Circular Flow of Income
Each of the four factors of production receives an income when it is used in the production process.

Land - rent
Labour - wages
Capital - interest
Enterprise - profit
Inanimate assets a firm may use in production such as factories and machinery. Viewed as fixed input as can only be changed in the long run or fixed in the short run.
Two sectors :
Households - buy the nations output and own the factors production
Firms - hire the factors of production and produce the nations output.
Most simple form involves two sectors
In this simplified model the economy is in equilibrium. All of the income received by households is spent on goods and services, therefore flows around the economy. There is no reason for the economy to grow or shrink.
Household expenditure on goods and services =£100
The value of national output (GDP) must therefore also be £100
National income (to household) must also be £100.
A more realistic circular flow includes. Not all income recieved by a household will be spent on goods and services. Some is:
Paid in Taxes
Foriegn Goods
Four Sector Economy
Therefore a more realistic circular flow model needs to be created, including:
Banking Sector
The Government
International Trade
Any money that is not passed on in the circular flow to purchase domestic goods and services is known as a leakage or withdrawal. These include:
Saving - portion of income that is not spent.
Import spending - spending on goods produced abroad.
At the same time money is flowing into economy that originated from outside the circular flow. These include:
Investment - the addition to the capital stock of the economy
Government Spending - the purchase of domestic goods and services by the government.
Export Revenue - the revenue from goods and services produced domestically sold abroad.
The purchase of capital (goods that produce other goods) not be in mistaken for financial capital e.g buying shares
Equilibrium in the Economy
National income in the economy willbe in equilibrium when:
Investment+Government Spending + Exports = Saving + Taxes + Imports

because there are injections and withdrawals in the circular flow, there is no guarantee that the economy will remain in equilibrium.
If the sum of injections > the sum of withdrawals
then the level of national income is rising
If the sum of withdrawals > the sum of injections
then the level of national income is falling.

There are often too many variables to considered when answering even the simplest of questions. It is for this reason that economists simplify the problem. In short this means ignoring the factors at play that in the real world have little or no impact on the solution. These factors may confuse the important issues so we assume them away. Simplifications allow social scientists to come to an approximate solution with dramatically less calculation, but with very little shortfall in accuracy.

The price of PC's for instance - economists would start with a simplification. They might imagine that the demand for PC's depends only on price.
they might also assume that the supply of PC's only depends on price, with the number of PC's a firm is willing to supply being greater at a higher price. Then imagine that the price will adjust until it is at a level where suppliers are willing to supply to market the exact number of PC's as consumers are willing to buy .

Economists call this an equilibrium price and quantity. its an equilibrium because none of the agents have an incentive to change their behavior. This is the famous economic model of supply and demand.

More PC's built by suppliers than consumers are willing to purchase. So sellers would reduce price in order to reduce surplus stock.
Consumers would try to buy more PC's than the producers were manufacturing. So sellers would have to tell consumers their stocks were depleted which would lead to them to realise that the price could increase.
What would happen if the price was lower than equilibrium?
So what would happen if the price was higher than equilibrium?
How would the different agents act? Suppliers, consumers and sellers.
Thinking like an Economist
What is demand - the quantity of goods (or services) consumers are willing to buy at the prevailing price over a given period of time.
What is supply - quantity of goods (or services) that producers are willing to sell at a given price over a given period of time.
Aggregate Demand
AD = C + I + G + (X-M)
C = Consumption
I = Investment
G = Govt spending
X = Exports
M = Imports
Aggregate demand is total planned spending on all goods and services produced in the domestic economy in a given period of time.
National Income = National Output (GDP) = National Expenditure
These terms are interchangeable.
A Reminder
As with the simple economy it is still the case in the more complex economy.
The AD curve shows the inverse relationship between the price level in the economy and the aggregate demand. On the Y axis "price level" - is the average level of prices of all goods in the economy. We use this rather than price because we are looking at the macro economy the demand for all goods and services on one diagram.

On the X axis "Real national output" or real GDP. (Measure of national income/expenditure with the effects if inflation removed)
AD curve is downward sloping for two main reasons -

1. When prices fall consumers feel wealthier because their real incomes have increased - they can buy more goods and services with their income.
2. When prices fall UK goods become more competitive abroad so exports increase and imports decline.
AD Curve
Aggregate Supply
Economic Performance
Macroeconomic Equilibrium
Stocks and Flows


Output, Expenditure and Income

Problems with GDP comparisons

Units of account
Imputed services
Second hand goods
Shortcomings of GDP

Defensive Expenditures
Bias towards traded services

Alternatives to GDP

Happiness Economics
Difference between Micro and Macro
Objectives and Indicators used to measure economic performance.
Four objectives -
Full employment
Price stability
A high, but sustainable, rate of economic growth.
Keep the balance of payments in equilibrium.
National income - GDP - Per capita and real
Bar Charts
Median uses of index numbers

Calculation and interpretation of index
Use of index numbers -
Calculating percentages - % change of raw data and index figures.
3.2.2 How the macroeconomy works: Circular flow, AD/AS Analysis and related concepts.

Circular flow
Injection leakages
The Multiplier

What is meant by circular flow of income, injections and withdrawals.
What is meant by:
AD its components and how it influences the level of economic activity.
Drawing AD curves with appropriate axes labels and interpretation of changes in different components of AD a basic understanding of multiplier and accelerator processes.
AD = C+I+G+ (X-M)
Consumption - factors affecting consumption and changes in consumption over time such as changes in confidence.
Human Capital
Physical Capital
Government spending - main areas using highlights from previous budget.

Net trade - current trade data
AD and diagrams - effects of government policy. Early links to be made to changes in any component altering AD.
Multiplier diagrammatically - demonstrate the effect of the multiplier on AD.
Investigate significance of each component of AD and compare against other countries.
Aggregate Supply

What is meant by aggregate supply and what affects short run, as opposed to long run, aggregate supply.
Drawing AS curves - long and short run.
5 hours
2 hours
4 hours
2 hours
4 hours
Shifts in short run aggregate supply - SRAS shifts to the left if things such as money wages or the cost of the other factor inputs increase.
Short run aggregate supply comprehension - evaluate the likelihood of events considering why the SRAS shifts.
Long run aggregate supply - what determines the "productive potential" or "capacity" of the economy. Simple links can be made to micro economic principles and expanded.
Diagrammatical analysis - explain the shape of both curves and the Keynesian supply curve.
AD and AS analysis
To be able to use AD and AS analysis both in written and diagrammitical form, to help explain a range of macro problems and issues.
Drawing accurate - labelled AD/AS diagrams to show the effects of changes in AD and/or AS on Macroeconomy, in the short and long term.
Combining AD and AS - diagrams used to bring the two together
Effects on macreconomic
GDP - defined as the total value of goods and services produced in the economy. In other words the value of the economic output.
“Democracy is the worst form of government … apart from all the others that have been tried from time to time” - Winston Churchill
Economists see GDP in much the same way as in to say that GDP is a pretty bad measure of how well off people are, but it doesn't stop it being the best available.
We must have a measure to be in a position to know whether or not the economy is growing leading to greater wealth for people.
Stocks and flows
Stocks - the value of something at a given moment in time. - Bank account at 2pm.
Flow - how much something moves per unit of time. income PA
GDP is a flow variable as it measure the value of the output produced in an economy. the corresponding stock variable would measure the value of all the assets in the economy, seeing as GDP as the return on those assets in the form of human and physical capital. The value of those assets would very much depend upon the future income they could generate. this is why national income and national wealth are very closely connected.
many components of GDP are flow variables with with important stock related variables. E.g - investment is a flow that tends to increase capital stock in the economy.

Income method - amount of money firms spend on buying labour from workers and repaying households for the use of capital machinery.
Two ways to measure GDP
Expenditure method - measuring the amount of money people spend buying goods and services from firms.
However complicated the economy is = every time someone spends £1, someone else's income increases by £1. MP3 example
Problems with GDP comparisons
As with any measure it is only of any use if comparisons can be made. IE other countries must have a GDP figure to start.
Once comparisons start problems arise - does the fact that Americas GDP is 6 times the size of the UK mean that americans are six times better off than us? Does the fact that the Frances GDP in 2011 was twice as big as it was in 1994 mean that the French people feel twice as well off?
No - due to population, exchange rates and inflation. therefore it is vital that adjustments are made when comparisons are made.
By 2030 China will blow past America as the worlds largest economy and global power will shift decidedly in favour of Asia. Fox news 10th December 2012
By 2017 the IMF predicts the GDP of china will overtake that of the United States. Newsweek 19th of august 2012
These headlines highlight the issues of comparing countries based upon GDP. Where would you prefer to live post 2030 or 2017?

Mr Cullen
The Economist's Dictionary of Economics defines economics as "The study of the production, distribution and consumption of wealth in human society"

The purpose of economic activity

It is often said that the central purpose of economic activity is the production of goods and services to satisfy our ever-changing needs and wants.

The basic economic problem is about scarcity and choice. Every society has to decide:

Does the economy use its resources to build more hospitals, roads, schools or luxury hotels? Do we make more iPhones and iPads or double-espressos? Does the National Health Service provide free IVF treatment for childless couples?
What is the best use of our scarce resources? Should school playing fields be sold off to provide more land for affordable housing? Should we subsidise the purchase of solar panels for roofs?
Who will get expensive hospital treatment - and who not? Should there be a minimum wage? Or perhaps a living wage? What are the causes and consequences of poverty in societies across the globe?
What is Economics?
What goods and services to produce?
How best to produce goods and services?
Who is to receive goods and services?
Full Employment
Price Stability
Economic Growth
Balance of Payments
Homework - Research - find an article about your macro objective. Read it and then produce 5 questions on it. The article can be on any country in the world but has to have been published in 2015. (The more recent the better). To be handed next lesson. Questions to follow the article and answers on a different page.
L6S - Thursday P4
L6R- Thursday P5

Macroeconomic Objectives
1.Economic Growth - Gross Domestic Product
2.Full employment - Level of employment
3.Price stability - inflation
4. Balance payment - imports/ exports
Primary - raw materials
Secondary - Manufacturing
Tertiary - services
Quaternary - R+D
Reading -



Sectors of the economy
Short run and Long run
Short run growth occurs when there are unemployed resources or slack in the economy. Moving from a point inside the economy's production possibility frontier to a point on the frontier. This is also known as recovery.
Long run - the outward movement of the production frontier.
Measures - GDP - note this is often shown in quarter rather than PA.
What could lead to a reduction in the PPF?
Real vs Nominal GDP
From an economic view point write down what the government objectives are.
(If you wish to protect your beloved notes from the utterly awful scenario of writing something wrong use a rough piece of paper.)
Target 2%
3% or less
Labour force survey
Claimants method
The immediate answer is that they include slightly different things. RPI includes the costs of housing (mortgage interest costs and council tax for example) while CPI does not.

However it isn’t that simple. If it was, we might have seen RPI fall below CPI as mortgage rates collapsed from 2008. The complicated bit – and the more relevant difference between the two – comes in the calculations. The RPI is an arithmetic mean – ie, the prices of everything to be included in it are simply added up and divided by the number of items. The CPI is a geometric mean. It is calculated by multiplying the prices of all the items together and then taking the nth root of them, where ‘n’ is the number of items involved.

Look on the ONS site and you will see that “an advantageous property of the geometric mean is that it can better reflect changes in consumer spending patterns relative to changes in the price of goods and services.” That may be so. But the real advantage to the government of using a geometric mean is that it is always below or equal to the arithmetic mean.

So much so that the so called “formula effect” tends to produce a difference of approximately 1% in the different indices. If the CPI were calculated as the RPI currently is, it would be about 1% higher than it is – and higher than the RPI. This is why the government likes to link the payments it makes (pensions and so on) to the CPI and the payments it receives (taxes and so on) to the RPI. More detail on all this here.

An interest rate increase could lead to the rate of employment decreasing.
Greek crisis leads to uncertainity in demand for american goods in Europe and therefore employment may grow at a lesser rate.
Fed is the American version of the BOE. amongst other functions it set interest rates and QE (quantitative easing). It is in charge of the fiscal and monetary policy in the united states. The result of this is that it influences the level of demand in the economy and therefore the rate of employment.
Interest rates influence the level of demand in the economy which in turn has aknock on impact upon the rate employment.
Current account of the balance of payments.



Balance of trade

Balance of trade deficit

Balance of trade surplus

The immediate answer is that they include slightly different things. RPI includes the costs of housing (mortgage interest costs and council tax for example) while CPI does not.

However it isn’t that simple. If it was, we might have seen RPI fall below CPI as mortgage rates collapsed from 2008. The complicated bit – and the more relevant difference between the two – comes in the calculations. The RPI is an arithmetic mean – ie, the prices of everything to be included in it are simply added up and divided by the number of items. The CPI is a geometric mean. It is calculated by multiplying the prices of all the items together and then taking the nth root of them, where ‘n’ is the number of items involved.

Look on the ONS site and you will see that “an advantageous property of the geometric mean is that it can better reflect changes in consumer spending patterns relative to changes in the price of goods and services.” That may be so. But the real advantage to the government of using a geometric mean is that it is always below or equal to the arithmetic mean.

So much so that the so called “formula effect” tends to produce a difference of approximately 1% in the different indices. If the CPI were calculated as the RPI currently is, it would be about 1% higher than it is – and higher than the RPI. This is why the government likes to link the payments it makes (pensions and so on) to the CPI and the payments it receives (taxes and so on) to the RPI. More detail on all this here.
Week 3
Week 1 & 2
Week 4
Week 5 & 6
Week 7 & 8
Other Objectives
Balancing the Budget
Distribution of income
Post financial crisis this has been a hot topic between political factions. The budget deficit and how to reduce it are central to much of the debate taking place around the economy and its performance.
This is a traditional debate between the political parties. Income inequality has widened since the 2008 financial crisis and consequent recession. Many people see this inequality as an issue that must be tackled. Rich getting richer and the poor getting poorer.
Its vital that you keep abreast of the Governements policy objectives.
What are they doing in each of the four objectives?
Does one seem to take precedent over others?
Policy Conflicts
Mutually exclusive
Trade offs


Some argue that there is only a conflict in the short term (Less then three years) and that with the correct policies all macro objectives could be achieved in the long run (Over three years). Pro-free market economist tend to believe that with certain supply side policies macro objectives are compatible in the long run.
Is there really a need to priorities?!
Keynesian - John Maynard Keynes - governments should manage the economy through mainly fiscal policies.
economic growth, full employment, price stability, balance of payments.
They also believe in the fair distribution of wealth (income equality).
Most efficient way to achieve human happiness and economic welfare.
In short Keynesian economist place economic growth and full employment at the forefront of policy whilst the other two objectives are secondary issues or even constraints on achieving the primary objectives.

Austerity - government spending cuts. This is a policy to aid the balancing of the budget. The other would be to increase taxes however these can stifle growth and are unpopular.
By running a budget surplus it would allow for a greater fiscal injection when a recession hits. This should lead to a shallow and short recession.
1945 -79
During this time the primary macro economic objectives were full employment and economic growth with the distribution of income being a key factor in policy decisions.
Balance of payment and inflation were a clear second in terms of policy objectives. On occasions they were perceived as constraints.
Pro free market
Maggie T's government changed the economic policy direction of the UK and adopted a free market approach. Due to inflation being almost out of control in 1979 it placed at the centre of policy decisions.
An example of how price stability has been chosen above employment was in 1993 when the Chancellor Norman Lamont stated high unemployment "was a price worth paying" for lower levels of inflation.
In short pro-free markets economists believe that inflation must be controlled if sustainable high employment is to be achieved.
In reaction to the deep recession that hit the UK in 2008. There has been a revision to how the macroeconomic objectives are prioritized. inflation took a back seat to the more pressing issue of steering the economy into recovery. As a result economic growth and bringing about higher levels of employment are once again in the driving seat. This explains loose monetary policy (low interest rates) and a tight fiscal policy (Austerity - budget cuts).
Real GDP is adjusted to take into consideration price increases.
Whilst nominal simply takes the value of products produced at "today's" prices.
Nominal GPD - rate of inflation.
Real, nominal and per capita GDP
L6R - 28th Sep.
L6S - 28th Sep
L6P - 28th
GDP per capita
Performance Indicators

Why is it important to have some understanding of what the near future holds.
What is fiscal policy?
What is monetary policy?
Recap -
Performance indicators
What is the definition of a performance indicator.
Who is the primary user of performance indicators?
Give two examples of performance indicators.
How can performance indicators be used?

Define Lead indicators
Three examples of lead indicators.
What method of data collection is used?
What is a commodity?
Lead Indicators
Lag Indicator
Define Lag indicator
What are they used for?
Performance indicator analysis
What factor does the usefulness of indicators depend upon?
What does this factor rely on?
Q2 - case study 6.3 q 150
10 marks - develop your arguments - consider the implications of these indicators. no less than 3/4 of a side
The performance of an economy is usually assessed in terms of the achievement of economic objectives. These objectives can be long term, such as sustainable growth and development, or short term, such as the stabilisation of the economy in response to sudden and unpredictable events, called economic shocks.

Economic indicators
To know how well an economy is performing against these objectives economists employ a wide range of economic indicators. Economic indicators measure macro-economic variables that directly or indirectly enable economists to judge whether economic performance has improved or deteriorated. Tracking these indicators is especially valuable to policy makers, both in terms of assessing whether to intervene and whether the intervention has worked or not.

Useful indicators include:
Levels of real national income, spending, and output. National income, output, and spending are three key variables that indicate whether an economy is growing, or in recession. Like many other indicators, income, output, and spending can also be measured in per capita (per head) terms.

Growth in real national income.

Investment levels and the relationship between capital investment and national output.

Levels of savings and savings ratios.

Price levels and inflation.

Competitiveness of exports.

Levels and types of unemployment.

Employment levels and patterns of employment.

Trade deficits and surpluses with specific countries or the rest of the world.

Debt levels with other countries.

The proportion of debt to national income.

The terms of trade of a country.

The purchasing power of a country's currency.

Wider measures of human development, including literacy rates and health care provision. Such measures are included in the Human Development Index (HDI).

Measures of human poverty, including the Human Poverty Index (HPI).nnn
Performance Indicators
Examples of Performance Indicators
L6R - finish Q's
30th on performance indicators.

Performance indicators
Cover work.
Case study 6.4 Pg 155
Q1 + 2
Complete Q2 of the PI work. Hand in at the end of the lesson.
PI questions and short essay.
CPI & RPI Case study Questions
You have this lesson and homework to create a presentation on CPI & RPI.
Prezi or Powerpoint
Hand out to be completed by the class
Your turn to teach
Plan and research using phones and text book
First 20 Minutes
Once you've shown me a plan and some of research you are going to turn into a presentation you can go downstairs to the computer room.
What do they measure?
How are they created?
What is their purpose?
Why do they both exist?
Who uses them?
What is Weighting?
What is the average family?
List of products that are in the "baskets".

Index Numbers
Changes in real GDP and labor productivity are examples of economic data that are analyzed using indexes.
A base year is chosen. This is given the value of 100.
If the data increases the index number will rise above 100 and decrease of the data reduces.
E.g 105 = 5% rise from the base year.
95 = 5% fall from the base rate.
Two types of inflation

Benign inflation – resulting from technological changes
Malevolent inflation – resulting from changes in economic activity

Quantity Theory of Money


Latest Inflation Report - MPC

Lower cost push inflation – falling oil prices.
Other commodity prices also falling, such as metals, food.
Lower energy prices – gas and electricity
Low worldwide inflationary expectations. Europe is experiencing deflation and this is keeping inflation low.
Supermarket price wars, with big chains, such as Tesco and Sainsbury attempting to maintain market share from Pound Shops and discounters like Lidl
Wage growth still weak, despite early signs of some wage growth.
Negative output gap.

Causes of recent low-inflation


Inflation turns negative!!!!

transport: prices, overall, rose by 0.1% between July and August this year compared with
a larger rise of 0.8% between the same 2 months a year ago. Within transport, the largest
downward contribution came from motor fuels, with diesel prices falling by 6.2 pence per litre
this year compared with a fall of 2.1 pence per litre a year ago. Petrol prices also fell this year,
by 2.4 pence per litre compared with a fall of 1.8 pence per litre a year ago. There was a large
downward contribution from sea transport, with fares rising by less than a year ago. These
effects were partially offset by a small upward contribution from air fares, which rose by more
than a year ago, particularly on long-haul routes.
• clothing and footwear: prices, overall, rose by 1.5% between July and August this year
compared with a rise of 2.6% between the same 2 months a year ago. Prices of clothing and
footwear usually rise between July and August as autumn ranges start to enter the shops
following the summer sales season. The smaller rise this year follows a sales period in which
prices fell by less than a year ago. The downward contribution came from price movements
across a range of garments but particularly from women’s outerwear.
• recreation and culture: prices, overall, fell by 0.4% between July and August this year
compared with a fall of 0.1% a year ago. The downward contribution came from a range of
sectors, most notably books and cultural services.



Activity sheet

Calculating the price index

The following categories are weighted in measuring the CPI; decide on the weighting they should be given:
Food & non-alcoholic beverages
Alcohol & tobacco
Clothing & footwear
Housing & household services
Furniture & household goods
Recreation & culture
Restaurants & hotels
Miscellaneous goods & services



The CPI is a weighted price index used to measure the change in the prices of a typical ‘basket’ of goods and services.
Family Expenditure Survey – a representative monthly survey of UK household expenditure used to derive changes in the CPI

How are index numbers created?

5. Retail Price Index (RPI) – Used to be the official measure. Includes more factors such as mortgage interest payments.
Volatility means that it has been superseded by RPIJ

4. Core Inflation – Another measure of inflation seeks to strip away volatile factors such as food and commodity prices.
This includes a smaller basket of goods. But, it may be more accurate in showing underlying inflation.

3. CPIY – The CPI minus Indirect taxes.
It is useful for determining the underlying level of inflation ignoring tax increases which tend to just last for a year.

2. CPIH – CPIH It is based on CPI, plus it includes housing costs, such as mortgage interest payments.
Owner occupiers housing (OOH) account for 12% of the CPIH weighting.
Mortgage interest payments average 10% of household expenditure.

1. CPI
official measure. Based on the EU HICP (Harmonised index of consumer prices)
Includes taxes
Excludes mortgage interest payments and housing costs
Includes some financial services not included in RPI

Different Measures of Inflation

Candidates should have an understanding of how index numbers are calculated and used to measure changes in the price level. Although a detailed technical knowledge is not expected of indices such as the Retail Price Index (RPI) and Consumer Price Index (CPI), candidates should have an awareness of the underlying features, for example, the Family Expenditure Survey, the concept of the ‘average family’, the basket of goods and services, and weighting.


Quantity theory of money

The theory that increases in the money supply will lead to increases in INFLATION.

M x V = P x T (or MV=PY)
Need to know formula – and what it represents
Supports the views of Monetarists
Criticisms of the theory – could argue V is not constant, it varies as shown during the 1980s, where less emphasis was then placed on the money supply to control inflation
Difficulties in defining the money supply
Ability of supply to increase to meet rise in money supply

Cost-push inflation e.g.
Rise in cost of imported raw materials
Rising labour costs
Higher indirect taxes
Wage-price spirals
Expectations of inflation
Demand-pull inflation e.g.
Increased investment due to lower interest rates
Lower income tax rates lead to increased consumption
Economic boom in main trading partners

Causes of inflation

Different population groups experience different levels of inflation so not relevant for all e.g. Tobacco for non-smokers
Does not include house prices and also mortgage payments likely to be large chunk of annual spending
Doesn’t take into account improvements in quality

Limitations of the CPI

The following categories are weighted in measuring the CPI; decide on the weighting they should be given:
Food & non-alcoholic beverages (11%)
Alcohol & tobacco (4.3%)
Clothing & footwear (7%)
Housing & household services (12.8%)
Furniture & household goods (5.9%)
Health (2.5%)
Transport (14.9)
Communication (3.1%)
Recreation & culture (14.7%)
Education (2.6%)
Restaurants & hotels (12.1%)
Miscellaneous goods & services (9.1%)


The CPI is a weighted price index used to measure the change in the prices of a typical ‘basket’ of goods and services.

How are index numbers created?

Homework - Notes on Pg160-162.
Test yourself question on (7.1)- pg 165.
Research the British winner of this year economic nobel prize.
Due Thursday -
Due - Wednesday
17. What are the four macro economic objectives?
18. Draw a labeled circular flow of income diagram.


A rise in the price level causes a contraction of AD







General Price Level

The Aggregate Demand Curve (AD)

AD1 – AD2: Outward shift – will raise national output at all price levels






Real GDP

General Price Level

Shifts in the Aggregate Demand Curve (AD)

AD1 – AD2: Outward shift – will raise national output at all price levels

AD1 – AD3: Inward shift – will reduce national output at all price levels








Real GDP

General Price Level

Shifts in the Aggregate Demand Curve (AD)

Some factors affecting consumer confidence

Consumer confidence surveys measures a range of consumer attitudes, including forward expectations of the general economic situation and households’ financial positions, and views on making major household purchases.

Consumer Confidence

A fall in the price level causes an expansion of AD

A rise in the price level causes a contraction of AD







General Price Level

The Aggregate Demand Curve (AD)

AD = C+I+G+(X-M)
Austerity measures

Eco L6P
Content/Knowledge. - definitions - know your stuff. Use the correct terminology.
Application - data response questions. Use the case study/data provided.
Analysis = steps of implication. What are the economic consequences of your point.
Evaluation - justified judgement.
More steps of implication
Steps of implication
Your point
Economic consequence
Treat the examiner as if he knows "nuthin"
Must explain the why a consequence happens
Why your point is relevant and answers the question.
Q 1,2,6,9 & 10
Socio economic group
A- Lawyers, Drs
B - Teachers
C2 - Skilled manual
D- unskilled manual
E- Pensioner, unemployed
Explain why the macro objectives of price stability and low unemployment can conflict with one another.
8 marks.
Very Silly Fools Swallow Thick Chips
Geographical immobility of labour
Occupational immobility of labour

Using the book look up
1. Define - Fiscal and Monetary policy.
2. Give an example for each policy that would increase demand.
3. What is the change percentage change between year 1998 and 2004.

Pop Quiz
1998 - 92
1999 - 98
2000 - 100
2001 - 101
2002 - 105
2003 - 111
2004 - 112
4. Explain the difference between a lead and a lag indicator.
5. What is the formula for AD
Highlight which are injections and withdrawals.
6. A current account deficit of the UK's balance of payments means that generally....
7. Define investment.
8.How does an increase in investment lead to increased economic growth. explain the links - analyze.
9. Define consumption.
10.Define AD
11. What is G in AD and how does it lead to an increase in AD?
12. Draw an AD curve showing a reduction in AD.
13. List possible reasons why AD may have reduced.
Terminology - ensure you use economic terms - E.g Firms, Households, Goods and services.

Services - Exported
Consultancy/Accounting companies.
Examples -
Ernst & young
UK Trade Data
September 2015 – Trade bulletin from the ONS
•UK trade shows import and export activity and is a main contributor to the overall economic growth of the UK. All data are shown on a seasonally adjusted, balance of payments basis, at current prices unless otherwise stated.
•The UK’s deficit on trade in goods and services was estimated to have been £1.4 billion in September 2015, a narrowing of £1.6 billion from August 2015. The narrowing is attributed to trade in goods, where the deficit decreased from £10.8 billion in August 2015 to £9.4 billion in September 2015.
•Exports of goods increased by £0.6 billion to £24.0 billion in September 2015, this was attributed to an increase in chemicals of £0.6 billion. Imports of goods decreased by £0.9 billion to £33.3 billion over the same period, this was attributed to a decrease in unspecified goods of £1.0 billion.
•Despite the narrowing of the deficit on the month of September 2015, in quarter 3 (July to September) 2015, the UK’s deficit on trade in goods and services was estimated to have been £8.5 billion; widening by £5.1 billion when compared with quarter 2 (April to June) 2015.
•Between quarter 2 (April to June) 2015 and quarter 3 (July to September) 2015, the trade in goods deficit widened by £5.9 billion to £32.2 billion. The widening was as a result of a £6.0 billion decrease in exports to £70.1 billion, there were falls in exports of oil (£1.3 billion), chemicals (£1.1 billion) and finished manufactures (£1.7 billion). Over the same period imports decreased by £0.1 billion to £102.3 billion.
•Between quarter 2 (April to June) 2015 and quarter 3 (July to September) 2015, the trade in services surplus widened by £0.8 billion to £23.6 billion, as imports fell 2.4%.

From what parts of the world have contracts been won by UK manufacturing companies during October.
Has manufacturing employment increased or decreased?
Of the three "sectors" of the economy where does manufacturing rank in terms of employment?
Which EU country is famous for its manufacturing?
What led to a reduction in manufacturing in this country?
Downside risk is the financial risk associated with losses. That is, it is the risk of the actual return being below the expected return, or the uncertainty about the magnitude of that difference.
Downside risk
What effect does a rise in house prices have in savings?
How could the Government redistribute wealth from the rich to the poor and what impact would this have on savings?
If credit is readily available what impact does this have in consumption?
Why do people save less if the value of houses is increasing?
What causes "precautionary saving"?
Consumption V's Saving
What is "talking the economy up"?
To do list:
Complete and hand in questions 412-435 multiple choice.
On you Investment notes
Aggregate discretionary income levels for an economy will fluctuate over time, typically in line with business cycle activity. When economic output is strong (as measured by GDP or other gross measure), discretionary income levels tend to be high as well. If inflation occurs in the price of life's necessities, then discretionary income will fall, assuming that wages and taxes remain relatively constant.

Discretionary spending is an important part of a healthy economy - people will only spend money on things like travel, movies and consumer electronics if they have the funds to do so. Some people will use credit cards to purchase discretionary goods, but increasing personal debt is not the same as having discretionary income.

The accelerator effect occurs when an increase in national income leads to a greater percentage increase in investment – it occurs when the economy is close to capacity.

They have 5 machines costing £100 each. Each machine can produce 200 units.

Each year one machine becomes obsolete. This year demand increases by 20%. What does the firm have to do to in terms of investment?

What is the percentage increase in investment compared to a normal year?

The Accelerator Theory of investment
A type of good for which demand declines as the level of income or real GDP in the economy increases. This occurs when a good has more costly substitutes that see an increase in demand as the society's economy improves. An inferior good is the opposite of a normal good, which experiences an increase in demand along with increases in the income level.
Inferior good
The Multiplier
Purchasing power is the value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing power is important because, all else being equal, inflation decreases the amount of goods or services you would be able to purchase.
Purchasing power

AS - curve
Due to two microeconomic assumptions.
1. All firms want to maximize profit
2. in the short run the cost of producing more units increases as the firms produce more output.

Short run aggregate supply = SRAS
Curve A - employment will increase as demand for output increases. More workers are required to make more units. Expansionary
Employment and AD
Curve B - Employment reduces as firms make redundancies to reduce costs and therefore ensure survival at a time when demand and therefore revenue is falling. Contractionary
To be taken from these graphs -
SRAS - questions
1. Draw an SRAS curve - See Figure 7.12 on page 181.
2.Explain the reasoning in the shift in price level from P1 to P2.
3. Explain the shift along the SRAS curve in Figure 7.13 from AD1 to AD2.
4. At what stage does an increase in demand solely lead to inflation?
5.What assumption are all SRAS curves constructed under?
6.Draw a curve that shows an increase in AS.
7. What is consequence of this shift.
8. List and give realistic examples of the factors that can give a rightward shift of the SRAS curve.
9. Definition of "reflationary policies" Pg 271

Personal tax allowance - personal allowance is the threshold above which income tax is levied on an individual's income.

MEC- The MEC is the net rate of return that is expected from the purchase of additional capital. It is calculated as the profit that a firm is expected to earn considering the cost of inputs and the depreciation of capital

Wealth effect - The premise that when the value of stock portfolios rises due to escalating stock prices, investors feel more comfortable and secure about their wealth, causing them to spend more.
Folder Check Term 1
Technical progress - amazon - 3d printing




Enterprise -

Mobility of factors - labour, - ensure people can move to fulfill employment opportunities.

Productivity - labour productivity - ensuring labour productivity is high enough to attract inward investment FDI.

Peoples attitude of work - underemployment - Finland initiative ( universal basic income). Ensure benefits are designed to incentivize work.

Institutional structure of economy - efficiency of the banking, rule of law. How the country is govern allows for greater levels of productivity. Corruption is cited as an issue that is very detrimental to productivity.
Open book Pop Quiz
1. Draw a SRAS curve showing a leftward shift. What could have caused this?
2. Draw a LRAS that shows a reduction in production potential of the economy.
3. Draw Keynesian AS curve.
4. What diagram is associated with the LRAS curve.
5. Name 5 factors that would lead to a shift in LRAS
6. Explain what the LRAS is.
7. Name five factors that lead to a rightward shift of a SRAS curve.
8. Nominal national income =
9. MPC stands for?
10.What's the multiplier formula?
11. Name three threats to the UK economy in 2017.
12. What was the date of the last increase in interest rates the UK.
13. AD - name the components.
14. Name withdrawals and injections.
15. Two ways that AD would increase.
16. Two ways in which AD would decrease.
Economic Growth
Demand Side

Supply side
The Trend Growth Rate
Reduce budget deficit
Increase tax and keep Gov't spending the same
Decrease Gov't spending (Austerity) keep tax the same.
What is the Budget deficit?
How to reduce the budget deficit?
Consequences of reducing the budget deficit.
Withdrawals - increase
Fluctuations in AD
Supply-side factors
Speculative bubbles - http://www.tutor2u.net/economics/blog/as-macro-key-term-bubble
Political business cycle theory
Outside shocks hitting the economy
Changes in inventories - Besides investing in fixed capital, firms also invest in stocks/inventories of raw materials, and in stocks of finished goods. This is known as stock building or inventory investment. Despite accounting for less than 1% of GDP PA, swings in inventories are often the single biggest determinant of recession.
Marxists Explanation - Marxist economists suggest recession creates conditions in which stronger firms either take over weaker competitors, or buy at rock bottom prices the assets of competitors that have been forced out of business. Marxist analysis highlights that economic cycles are required to regenerate and therefore the survival of capitalism.
Multiplier /accelerator interaction - Keynesian economist suggest the interaction between the multiplier process and the accelerator. Thus the relationship between income and investment is one of mutual interaction; investment affects income (via the investment multiplier), which in turn affects investment demand (via the accelerator), and in this process employment and income fluctuate in a cyclical manner.
Climatic cycles - Stanley Jevons makes a link between the economic cycle and the solar cycle. Solar rays impacts on the quality of harvests, influencing the price of grain and therefore business confidence. Widely dismissed although has had a renaissance due to the El Nino being recognized.

Gov't spending reduced to reduce the size of the budget deficit. This will lead to the reduction in budgets of public sectors organizations which will lead to redundancies made. This will have contributed to the loss 33,000 public sector jobs.

Economic cycle measures

Real GDP - most common however other measures are also used. Such as:
Employment - this line often lags behind the output economic cycle and firms take time to react to the changing output in the economy.
Inflation - in the upswing excess demand will pull up the price level, this can be exacerbated by labour shortages leading to real wage increases.
Economic growth
Of the four macro objectives where would you place economic growth in priority order?
What is the main benefit of economic growth?

What are the costs of economic growth?
Environmental issues: - Developing countries

Other benefits include:
Look up the oil crisis and what impact it had upon the UK economy.
What date was it?
Who/what caused it.

Born out of this crisis was the environmentalist movement.
Lack of sustainability of the industrial way of life
Why is this the case? what is it about how we undertake economic growth that makes it unsustainable.
Expansion vs Stability
Three dilemmas
Exhaustion of finite resources.
World's population growth leading to mankind destroying itself through the weight of numbers
Pollution going beyond the world capacity to clean itself and regenerate.

Employment and Unemployment
Write down as many issues or pieces of terminology related to unemployment.

Geographical immobility of labour - workers unable or unwilling to move in search of work.
Occupational immobility of labour - Difference in skills prevent a move from one type of job to another.
Deindustrialisation - the decline of manufacturing industries, together with the coal industry.
Seasonal unemployment - casual unemployment arising in different seasons of the year. Prone in agricultural and tourist reliant localities.
Real wage theory of unemployment
Real wage - the purchasing power of the nominal wage. If inflation is greater than the nominal wage rate the real wage falls.
Real-wage unemployment - unemployment caused by real wages being stuck above the equilibrium real wage.
Expectations of inflation.
How do people behave when high levels of inflation are expected?

How do people behave when inflation is expected to fall?

What is "Inflation Psychology"
Winners and losers of inflation.
Note who benefits from inflation and why it is the case.
Concise notes of the 4 bullet points related to the costs of inflation.

Homework: Research and create a mini presentation (Powerpoint or prezi) with a single side of A4 worksheet/fact file on GDP. What it is, what does it measure, how is it worked out and what are it's weaknesses. Include UK figures from the last 2007 - 2016 - a graph would be useful.
Deadline Friday - 16th:
Read up on the Fed's decison regarding interest rates.
Who is the head of the Fed.
What is the current interest rate?
When is the next rate increase rate expected?
Why are they considering increasing it?
Explain the link between interest rates and inflation.

Research on your phone date and description of the winter of discontent - look at pictures.
What was the rate of inflation in 1979,89,99,09.
What were the interest rates for the dates above.
Level of unemployment rates for the dates above.
Place on your time line significant economic dates for the UK.
What is nationalisation and what governments implemented it on a significant scale?
What are general strikes?
When did we enter the EEC?
Oil crisis - how many have there been and when?
In what year and at what % did inflation peak.
Who was the most eminent free market economist?

October Assessment
Circular flow
Macro objectives
Performance indicators
Index numbers
Question types
Multiple choice
Data interpretation
10 marker

Interest rates reduced
Lowers cost of borrowing - encourages more borrowing
Trend growth rate - the rate at which output can grow, on a sustained basis, without putting upward or downward pressure on inflation. It reflects the annual average percentage increase in the productive capacity of the economy.
Draw and AD/AS diagram that shows the impact of a reduction in exports.
Defined as:
The relationship between a change in AD and the resulting usually larger change in national income.
Multiplier = Change in national income
Initial change in component of AD


The fraction of any increase in income that will be spent on domestic goods and services once taxes and spending on imported goods is taken into consideration.

E.g If they plan to spend 30p of every £1 extra of income the MPC is 0.3.
Multiplier Formula

K= 1
1-0.3 = 0.7
Q3 -
Fiscal dividend - Market failure - fixes - Bailouts. RBS - how of RBS do tax payers own.
Virtuous Cycle
Benefits of economic growth

The real wage theory of unemployment
Pg 204 - define
real wages
Real wage unemployment
Draw Fig 8.13
Correctly Diagnosing causes of inflation
UK gov't target for inflation is 2%

To effectively manage inflation it is vital to recognise which type of inflation is at work.
Until recently the general assumption was that UK inflation was caused by an excess of demand (.............. ...............). Therefore the BOE was very effective in controlling inflation by using ............. ............. Inflation was kept within the governments target range for almost every month between 1997 and 2007 by manipulating .............. ..............
The fact that cost push inflation was almost non existent during this period was explained by the success the supply side policies implemented during the 1980s and 1990s. These included improved labour market flexibility by shattering the power and influence of the ............ ......... Globalisation also contributed through reducing the price of ............... manufactured goods.
2007- 2014 - the price of commodities such as copper and wheat increased along with other key inputs such as imported energy (Oil and gas) went up significantly leading to cost push inflation.
Interest rates can be used to influence the exchange rate and therefore have an influence on cost push inflation. Raising interest rates can strengthen the exchange rate and therefore reduce the costs of importing goods. However on the whole the most effective way to control cost push inflation is through supply side policies.
Monetary policy and in particular interest rates are the most effective method to control demand pull inflation.
Monetarist Inflation
What prime minister and President were advocates of this type of economics.
Define monetarist
Quantity theory of money
Name the big players in this school of economics.
Equation + explanation
Ensure you the study tips on pg 213 are included.
The effects of expectations on changes in the price level.
Expectations of what is likely to happen in the future has a big bearing on how people act in the present. This is a component of the monetarist theory of inflation. Milton Friedman was one of the first economists to highlight how peoples expectations of future rate of inflation has a bearing upon the current level of inflation.
If inflation is expected to be high next year how will people act today?

"Get their retaliation in first" - workers and firms try to ensure income or profits are not eroded by the expected inflation.
Make notes on Inflationary Psychology using investopedia.
Why do british home owners and the government want inflation?
This inflationary psychology was countered during 1997-2007 by the government being able to convince the population that inflation would remain around the target of .......... This allowed them to manage inflation. although inflation was dormant rather dead and it was resurrected by the financial crisis in 2008 which led to a period of inflation until 2011.

Supply side Fiscal policy
This relates to changing the G & T to incentivizes behaviour that benefits the economy. This will therefore lead to an outward shift in LRAS as the factors of production are increased or improved. This leads to a reduction in firms costs and therefore an outward shift of the SRAS.
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