2.1 Measures of Economic Performance Flashcards
Economic growth
the rise in value of GDP
GDP
the quantity of goods + services produced in an economy
Difference between real and nominal GDP
real is adjusted for inflation
GDP per capita
total value of GDP divided by the population
Limitations of using GDP to measure living standards
- does not give any indication of distribution of income
- gives no indication of welfare
- does not account for large hidden economies eg the black market
Inflation
persistent increase in the general price level in an economy over a year
Deflation
the decrease in the general price level
Disinflation
when the general price level is still rising, but to a slower extent
How to work out index number?
raw #/base year raw # x 100
What is the CPI?
consumer price index which is a weighted basket of goods and services
Downsides of the CPI
personal inflation rates differ (CPI assumes an ‘average family’ ideology, housing costs are not included, basket updates are too slow
Two causes of inflation
cost push + demand pull
What is cost push inflation?
when firms face rising costs and so SRAS shifts to the left
Causes of cost push inflation
increase in raw materials, wages, business taxes eg VAT, price of imported raw materials (due to a weaker exchange rate)
What is demand pull inflation?
when AD is growing unsustainably, there is increased pressure on FOPs which causes producers to increase their prices
Causes of demand pull inflation?
anything that increases AD for eg lower interest rates, increased govt spending, weak exchange rate, decreased income/corporation tax
Costs of inflation
- decrease in purchasing power (esp on low income households)
- reduced international competitiveness,
- anticipated inflation - wage/consumption spirals (can increase costs of production leading to an increase in price where workers may demand more wages)
- uncertainty (can put firms off investing which reduces AD)
- erodes value of savings
Benefits of inflation
- stable levels of consumption (incentivises BUY NOW culture which is good for economy)
- increased production (firms can gradually increase prices leading to more profit)
Unemployment
those of working age who are willing and able to work but do not have a job
Underemployment
those who have a job, but their labour is not used to its full productive potential
2 measures of unemployment in the UK
LFS + claimant count
What is the claimant count?
the # of people claiming unemployment related benefits
Costs of unemployment
- lost output (operating inside the ppf)
- budget deficit is worsened (more finances spent on unemployment benefits)
- hysteresis (workers who become demotivated and lose skills over time)
- loss of income
- social costs (increased crime, anxiety, depression, divorce etc)
Benefits of unemployment
- firms benefit from a larger labour pool
- workers have time to search for best job for them (some frictional U can be good for an economy)
Structural U
occurs with a long term decline in demand for the goods and services in an industry, which costs jobs + it can be worsened by immobility
Frictional U
when people are searching fro a new job (short term)
Cyclical U (demand-deficient)
general lack of demand for goods + services within an economy
Seasonal U
occurs at different points within a year
Example of structural U
tech jobs have left jobs at risk due to automation
Example of cyclical U
covid-19 + the hospitality sector
4 components of the current account
trade in goods, trade in services, income, transfers
