Investment, Real GDP, Aggregate Demand and the Bank of England

1. An investment is a purchase involving goods that have an effect over a period of time. The investment is made on certain good or company. In the long term this results in future production and profit for the investor. E.g. I may invest in a large supply of ingredients for a recipe used in a pie business. The goods bought in the investment will be used to make the pies which would then be sold at my shop.

Real GDP is the gross domestic product that accounts for any recent changes in price levels of goods in the country. This makes for a more accurate rate of GDP. E.g. I have £1 million pounds in 2012 but because of an inflation in 2008 which was the base year, I could have a value of much less money. The real GDP could go down to £750,000. Real GDP includes changes in inflation whereas normal GDP does not.

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Aggregate Demand is affected by the total sum of consumer goods and services (consumption and spending costs), our total spending in the economy e.g. individuals and governments and businesses spend and invest money in goods and services. . It is the total price of these over a given period of time. E.g. an aggregate sum of services in the UK would be the total of the income acquired from these services.

The Bank of England is the central bank of England. Money for England is minted here. It controls the issuing of bank notes in England and Wales.

Discuss a decline in GDP and the effect it has on unemployment

1. A decline in GDP rates usually results in unemployment. This is because the economy is not doing as well as it should have done. When the economic activity in a country decreases because of GDP it usually means that money has been lost in the economy. With less GDP, government spending will decrease, companies like the NHS who rely largely on the high government spending will suffer and will have to cut more jobs as the GDP is less and the government have less money to spend. There is a common link between unemployment rates and GDP decrease, it is known as Okun’s law. This theory states that if there is an approximate decrease in GDP by 1%, there will be an approximate increase in unemployment by 2%.

Name 3 factors that affect the level of imports in the UK:

1. 3 factors that affect the level of imports in the UK:

1. Exchange Rate; for the UK, this is the value of the English pound in other countries e.g. the £1 converts to 1.2513 Euro. If the exchange rate increases so that the English pound became stronger, the value of the pound in other countries will increase therefore the country can increase its imports due to its higher value of money in foreign currency. If the pound became decreased in value, we could buy fewer goods because our money is worth less.

2. Transportation Costs; this is the cost of moving goods from one place to another for imports and exports this is a cost for international travel of goods. E.g. the UK would have to pay for the transportation costs of fruits on a plane and oil on a ship if they were purchasing these items. If these costs go up and the UK cannot afford them, the UK would either have to seek an offer from another supplier, produce its own goods of that sort, borrow money off another country or stop that import to the country.

3. Necessity; if a good is highly sought after it will be highly imported e.g. the English population eats many bananas therefore it is imported and a basic necessity to the UK’s population. However if banana’s decreased in demand which could be down to a number of reasons e.g. a pandemic of ecoli that could affect banana’s; because of the health risk, the demand for banana’s in the UK will decrease dramatically and therefore imports would decrease.