Yr 1 Macro Economics The UK economy performance and policies Summer Homework BOOKLET TRANSFORM The content of the lessons into notes in your own words. PRACTISE Applying this content to exam questions. RECALL Generate a verbal or visual mnemonic that would prompt recall of the content. Use this booklet to get your Year 1 revision notes in order and to practise exam technique. Use your summer efficiently and be productive! Your class teacher will be reviewing your notes within the 1st week of term in September There are a number of methods you can use to transform your notes, for example, create a mind maps, revision cards, revision notes - use what works for you. 1. Use the revision guide and the PLC to supplement your class notes 2. Use this link for any class notes you may have missed http://www.physicsandmathstutor.com/economics-revision/a-level-edexcel-a/ 3. Review the tutorials on Econplusdal: He is brilliant! https://www.youtube.com/watch?list=plweicfrebuydlalppnrtzpwgbasflf4lu&v=_d myohphg0k 4. For exam technique watch these Econplusdal videos https://www.youtube.com/watch?list=plweicfrebuycuuestjg3rlfnyynr_6asm&v=l qup1xaqfwg 5.
TRANSFORM 1 1.1 Macro Topic 2.1 Measures of economic performance 2.1.1 Economic growth 2.1.2 Inflationt content What students need to learn: 2.1.3 Employment and unemployment 2.1.4 Balance of payments 2.2 Aggregate demand (AD) 2.2.1 The characteristics of AD 2.2.2 Consumption (C) 2.2.3 Investment (I) 2.2.4 Government expenditure (G) 2.2.5 Net trade (X-M) 2.3 Aggregate supply (AS) 2.3.1 The characteristics of AS 2.3.2 Short-run AS 2.3.3 Long-run AS 2.4 National income 2.4.1 National income 2.4.2 Injections and withdrawals 2.4.3 Equilibrium levels of real national output 2.4.4 The multiplier 2.5 Economic growth 2.5.1 Causes of growth 2.5.2 Output gaps 2.5.3 Trade (business) cycle 2.5.4 The impact of economic growth 2.6 Macroeconomic objectives and policies 2.6.1 Possible macroeconomic objectives 2.6.2 Demand-side policies 2.6.3 Supply-side policies 2.6.4 Conflicts and tradeoffs between objectives and policies Score1-5 before summer task Score1-5 after summer task Give yourself a score from 1-5 in terms of confidence on each of these topics. 1 being exam ready and 5 not confident at all. Anything 3 or below should trigger attendance at the intervention session with this as a key topic to cover. Use the summer to transform your notes!
PRACTISE PRACTISE Context How can you read purposefully? Read the following article and highlight any topics from Theme 2 which you think could be used. UK Economic Forecast The Q2 2017 ICAEW Economic Forecast, is based on the views of those running UK plc: ICAEW Chartered Accountants working in businesses of all types, across every economic sector and in all regions of the UK, surveyed through the quarterly ICAEW Business Confidence Monitor (BCM). Following an inflation-induced slowdown in the first three months of 2017, economic activity has strengthened a little in Q2. The business confidence index looks positive for the first time since before the EU referendum and there has been strong output data reported for the manufacturing sector. That said, consumers will face challenges for the remainder of 2017 thanks to falling real wages, while business investment remains constrained by domestic political uncertainty and upcoming Brexit negotiations. Q2 Key findings: The economy is forecast to grow by 1.7% in 2017. GDP growth slowed sharply from Q4 2016 to Q1 2017 (the 0.2% reported in the first three months of this year being the slowest increase since 2014). We expect GDP growth to rebound a little in the remainder of 2017, with exports playing a greater role in driving growth than in previous years. We have nudged up our forecast for GDP growth in 2017, from 1.6% in our last report to 1.7% in this edition. Weaker business investment in 2017, with potential for faster rebound. Investment recovered a little in Q1 2017, but we continue to forecast a modest fall for the year. However, firms financial positions and profit margins remain good, and borrowing costs will remain low for quite some time. Given the uncertain domestic political outlook and difficult Brexit negotiations to come, firms are likely to exercise restraint in their capital spending. Labour market to remain tight. Recent labour market data suggests the degree of spare capacity remains historically low, while BCM evidence shows firms expect to continue to create jobs in the year ahead. At just 0.7% for the year, the rate of private
sector employment growth will be the slowest since 2012. Given the continued growth in working-age population, this rate of job creation will be just enough to stabilise the unemployment rate close to the current reading. Real income losses for households. Weaker growth in demand for workers, along with upward pressure on non-wage labour costs faced by firms, suggest that wage growth will remain around 2% in 2017. With the Bank of England expecting inflation to remain close to 3% for the year, this will mean real income losses for households in 2017. Long-term fiscal risks still not being tackled. The last fiscal year delivered the smallest budget deficit in cash and GDP terms for almost ten years. But early evidence for 2017-18 suggests that the slowing economy is hurting the UK s fiscal position. The election campaign has demonstrated that no consensus exists on how to tackle longerterm risks to the public finances.
Use the exam questions and generic mark schemes to help you develop your knowledge into skill. You need to Know, Understand, Apply, Analyse, Discuss and Evaluate.
Questions are on the next page
(a) With reference to Figure 1, explain what has happened to real annual business investment since 2008. (4) (b) With reference to Figure 2, explain the likely effect of an appreciation of the British pound ( ) against the US dollar ($) on the volume of UK imports from, and UK exports to, the USA. (5) (c) With reference to Extract A, explain two reasons why consumer spending rose in 2013. (6) (d) Assess the importance of interest rates in determining the level of business investment in the UK. (10) (e) Discuss the likely impact of both a lack of new investment and an appreciation of the British pound ( ) on inflationary pressures in the UK (Extract A line 36). (15) (f) Evaluate whether the UK government should focus on achieving economic growth as its key macroeconomic objective. (20) AND (g) Evaluate the use of monetary policy to achieve the UK s macroeconomic objectives. (20)
After you complete each question self-mark it and make improvements with the green pen of reflection.
RECALL STRATEGIES RECALL Jot down all you can recall from each of these topic areas and compare to the chart beneath AGGREGATE DEMAND SIDE ECONOMIC GROWTH THE OUTPUT GAP DEMAND POLICIES LOW UNEMPLOYMENT OTHER OBJECTIVES AGGREGATE SUPPLY SUPPLY SIDE POLICIES LOW AND STABLE INFLATION (2%) EXCHANGE RATES CIRCULAR FLOW OF INCOME BALANCE OF PAYMENTS
AGGREGATE DEMAND AD = C+I+G+(X- M) C = consumer spending Determined by interest rates, confidence, MPC, income tax, house prices (wealth effect). I = Investment spending Determined by interest rates, confidence, corporation tax, profitability, FTSE (wealth effect). G = Government Spending Determined by tax revenues (economic cycle), priorities e.g. war, policy commitments. X = Export revenue Determined by price factors e.g. exchange rate, inflation, wages and non price factors e.g. quality. M = import expenditure Determined by price factors e.g. exchange rate, inflation, wages and non price factors e.g. quality AGGREGATE SUPPLY AS measures the total quantity of goods and services produced by an economy over a given period of time. It is affected by: Education & training of staff, Wages, Input prices, Corporation DEMAND SIDE POLICIES Fiscal Policy The use of Government Spending (G) and taxation (T) to affect the position of the AD curve. Contractionary: Cut G, Increase T Expansionary: Increase G, Cut T Monetary Policy The use of interest rates, exchange rates and the money supply to affect the position of the AD curve. Contractionary: Increase IR, C & I fall due to increase cost of borrowing, AD shifts left. Expansionary: Cut IR, C & I increase due to the cheaper cost of borrowing, AD shifts right. IR time lag is approx 18-24 months. SUPPLY SIDE POLICIES These are intended to shift the AS curve right in order to stimulate output and reduce inflationary pressure.they include: Improving education (time lag), Lowering corporation tax (op cost), Subsidies (op cost), Reducing trade union power (TU ECONOMIC GROWTH Economic growth is the long term expansion of the productive potential of the economy. It is measured by an annual % increase in real (adjusted for inflation) GDP. Causes: right shift in AD, right shift in AS. Benefits: average incomes will increase lifting some out of poverty, fall in unemployment, fiscal boost, confidence C and I. Problems: Inflation and environmental issues (to evaluate both AS shift and Kuznets) LOW UNEMPLOYMENT The number of people willing and able to work that are unable to find a job despite an active search for one. Measured by the Claimant Count and the Labour Force Survey. LFS is greater as it includes 16-18, married women and those on sick benefits. Causes: cyclical, structural, frictional, seasonal, technical. Problems: Fiscal drain, output falls, fall in living standards, social costs. LOW AND STABLE INFLATION (2%) An increase in the average price level over one year. Measured by CPI and RPI. Mortgage interest payments are excluded from RPIX and CPI. Causes: demand pull, cost push, wage price spiral. Problems: Fixed incomes lose out or those who can t get higher wages, THE OUTPUT GAP A negative output gap is the difference between actual output (where AD=AS) and potential output (where AS is vertical) - BUST. Anywhere on the vertical part of the AS curve could represent a positive output gap - BOOM. This is a useful concept for evaluation. If there is a large negative output gap, any demand-side increase would not be inflationary. The output gap can be referred to as spare capacity. OTHER OBJECTIVES Distribution of income. Using taxes and transfer payments (benefits) to alleviate poverty and redistribute wealth. Benefits: Fairer and less long term issues. Problems: Disincentive effects. Fiscal deficit Environmental concerns. Achieving sustainable growth. Benefits: Long-term sustainability. Problems: Could hold back economic growth and lead to unemployment. EXCHANGE RATES The price of one currency in terms of another. Determined by the supply and demand of a country s currency. S strong P pound I imports C cheap E exports D dear Strong pound worsens the BofP. Weak pound improves it.
tax, Subsidies, Trade union power, Population, R&D, Productivity. membership low so limited impact), Encourage R&D through subsidies (op cost). international competitiveness suffers, uncertainty leading to a lack of C and I, Savers lose (but borrowers gain), shoe leather costs, menu costs. CIRCULAR FLOW OF INCOME is a model that charts the flows of money between firms, households, the government, banks and the rest of the world. Injections: G, I, X. Withdrawals: S, T, X. MULTIPLIER: Injections into the circular flow lead to further rounds of spending and as a result, the initial change in AD can have a greater final impact. (This can be used to evaluate the effects of injections e.g. G, I and X). BALANCE OF PAYMENTS The BofP records all the financial transactions that are made between the UK with the rest of the World. The Current Account measures: Balance of Trade in goods and services + transfer payments + income from foreign investments. There is a deficit on the goods account and a surplus on the services account. Cause of a deficit: strong UK demand, high YED, strong ER, uncompetitive exports. Problems: Confidence falls (C&I), negative multiplier, fall in AD (output and employment), however inflationary pressure falls.