The Relationship between the Exchange Rate and the Interest Rate If the UK’s exchange rate rises, export prices in terms of foreign currencies will rise Demand for exports will therefore fall, reducing AD This lower AD will reduce inflationary pressure This lower...
Determination of Exchange Rates An exchange rate is the price of one currency in terms of another. Most countries’ exchange rates are determined by the forces of supply and demand. If demand for a country’s currency rises, this will increase its exchange rate. A rise...
GDP and Real GDP Nominal GDP is output measured in current prices, and hence not adjusted for inflation Economists prefer Real GDP, as this is a more accurate figure and takes inflation into account, and so can be used to compare between years It is calculated by (GDP...
The Benefits of Economic Growth The main benefit of economic growth is that their is likely to be an increase in people’s living standards If real GDP per head rises, the population is likely to enjoy more goods and services. Economy growth allows poverty to be...
Measuring Economic Growth Economic growth is usually measured by the annual percentage change in real GDP Due to the circular flow of income, real GDP can be calculated by either totalling output, income, or expenditure. Economic growth can therefore be measured by...
The Effect of a Change in the Exchange rate on Export and Import Prices A fall in the exchange rate – called a depreciation – will reduce the price of exports in terms of foreign currencies So a foreign country could buy UK exports at a cheaper rate if the UK exchange...
The Structure of the Current Account of the Balance of Payments The main elements of the balance of payments are: the current account, the capital and financial accounts, and net errors and omissions The current account is the most important, and includes things like...
Changes in the Exchange Rate and the Macroeconomy A fall in the exchange rate is likely to improve the currency account position of the balance of payments. A fall in the price of exports will result in a rise in export revenue if demand is elastic A lower exchange...
The Causes of Economic Growth In the short run, if an economy’s operating with spare capacity, economic growth can occur due to an increase of AD This can be things like consumption lead growth, export lead growth, etc. Net investment has a different effect on...
The Causes of Unemployment The causes of unemployment can be examined from the demand side and the supply side. Cyclical unemployment is unemployment arising from a lack of aggregate demand This can be represented on a diagram by YFe (output when full employment)...
The Causes of Inflation Inflation can arise from both the demand side and the supply side Demand pull inflation is when increases in the price level are caused by increases in aggregate demand When the economy is producing at or near its potential, an increase in AD...
The Causes of a Surplus on the Current Account of the Balance of Payments This occurs when a country’s revenue abroad is greater than its expenditure abroad. A surplus on trade in goods on services could occur in several different ways, like the state of the economy...
The Causes of a Deficit on the Current Account of the Balance of Payments This occurs when the country’s expenditure abroad exceeds its revenue from abroad. This can be because the country’s inhabitants have spent more on goods and services abroad than foreigners have...
The Consequences of Unemployment Unemployment can have consequences for the economy, the unemployed, and other economies Lost Output Of the unemployed were in work, then the country’s output would increase Increasing output is likely to increase living standards, as...
The Consequences of Inflation Fall in the Value of Money Whether a household’s purchasing power actually decreases, however, depends on whether their income rises above the rate of inflation Menu Costs These are the costs of changing prices due to inflation...
The Benefits of Inflation If an economy is experiencing demand-pull inflation, then higher AD and a steady rise in the price level may encourage firms to increase output Psychologically, workers will like an increase in their wages, even if it has no real impact...
Deflation Deflation arising from the supply side can be beneficial A fall in the price level as a result of a decrease in the costs of production will enable consumers to buy more goods and services, and increase the country’s international competitiveness. Deflation...
The Significance of a Current Account Deficit How significant a current account deficit is depends on Its size and duration g. a deficit of 5% for a couple of months won’t be as significant as a deficit of 2% of real GDP for a couple of years. The cause of it A...
Key Performance Indicators Economic Growth Short run – When an economy increases its output (real GDP) This is unsustainable as the productive potential must increase too, for if it doesn’t, the economy will reach supply constraints (slope of AS curve) Long run – an...
The Consequences of a Deficit and a Surplus on the Current Account of the Balance of Payments A deficit means that a country is consuming more than it is producing. A deficit will reduce AD, as M (of C + G+ I + (X – M)) is increasing. This will lower the economy’s...
Current Trends Between 1992 and 2007, the UK economy has experienced: Continuous economic growth Low unemployment Low and stable inflation This can be attributed to: successful monetary policy, a high value of the pound, and increased global pressure on firms to keep...
The Significance of Inflation The impact of inflation on an economy will depend on The rate of inflation The cause of the inflation Whether it is fluctuating Whether it was correctly anticipated Its rate relative to that of other countries. A low rate of inflation is...
Objectives of Government Economic Policy Economic Growth Governments want to achieve economic growth, due to the benefits it brings (increased living standards) However, the growth has to be sustainable, so as to avoid harmful fluctuations in the economy. Sustainable...
The Costs of Economic Growth If an economy is producing on its productive potential, then the only way for it to increase output is to switch from producing consumer goods to capital goods. In the short run, this means less consumer goods will be made, but in the long...