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Edexcel AS Economics (New Spec) Unit 2 - 23rd May 2016

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How does inflation reduce competitiveness?
Original post by Bigbosshead
How does inflation reduce competitiveness?


Inflation = increase value of the pound. This means that exports are more expensive so demand for exports fall. This decreases net trade leading to a fall in AD.
However you can evaluate that it depends on the relative inflation in other countries!

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(edited 7 years ago)
What is the difference between GNP and GNI?
Also why is it hard to compare GDP with other countries?


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But doesn't the value of the pound following inflation not actually increase in real terms?
Original post by Bruce267099
Could someone explain how the state of the world economy affects net trade.


Bad state of world economy = poor overseas confidence = low exports (e.g China suffered slow growth due to recession in Europe)

If the UK on the other hand experiences a poor state of economy, whilst world economy is healthy, our imports decrease and exports increase
Original post by Bruce267099
Could someone explain how the state of the world economy affects net trade.


This is to do with interconnectedness. If there is a recession overall demand for exports will fall. A country with export led growth eg. China will suffer.


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GDP per capita is used to compare the national income of different countries, but due to the different purchasing power of the currencies in purchasing a basket of goods and services within the country, it is, to some extent, inaccurate.
Original post by Bigbosshead
But doesn't the value of the pound following inflation not actually increase in real terms?


No if there is inflation, the value of the currency falls.

Maybe this picture from Hyperinflation Germany will illustrate this

Original post by Bigbosshead
But doesn't the value of the pound following inflation not actually increase in real terms?


Inflation means increase in general price level. Therefore the pound is less competitive because prices increase


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Original post by Bigbosshead
GDP per capita is used to compare the national income of different countries, but due to the different purchasing power of the currencies in purchasing a basket of goods and services within the country, it is, to some extent, inaccurate.


Any last minute predictions for tomorrow's paper. I need to do well in economics so that I can drop my third science. :s-smilie:
Original post by _cryinglightning
What is the difference between GNP and GNI?
Also why is it hard to compare GDP with other countries?


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GNP is gross national product: it is the value of goods and services produced in addition to the net income from abroad (such as Dividends or profits)

GNI is exactly the same, except it is based upon the national income. (GDP + net income)

(O = E = Y) So GNP (output) is commonly regarded as the same as GNI (income (Y))

GDP on the other hand does not include net incomes from abroad

For example, Ireland has a lot of international firms. This profit is mostly leaked to the origin of these international firms. As a result Ireland has negative net income. Therefore it is expected that GDP is higher than GNI

The opposite can be said for a country such as Japan which receives this income from it's firms operating in other countries.
(edited 7 years ago)
predictions for unit 1 were completely off id suggest people just go over everything lol
Original post by _cryinglightning
Inflation means increase in general price level. Therefore the pound is less competitive because prices increase


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Yes, this depends if other countries are also experiencing inflation. If inflation of 2 countries is increasing at the same rate, the exchange rate does not change
Original post by _cryinglightning
What is the difference between GNP and GNI?
Also why is it hard to compare GDP with other countries?


Posted from TSR Mobile


It is hard to compared GDP between countries:

Population sizes differ: share of GDP different

Depends on distribution of income: i.e may have high GDP: this may not be fairly distributed

Purchasing Power of currencies vary: GDP should be adjusted to account for the different living costs in each country

Rate of inflation differs between countries (therefore GDP should be adjusted by making it Real)

Original post by harryleavey
Yes we do. Take a look at the specification: page 12
http://qualifications.pearson.com/content/dam/pdf/A%20Level/economics-a/2015/specification-and-sample-assessment-materials/PearsonEdexcel-AS-EconomicsA-AccreditedSpec-August14.pdf

a) Rates of change of real GDP as a measure of economic growth

Ignore the attached image


That just mean how the CPI works (two surveys on commonly bought foods and then survey on prices), you don't need to know the equation/formula.
Original post by Hot&SpicyChicken
That just mean how the CPI works (two surveys on commonly bought foods and then survey on prices), you don't need to know the equation/formula.


Nope, that is another part of the specification (2.1.2)
It doesn't really take very long to learn the formula anyway. What is the harm?
Similar questions are in the textbook and on past papers.

You will be frustrated if this kind of question comes up.

The formula also helps to understand that even if nominal GDP is increasing, this may not signal economic growth if inflation is increasing at a faster rate.
Similarly, if GDP is increasing, but population is increasing at a faster rate, living standards are not increasing.
(edited 7 years ago)
your best bet for an improvement of the current account would be a depreciation of the pound, this means the £ is worth less, making it cheaper for foreigners to buy, and more expensive to import, this theoretically would increase the competitiveness and make X>M, improving the trade deficit
Original post by harryleavey
Nope, that is another part of the specification (2.1.2)
It doesn't really take very long to learn the formula anyway. What is the harm?
Similar questions are in the textbook and on past papers.

You will be frustrated if this kind of question comes up.

The formula also helps to understand that even if nominal GDP is increasing, this may not signal economic growth if inflation is increasing at a faster rate.
Similarly, if GDP is increasing, but population is increasing at a faster rate, living standards are not increasing.


Alright thanks! I will learn the formula!
If inflation means that the value of currency decreases, and the price of goods increase, won't these effects cancel each other out in terms of net exports? [Obvs not exactly, but the go in opposite directions, no?]
I mean because the weakening of the pound means that UK goods become more competitive on an international market and inflation means that they become more pricey.
I'm confused.


Do we actually need to know this?

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