2.1 measures of economic growth Flashcards
what is economic growth?
the rate of change in output. It is an increase in the long term productive potential of the country which means there is an increase in the amount of goods and services that a country produces.
how is economic growth measured?
percentage change in real GDP per annum. It can also be shown through the shift of PPF
Gross domestic product
a measure of value of production of goods and sevices
What is GDP a measure of
the standard of living in a country
Total GDP
the overall GDP for the country
Total GDP
the overall GDP for the country
when does GDP per capita grow
national output grows faster than population over a given
time period, so there are more goods and services to enjoy per person.
GDP per capita
the total GDP divided by the number of people in a country.
difference between real and nominal
Real strips out the effects of inflation whilst nominal doesn’t
difference between value and volume
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.
Gross National Income
The value of goods and services produced by a country over a period of time plus net overseas interest payments and dividends.
Gross National Product
The value of goods and services over a period of
time through labour or property supplied by citizens of a country both domestically (GDP) and overseas.
Comparasion of growth over time
Changing national income levels will show us whether the country has grown or shrunk over a period of time.
Comparasion of growth between countries
When countries have a difference in population, a difference in total GDP doesn’t necessarily mean a difference in living standards so to make comparisons, we work out GDP per capita.
Purchasing Power Parities
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 are PPP’s useful
takes into account the cost of living (how much has to be spent to maintain living standards), and so will help us
better compare living standards.
Problems of using GDP to compare standard of living
-inequalities
-inaccuracy of data
-quality of goods and services
-comparing different currencies
-spending
Measuring National Wellbeing
Reported on how lives are improving. They found that self-reported health, relationship status and employment status most affect personal well-being.
Real incomes and subjective happiness
One key finding of psychological research is that happiness and income are positively related at low incomes i.e. if you are poor and your income increases,
you will be happier, but higher levels of income aren’t associated with increases in happiness i.e. rich people aren’t necessarily happy and increases in their income
won’t necessarily make them happier. This is called the Easterlin Paradox
inflation
general increase of prices in the economy
deflation
fall of prices and indicates a slowdown in the rate of growth of output in the economy.
disinflation
reduction in the rate of inflation i.e. prices are still rising but they are not rising by as much
GDP per capita calculation
GDP total / population
Consumer price Index
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
-not totally represntative
-doesn’t include price of housing
-difficult to make comparasions
Retail Price Index
-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.
Causes of Inflation
-demand pull
-cost push
-growth of the money supply
Demand pull 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.
cost push 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
Growth of money supply
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.
effects of inflation on consumers
-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, and vice versa
-consumer confidence
effects on 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.
-deflation causes people to postpone purchases as they are waiting for prices to fall further so will effect profits
-inflation is difficult to predict so it is hard for firms to plan
-
effects of inflation on governement
If the government fails to change excise taxes (taxes at a set amount e.g. £1) in line with inflation then real government revenue will fall. However, if they fail to change personal income tax allowances (the amount a worker can earn tax free) then real government income will increase and taxpayers will have less money.
effects of inflation on workers
-If workers do not receive yearly pay rises of the rate of inflation, they will be worse off and their living standard will decrease.
-Deflation could cause some staff to lose their jobs as there is a lack of demand
meaning firms see a fall in profit and have to decrease staff to cut costs.
what does unemployment represent?
a waste of resources and so the level of unemployment is a good indicator of a country’s economy.
what is the claimant count?
a measure of people who are eligible to claim job seekers allowance
what makes you eligible for the claimant count
-out of work
-avaliable for work
-actively seeking employment
-aged 18-66
-less than £16,000 in savings
how much do you get on JSA
-up to 24 is £61.05 a week
-25 or over is £77 per week
current rate of economic activity
82.3%
current rate of unemployment
3.7%
current amount on claimant count
1,221,000
benefits of the claimant count
-up to date + useful
-easy to understand/clear criteria
-cheap to access
drawbacks of the claimant count
-misses out on people who are unemployed
-not broken down by gender, ethnicity etc
-no used in europe
how to return back onto the PPF after no utilising full resources
-more apprenticeship schemes
-remove benefits from the unemployed
-invest in education
-increase training
-build factories on empty land
-encourage new start ups
-use more efficent methods
-increase wages
ILO survey
It counts those who are without any knind of job in the four weeks and are able to start work within two weeks
What makes you eligible for the ILO survey
-aged 16-70
-considerd a far more accurate and embracing method. It leaves a lot less people out
-used in europe so good for comparasions
-also considers those who have recently got a job but haven’t started yet
-considers those who are underemployed
Benefits of ILO
-used in europe
-wider criteria
-measures people who are always entitled to benefits
-measures students and retirees
Drawback of ILO
-can be out of date (done once a month)
-survey’s can be inaccurate
Employed workers are
Those who do more than 1 hour of paid work a week or are temporarily away from work (e.g. on holiday), are on a government supported training scheme or do minimum 15 hours of unpaid work for their family business.
under employed workers are
Those of working age who are without work, able to work and seeking work and have actively sought work in the last 4 weeks and are available to start work in the next 2 weeks.
Inactive workers are
Those who are neither employed nor unemployed; they are people of working age not seeking employment as well as those seeking employment but not able to start work e.g. those in study, looking after family, health
related issues, discouraged workers (those who are fed up of applying), retirement and those who do not want or need a job.
Comparasions between CC and ILO
-Some people may not be included in the LFS unemployment measure but would be in the Claimant Count.
-some people aren’t eligible for benefits but are classed as unemployed so would appear in the LFS but not the Claimant count.
- 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.
Both CC and ILO are under estimates as
-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
who are the economically active
the employed and unemployed. They are engaged in
labour market and are people employers can look to recruit. The workless are the unemployed and inactive.
employment rate
the percentage of the population of working age who are
employed
unemployment rate
the percentage of the economically active who are unemployed.
participation rate
the percentage of the population of working age
who are economically active
inactivity rate
percentage of the population of working age who are inactive.
significance of chnages in activity
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.
Frictional unemployment
-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.
Structural unemployment
-serious form of unemployment as it is a long term decline in demand in an industry leading to reduction in employment perhaps because of increasing international competition or technology.
-The lack of geographical and occupational mobility means that people will remain
unemployed, so need to be retrained in order to gain a job.
different types of structual unemployment
-regional
-sectoral
-technological
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.
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
real wage inflexibility
real wages being above their market clearing level leading to an excess supply of labour.
MIgaration impact on employment
-An increase in net inward migration tends to lead to increased jobs.
-it also leads to lower wages, particularly for lower-paid, low skilled jobs. UK firms are able to recruit foreign workers meaning that supply of labour is
increased and so the price equilibrium of labour is reduced. 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.
Examples of migration
Since the 1990s, the UK has seen a large increase in immigration from mainly Eastern European countries. Most of these people come to the UK to work, are of working age and often take lower skilled jobs; they are less likely to claim benefits than the existing population.
Skills impact on employment
-Economies progress over time, and as a result, higher skills are needed to work in them.
-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.
-If firms will not train staff, the government has to step in to correct the market failure but this is costly. As a result, people become long-term unemployed as their skills don’t fit the jobs on offer.
impact on unemployment on workers
-loss of income
-stigma
-lose skills
-low job security
impact on umemployment on firms
-fall in profit
-smaller pool of skilled workers
-low wages
impact of unemploymet on consumers
-less choice
-sales
impact of unemployment on government
-fall in taxes and higher spending
-budget deficit
impact of unemployment on society
-social deprivation. There is a relationship with crime and social dislocation (increased divorce rates, worsening health and lower life expectancy).
-loss of potential national output
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 is the balance of payments made up of
-current account
-finacial account
-capital account
current account
records payments for the purchase and sale of goods and services
capital and finacial account
records flows of money associated with saving, investment, speculation and currency stabilisation.
governemnt macroeconomic objectives
-reduce unemployment
-economic growth
-control inflation
-improves sustainabilty
-reduce inequality
-improve the balance of payment
-improve government debt
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.
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
Income 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
Current transfers are usually done by governments and are when they transfer money into or out of overseas organisations such as the EU.
Current balance equals
Balance of trade + Balance of invisibles + Net income and current transfers.
Current account surplus
where exports are greater than imports, so the current
balance is positive
Current account deficit
where imports are greater than exports, so
the current balance is negative.
What does high economic growth mean for the current account?
a deficit as there is increased imports due to increased demand, and it is during times of high unemployment etc. that the current account deficit tends to improve.
Factors that lead to globalisation
-The proportion of output of an individual economy which is traded internationally is growing.
-Many more people (or companies) own assets in other countries such as shares, loans or businesses.
-There is increasing migration between countries
-More technology being shared on a faster basis.
