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A-Level Economics Flashcards: Macroeconomics

A-Level Economics — Macroeconomics Flashcards

20 flashcards with spaced repetition. Press Space to flip, rate 1-4.

What These Flashcards Cover

These flashcards test your understanding of the economy as a whole. You should be able to explain key macroeconomic indicators, evaluate policy tools, and analyse the relationships between growth, inflation, unemployment, and the balance of payments.

Key areas:

  • Gross Domestic Product (GDP): The total market value of all final goods and services produced within a country in a given time period. Real GDP is adjusted for inflation; nominal GDP is not. GDP per capita = GDP / population. Economic growth is an increase in real GDP.
  • Inflation: A sustained increase in the general price level. Measured by CPI (Consumer Prices Index) or RPI (Retail Prices Index). CPI uses a weighted basket of goods. Causes: demand-pull (excess demand), cost-push (rising production costs). Effects: erodes purchasing power, redistributes income from creditors to debtors.
  • Unemployment: The number of people actively seeking work but unable to find it. Types: frictional (between jobs), structural (mismatch of skills), cyclical (due to recession), seasonal. The labour force participation rate = employed + unemployed as a percentage of the working-age population. The natural rate of unemployment is the rate when the economy is at full employment.
  • Fiscal Policy: Government spending and taxation. Expansionary fiscal policy (increased spending or reduced taxes) increases aggregate demand. Contractionary fiscal policy reduces AD. The government budget deficit = spending - revenue. National debt is the total accumulated borrowing.
  • Monetary Policy: Interest rate setting by the central bank. Lower interest rates reduce the cost of borrowing, increasing consumption and investment. Higher rates reduce AD. The money supply can also be adjusted through quantitative easing (buying government bonds to inject money into the economy).
  • Supply-Side Policies: Aim to increase the economy’s productive capacity. Examples: education and training (improves human capital), deregulation (reduces costs), tax incentives (encourages work and investment), privatisation (improves efficiency). Supply-side policies shift the LRAS curve to the right.
  • International Trade: Comparative advantage: countries should specialise in goods they can produce at a lower opportunity cost. Free trade benefits both parties but can harm domestic industries. Protectionism: tariffs, quotas, and subsidies to protect domestic producers. The balance of payments records all international transactions.
  • Exchange Rates: The price of one currency in terms of another. Fixed exchange rates are set by the government; floating exchange rates are determined by market forces. Appreciation makes exports more expensive and imports cheaper. Depreciation has the opposite effect.

Intuition

Think of the economy as a giant circular flow. Households provide labour to firms and receive wages. Firms produce goods and households buy them. The government takes some of this flow (taxes) and puts some back (spending). The central bank controls how fast the flow moves (interest rates). Trade connects this flow to other countries’ flows.

GDP is like the economy’s scorecard. It tells you how much the economy produced. But like a scorecard, it doesn’t tell you how the points were scored (who benefited) or what it cost (environmental damage, inequality).

Common Pitfalls

  1. Confusing GDP with GDP per capita. A country can have a high total GDP but a low GDP per capita if it has a large population. China has a higher total GDP than Luxembourg, but Luxembourg has a much higher GDP per capita.
  2. Confusing demand-pull and cost-push inflation. Demand-pull: too much money chasing too few goods (AD increases). Cost-push: rising costs force prices up (AS decreases). The causes and policy responses are different.
  3. Assuming lower unemployment is always better. Frictional unemployment is natural and healthy — it means people are looking for better jobs. Zero unemployment would mean no labour mobility and could indicate a dysfunctional economy.
  4. Misunderstanding the Phillips Curve. The short-run Phillips Curve suggests an inverse relationship between inflation and unemployment. But in the long run, this trade-off disappears (vertical LRPC at the natural rate of unemployment).

Cross-References