Lecture Notes: Key Economic Equations and Concepts for AQA and OCR Students

Introduction

• Importance of equations and formulas in multiple-choice questions.
• Emphasis on watching previous videos on formulas, equations, and conditions for micro and macroeconomics.

Multiplier Questions

• Equations Needed:
  • Multiplier = 1 / (1 - Marginal Propensity to Consume (MPC))
  • Change in National Income = Initial Injection x Multiplier
• Example Problem:
  • Initial injection of £2 billion results in £5 billion increase in national income.
  • Find MPC: Rearrange to find Multiplier = 5 / 2 = 2.5.
  • Multiplier = 1 / (1 - MPC) implies 1 / 2.5 = 0.4.
  • Solving gives MPC = 0.6.

Index Numbers

• Use in Growth and Output Gap Questions:
  • Base year index set at 100.
  • Example with potential growth of 6% per year and actual growth figures.
  • Calculate output gaps using index numbers.
  • In 2021 and 2022, negative output gaps as actual growth is less than potential growth.

Real GDP Equation

• Equation Needed: Real GDP = (Nominal GDP / Price Index) x 100
• Example Problem: Using percentage changes and index numbers to find real GDP growth.
• Steps: For various scenarios:
  • Convert percentage changes into index numbers.
  • Use the formula to find real GDP and determine its correctness.

Comparative Advantage

• Concepts:
  • Absolute Advantage: Ability to produce more of a good with the same resources.
  • Comparative Advantage: Lower opportunity cost in production.
• Approach:
  • Create tables to calculate opportunity costs for producing coffee and tea for different countries.
  • Example Problem:
    • Country X has a comparative advantage in coffee production.
    • Country Y has a comparative advantage in tea production.

Conclusion

• Importance of understanding and applying these concepts and formulas for success in exams.
• Encouragement to review key formulas, equations, and conditions videos for comprehensive understanding.