2.1 Measure of economic peformance Flashcards
Define Index number
- An economic data figure that reflect P/Q compared with base year
- Show % change in P/Q from base year
Difference between GNP and GDP
- GDP is total value of G+S an economy produce in a given period of time
- GNP includes value of all ouput regardless of whether they are located in the counrty or abroad
Define GNI
Includes the income of residents and businessses beyond borders and include remittance payments
Define GDP per capita
GDP divided by population
Output per person
Define living standards
The quality of life and economic wellbeing
Why is GDP a bad measure for living standards in relation to black markets
- Black market/ illegal activity arent included in GDP figure in which people work without declaring their income to avoid tax so GDP is underestimated as these incomes arent taken into account
Why is GDP a bad measure for living standards
- Doesnt take into account transactions without monetary value e.g. housework
- Developing countries often consume what they produce and dont offer it for sale on the market so it has no monetary value
- This often increases Y at the expense of quality of life like stress, long working hours etc- they might want to achieve growth at the expense of health and safety
- Inaccuracy of data- figures are usually converted into US$ but not always accurate for comparison so some argue PPP should be used to take into account the impact of differences in the cost of living in different countries
- Remittances arent included- people who move counry to increase Y then send money back home (this would increase GDP figure)
- Doesnt include income inequality- Distribution in Y is provided as an average, the differences in standard of living within the same country can be significant
Why is GDP a good measure of quality of life
GDP is an international comparable measure
Most countries have GDP data so it is a good measurement of living standards as it allows countries to compare easier
Define unemployment
Individuals not currently employed but actively seeking and available for work
Define structural unemployment
Unemployment that is related to a mismatch between the skills that workers currently possess and the skills that employers require
Define underemployment
An individual is currently in employment, but would like to work more hours.
household-level survey of the employment circumstances of the UK population
The Claimant Count measure of unemployment is constructed by…
counting the number of people claiming unemployment benefits
What is the ILO unemployment
Those actively looking for a job and out of work in the last 4 weeks.
Uses the Labour Force Suvery (LFS)- it is a survey
Why does ILO show higher unemployment than claiment count
Different reasons for collection/different methods
of collection: imply different results
* It is becoming much more difficult to claim unemployment related benefits e.g. changes in the level of savings making it difficult to claim unemployment related benefits
* Stigma issues: when people are unemployed= no stigma for ILO
but high stigma for unemployment related benefits
Reasons why underemployment might increase
o Recession/lack of demand in the market
o Increase in zero-hours/part-time/flexible contracts offered by employers
o Increased mechanisation/use of technology in the workplace
What does unemployment mean in terms of labour
There is a negative output gap and labour resources are not being utilised to their full potential. This means growth, national output, national income and national expenditure is also not being maximised to its full potential to maximise living standards.
Which one of the following is likely to cause a reduction in the claimant count?
A An increase in the weekly payment for claimants
B A compulsory weekly interview for every claimant
C An increase in the size of the workforce
D A fall in employment
B) A compulsory weekly interview for every claiment
Define labour force
The UK labour force includes all of the population over the age of 16 who are willing and able to work
Why might unemployment lead to lower standard of living
- As their capacity to purchase the same goods and services as they purchase during a period of employment, is diminished.
- They will have difficulty servicing their debts, including, in many cases, a mortgage
Why might unemployment lead to negative effects of health and wellbeing
As both the physical and psychological effects of being unemployed take effect. The psychological impacts can include feelings of low self-esteem and a loss of sense of purpose.
What is demand deficient unemployment
- Lack of demand for G+S
- Incentivises businesses to cut employment to reduce costs and restore some of their profitability
- Increase in worker layoffs and redundancies
How is inflation measured
- A base year is set at 100
- A family expenditure survey helps create the basket of goods with weighting
- Price surveys are complete
- Inflation is calculated via an average of all categories of: weighting x price change
Define weighting used in CPI
Weights defined as a proportion of consumer income spent on particular goods and services
Pigou Wealth effect
Inflation- consumption falls as consumers purchasing power is eroded.
Harm living standards for the lowest income earner- absolute poverty as they spend a greater % of their income on necessities
Shoe leather costs
Time and energy spent trying to find best deals for products and interest rates to make the most of their saving
However this leads to an opportunity cost- couldve been working and earning income
Wage/ consumer price spirals
- Workers bargin for higher wages
- Firms CoP increases
- Firms pass on higher costs via higher P’s
- Inflation increases
- Worker demand increase in wages, to protect buying power of income
- But it may not happen as UK workforce has low bargining power
How does inflation lead to low export competitivness
Increase in inflation: country is less competitive
Fall in demand for X –> fall in revenue from X –> worsening CA deficit
Fiscal drag
- Fiscal drag: workers recieving higher incomes in line with inflation, in a progressive tax system
- Higher rate of tax
- Fall in living standards
- Govt recieve more tax revenue
Benefits of inflation
- Those with high levels of personal debt will benefit as the real value of debt falls, e.g, the value of a mortgage loan relative to income is likely to decease
- Improvement of government finance - any taxes based on nominal values of G/S e.g. VAT as P increases, govt collect more revenue
- Firms encouraged to incease output- can increase P’s = more profit/ revenue
How might increases in exports (during economic growth) lead to cost push inflation
- Unemployment reduces as firms employ more due to expected D in economy and expected profit
- Higher unit labour costs as CoP increases
- Firms pass on higher P to consumers to protect profit margins
- SRAS shifts left
- Ceteris paribus= cost push inflation
- With increased P- workers may demand compensating wage increases to protect real incomes= wage/consumer price spirals
How might cost push inflation affect the current account deficit
- Cost-push inflation will cause exports to become less price competitive relative to foreign domestic goods.
- Imports will be more price competitive relative to domestically produced goods.
- This will affect the government’s balance of payments objective of equilibrium as the current account moves into deficit over the longer period.
Whats the correlation with a stronger pound and inflationary pressure
- Stronger £ = cheaper imports (SPICED)
- Price of imported G/S in CPI basket falls
- This reduces inflationary pressure
Disadvantage of deflation
Deflation leads to falling consumption as consumers hold off purchases in expectation of further falls in price in future
Paradox of thrift
Increase in saving can lead to a decrease in economic activity and a decrease in overall saving.
2 marks
Disadvantage of CPI
CPI does not include mortgage interest payments/ it also excludes council tax, TV licences etc (1)
which may be a considerable expense to some households (1)
Define purchasing power paraties (PPP)
- Making a comparison between countries, taking into account different cost of living.
Advantage of PPP
- Improves accuracy when comparing data between countries
- PPP compares cost of living between different countries
- Calculated by comparing the price of a basket of comparable G+S in different countries
Define balance of payments
A record of all economics transcations over a period of time between one country and the rest of the world
What is current account and what does it consist of
Record of the purchase and sale of G+S
Trade in goods and services
Investment income (primary income)
Transfers (secondary income)
What is financial account and what does it consist of
Records flow of money associated with savings and investment
Portfolio/ shares
Direct FDI (foreign direct investment)
Short term/ hot money flows
Gold/ currency reserves
Define balance of trade in goods and services
- Value of imports of goods and services equals the value of exports of goods and services
- Net trade (X-M)
Reasons for the reduction in the total UK trade deficit
- Depreciation of exchange rate- fall in the value of the pound makes exports cheaper and imports more expensive.
- Relatively lower inflation in UK makes exports more competitive
- Improvement in quality of UK exports increases demand for them
