2.1 economic performance Flashcards
what is gross domestic product
- the standard measure of output, which allows us to compare countries
- it is the total value of goods and services produced in a country within a year
explain the difference between Real and Nominal GDP, giving an example where we might want to use each
- real GDP strips out the effects of inflation whilst nominal GDP does not
- real values can be described as the volume of national income i.e. the size of the basket of goods, whilst nominal values represent the value of the national income i.e. the monetary cost of this basket of goods
explain the difference between total and per capita GDP, giving an example where we might want to use each
- total GDP represents the overall GDP for the country whilst GDP per capita is the total GDP divided by the number of people in a country
explain the difference between value and volume of, for example, exports
value of national income - is its monetary value at the prices of the day
volume - is national income adjusted for inflation and is expressed either as index number or in money terms
explain the difference between GNP and GNI
GNP - value of goods/services over a period of time through labour or property supplied by citizens of a country both domestically and overseas
GNI - value of goods/services produced by a country over time plus net overseas intrest payments and dividends
why must we be careful when comparing GDP across different countries?
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why must we be careful when comparing GDP over time?
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what is meant by ‘Purchasing Power Parity’?
an exchange rate of one currency for another which compares how much a typical basket of goods in the country costs compared to one in another country
why might PPP be useful?
takes into account the cost of living so it helps us better compare living standards
what is economic growth?
an increase in the long term productive potential of the economy; an increase in the amount of goods/services that are produced
how can inaccuracies of data be a problem when comparing standards of living
- some countries are in efficient at collecting or calculationg data
- there is a ‘hidden’ or ‘black ‘ market in which peoplle work to avoid declaring their income
- GDP does not take into account home-produced services
- methods used to calculate GDP will change over time
- errors in calculating the inflation rate means real GDP will be slightly inaccurate
how can inequalities be a problem when comparing standards of living
- an increase in GDP may be due to a growth in income of just one group of people and so therefore a growth in the NI may not increase living standards everywhere
- income distribution changes over time and varies between countries so makes comparisons difficult
how can the quality of goods and services be a problem when comparing standards of living
- the quality of goods and services is much higher than those fifty years ago, but this is not necessarily reflected in the real price of these goods and services
- living standards may have increased more than GDP would suggest since the quality of goods and services has improved greatly
- improved technology may allow prices to fall, suggesting falling living standards, when this is not the case
how can comparing different currencies be a problem when comparing standards of living
- there are issues over which unit should be used to compare figures: they are usually converted into US dollars because of the size of the American economy
- some people argue that Purchasing Power Parity should be used to take into account the impact of differences in the cost of living in different countries
how can spending be a problem when comparing standards of living
- some types of expenditure, such as defence, does not increase standard of living but will increase GDP
- for example, the GDP of the UK was higher during the Second World War than in the 1930s because a lot of money was spent on defence which increased GDP but it is difficult to argue that standard of living was higher in the Second World War
- this therefore makes comparisons difficult as spending varies overtime and between countries
what is inflation?
the general rise in prices of goods and services which erodes the purchasing power of money
what is deflation?
a persistant fall in prices of goods and services
what is disinflation?
a reduction in the rate of inflation
what does CPI include and how is it measured
- the Office for National Statistics (ONS) collects prices on 710 goods and services from 20,000 shops in 141 locations and online sites and the prices are updated every month, with collectors visiting the same retailers to monitor identical goods
- new items are added to the list every year, such as microwaveable rice and nail varnish , whilst others are taken away, including organic carrotsa
- all these prices are combined using information on the average household spending pattern to produce an overall price index
- the average household spending is worked out through the Living Costs and Food Survey, where around 5,500 families keep diaries of what they spend over a fortnight
limitations of CPI
- It is impossible for the figure to take into account every single good that is sold in the country and so therefore the CPI is not totally representative
- different households spend different amounts on each good and so therefore the CPI only measures an average rate of inflation, and is not totally representative
- it does not include the price of housing and so, since this has tended to rise more than the price of other goods, the data may be lower than it should be
- it is difficult to make comparisons with historical data as the figure is more recent
- it was only used since 1996 with estimates going back to 1988 which means that levels of inflation using CPI can only be accurately compared back to then
what does PRI include and how is it measured
- RPI includes housing costs such as mortgage and interest payments and council tax, whereas CPI does not
- CPI takes into account the fact that when prices rise people will switch to product that has gone up by less, therefore, the CPI is generally lower than the RPI
- RPI excludes the top 4% of income earners and low income pensioners as they are not ‘average’ households whilst CPI covers all households and all incomes
what are the causes of inflation
demand pull
cost push
growth of money supply
how does demand pull cause inflation
- prices in a market are determined by demand and supply and a shift in either will cause price to change
- inflation can therefore be caused by an increase in aggregate demand (AD), total demand for goods and services in the economy
- if any factor which increases AD was to increase, then inflation would increase
how does cost push cause inflation
- whilst an increase in aggregate demand can push prices up, a decrease in aggregate supply may also push prices up
- when businesses find their costs have risen, they will put up prices to maintain their profit margins
- this can be caused by any factor which decreases AS
how does growth of money supply cause inflation
- another potential cause of inflation is there being too much money in the economy
- if people have access to money they will want to spend it but if there is no increase in the amount of goods and services supplied, then prices will have to rise
- the government can also increase the amount of money that they print and decisions to increase government borrowing can also increase the money supply
what is the effect of inflation on consumers
- if people’s incomes do not rise with inflation then they will have less to spend , which could cause a fall in living standards
- those who are in debt will be able to pay it off at a price which is of cheaper value, but those who are owed money lose because the money they get back is of cheaper
value - consumers who have saved will lose out as their money is worth less
- inflation has psychological effects on consumers: because prices are rising, they may feel less well-off, even if their income is rising in line with inflation, and so this may cause them to decrease their spending
what is the effect of inflation on firms
- If inflation in Britain is higher than other countries, British goods will be more expensive. They will become less competitive and make them more difficult to export. This will also affect the balance of payments
- deflation isn’t good as it encourages people to postpone their purchases as they wait for the price to fall further
- difficult to predict meaning firms cannot plan for the future
- firms will have to calculate new prices then change their menus, labelling etc. and this can be expensive
what is the effect of inflation on governments
- if government fails to change excise taxes in line with inflation then real government revenue will fall
- if government fail to change personal income tax allowances then real government income will increase and taxpayers will have less money
what is indexation
adjusting a price, wage, or other value based on the changes in another price or composite indicator of prices
what is unemployment
one who is capable of working, actively seeking work, but unable to find any work
how is unemployment measured
claimant count
internatioal labour organisation (ILO)
labour fource survey (LFS)
what is the claimant count and how is it measured
- the Claimant Count is the number of people receiving benefits for being unemployed
- it provides the number of claimants on particular day each month and the numbers joining and leaving the count each month
what is the ILO and how is it measured
- the Office of National Statistics (ONS) uses the International Labour Organisation (ILO) definition of unemployment and employed
- through the ILO, anyone over 16 can be classed as employed, unemployed or economically inactive
what is the LFS and how is it measured
- the Labour Force Survey (LFS) is a sample of people living in households and is a legal requirement for every country in the EU
- it asks questions about personal circumstances and activity in the labour market to class people as employed,
unemployed or inactive by the ILO definitions - the figures are only an estimate of the true level of unemployment as it is measured by a sample
comparisons between the claimant count and LFS
- some people may not be included in the LFS unemployment measure but would be in the Claimant Count. These may include people working in the hidden economy or those who fraudulently claim benefits
- some people aren’t eligible for benefits but are classed as unemployed so would appear in the LFS but not the Claimant count. This can be if their partner is working, if they are looking for work along full-time study or if they are around State Pension Age. The LFS tends to be higher than the Claimant Count because of these reasons
- sometimes, the claimant count and LFS rates can be going in different directions. This could be due to the fact that the LFS is only a sample and different types of people have been asked which can lead to short term changes in the rate
- also, there may be things happening in the labour market not covered by the Claimant Count, for example more students could look for work along their studies or more people above State Pension Age may look for work
how is the claimant count and LFS similar
they both do not include those:
- working part time but would like to work full time
- on government training schemes who would prefer employment
- classed as sick or disabled
- who aren’t actively looking for jobs but would take a job if offered or are in education because they can’t get a job
what is underemployment
- the underemployed are those who are in part time or zero hour contracts when they would prefer to be full time and people who are self-employed but would rather be employees
- it also includes those who are in jobs which do not reflect their skill level , for example a university graduate that can’t find a graduate job so is working as a bartender
- the underemployed aren’t included in any unemployment statistics
- underemployment tends to increase during recessions because firms will just reduce staff hours instead of making them redundant and having to pay expensive
redundancies packages. It doesn’t have as many negative effects as official unemployment, but it does mean the underemployed have lower incomes and so will spend less, reducing aggregate demand and growth of the economy
what is the significance of changes in activity in the labour force
- increases in inactivity will decrease the size of the labour force, therefore causing a fall in productive potential of the country. There will be a lower GDP and lower tax revenues as less people are working
- however, decreases in inactivity could just result in more people being unemployed if there are no jobs available to them
what are the types of unemployment
frictional
structural
seasonal
cyclical
real wage inflexiblility
explain frictional unemployment
- frictional unemployment is due to people moving between jobs
- this could be due to new workers entering the labour market or people who have chosen to leave their previous job
- these people may take a while to locate and gain a job that they are willing to accept
- this isn’t a serious problem as it is only short term
explain structural unemployment
- it is a long term decline in demand in an industry leading to reduction in employment perhaps because of increasing international competition or technology
- it is where the demand for labour is lower than the supply in an individual labour market e.g. ship building
- the lack of geographical and occupational mobility means that people will remain unemployed, so need to be retrained in order to gain a job
- there are different types of structural unemployment:
regional unemployment - where certain areas of a country suffer from very low levels of employment due to industry closures; this is made even worse by the fact that the loss of jobs can mean a fall in demand for other businesses in the area, forcing more closures and job losses
sectoral unemployment - where one sector (primary, secondary and tertiary) suffers a dramatic fall in employment
technological unemployment - where an improvement in technology means that jobs are replaced
explain seasonal unemployment
- some employment is strongly seasonal in demand
- industries such tourism are only prominent during certain times of the year so only demand large numbers of workers at a specific time
- once that time of the year has passed then the labour force is drastically reduced
- there is little that can be done to prevent this from occurring in a free market economy
explain cyclical unemployment
- this is unemployment due to a general lack of demand of goods and services within the country - this is also known a Keynesian ‘demand deficient’ unemployment
- when there is a recession or severe slowdown in economic growth, we see a rising unemployment because of plant closures, business failures and an increase in worker layoffs and redundancies - this is due to a decrease in demand causing businesses to cut employment in order to control costs and restore some of their profitability
explain real wage inflexibility
- the result of real wages being above their market clearing level leading to an excess supply of labour
how does migration affect the economy
- an increase in net inward migration tends to lead to increased jobs
- due to the circular flow of income, immigrants’ spending creates jobs and total employment increases without an increase in unemployment - this depends how much money immigrant workers send back home
- leads to lower wages, particularly for lower-paid, low skilled jobs
- leads to lower wages, particularly for lower-paid, low skilled jobs
- there is more competition for jobs and UK workers who have low motivation to work and are low skilled are most affected as they are competing in the job market with hard working, more skilled workers prepared to take the same jobs as them
how do skills affect the economy
- economies progress over time, and as a result, higher skills are needed to work in them - in the UK 50 years ago, many jobs were available for those who couldn’t read or write but now there are few
- for the UK to maintain its employment levels, it needs to increase the skills of its workforce over time
- structural unemployment is caused by a lack of, or the wrong, skills. For example, engineering companies struggles to recruit skilled workers even though there are unemployed workers in the local area
- if firms will not train staff, the government has to step in to correct the market failure but this is costly; people become long-term unemployed as their skills
don’t fit the jobs on offer
what are the impacts of unemployment to workers
- those who are made unemployed normally have a loss of income which usually results in a decline in their living standards
- they often suffer from the stigma of being unemployed and feel degraded by the process of signing on to receive benefits to support their family which can lead to stress, marital breakdown, suicide, physical illness etc
- the long-term unemployed often find it more difficult to get another job as they lose skills
- those who are in jobs will suffer from lower job security and will fear being made redundant
- they could see a fall in wages because the firm can easily find someone to replace them if they complain about pay
what are the impacts of unemployment to firms
- there will tend to be a decrease in demand for their goods (but this depends on the YED) and so this could lead to a fall in profit
- long term unemployment can lead to loss of skills and reduce employability of workers, so firms have a smaller pool of skilled people to employ
- they can offer low wages as people will take the job anyway because they know there is a lack of jobs so have few options
what are the impacts of unemployment to consumers
- consumers in areas of high unemployment lose out because local shopping centres tend to be run down and don’t offer the range of shops available to those in areas of low unemployment
- they suffer from less choice
- the quality of goods may also decrease
- the unemployed consumers lose out as they have less available to spend
- firms may lower prices and put on sales in order to increase demand for their product
what are the impacts of unemployment to the government
- the reduced income results in a fall in tax revenues and higher spending on welfare payments for families with people out of work, incurring an opportunity cost as the money could be better spent elsewhere
- this will result in an increase in the budget deficit
- it will be likely that the government will have to raise taxation or scale back plans for public spending on public and merit goods, such as the NHS or education
- they may need to increase borrowing
how does unemployment impact society as a whole
- rising unemployment is linked to social deprivation; there is a relationship with crime and social dislocation (increased divorce rates, worsening health and lower life expectancy)
- areas of high unemployment often see a fall in demand for local goods and services, leading to a fall in income for those working in the services and sometimes further loss of jobs
- it results in a loss of potential national output and represents an inefficient use of scarce resources
- taxpayers paying money to the unemployed is not a loss for the economy as it is a transfer payment but the economy is affected because there is a fall in national output and the social costs of the unemployed e.g. violence and crime
how is the ONS National Wellbeing indicator measured?
what does the Easterlin Paradox show?
suggest why this might be the case
explain what happened to GDP and life satisfaction between 2007 and 2014 (see PMT)
what is the balance of payments
a record of all financial dealings over a period of time between economic agents of one country and all other countries
what are exports
are when money comes in, so the good/service goes out
what are imports
are when goods/services come in, so money goes out
what is the BoP made up of
- current account which records payments for the purchase and sale of goods and services
- capital and financial account which records flows of money associated with saving, investment, speculation and currency stabilisation
explain trade in goods
- these are known as visibles because you can physically see them
- they are goods that are traded, whether raw materials or finished goods
- the difference between visible exports and visible imports is known as the balance of trade
explain trade in services
- these are services traded in or out of the country, known as invisibles
- a holiday to Spain by a British family is an invisible import as money leaves the UK and goes to Spain, whilst a Japanese firm buying insurance from a city of London firm is an invisible export as money enters the UK
explain income and current transfers
- wages, interest, profit or dividends can be repatriated into the country
- For example, a Polish person could send the money they make in the UK back home to Poland or a British person could take the profits from their overseas country back to the UK
- current transfers are usually done by governments and are when they transfer money into or out of overseas organisations such as the EU
- income and current transfers can be split into primary and secondary incomes: primary income is the result of loans of the factors of production abroad e.g. interest, profits and dividends (including wages sent to other countries) whilst secondary income is a range of mainly government transfers to overseas organisations, such as the EU
formula for current balance
current balance = Balance of trade + Balance of services + Net income and current transfers
what is a current account surplus
where exports are greater than imports, so the current balance is positive
what is a current account deficit
where imports are greater than exports, so the current balance is negative
