2.1 Measures of Economic Performance Flashcards
Define nominal value
The value of an economic variable based on current prices, taking no account of changing prices of inflation
Define real value
The value of an economic variable, taking account of inflation
How do you calculate a price index to account for inflation? (Regarding GDP)
(Nominal GDP/ Real GDP) x 100
How do you calculate a percentage change of an economic variable?
(Change/ Original) x 100
Define the term index number
A device for comparing the value of a variable in one period or location with a base observation
Define potential economic growth
An expansion in the productive capacity of the economy
Define gross domestic product
The total value of goods and services produced in an economy in a given time period.
What 3 factors of GDP are all assumed to equal the same thing?
1) Total value of goods + services produced
2) Total expenditure
3) Total income earnt
Define gross national income (formally known as GNP)
Domestic GDP plus net income from abroad
Define actual economic growth
The rate of growth of GDP in a period
Why is actual growth not always equal to potential growth?
Because the economy is not always operating at full capacity, due to most economies going through the business cycle
Define the term business cycle
A phenomenon whereby GDP fluctuates around its underlying trend, following a regular pattern of booms, downturns, busts and recoveries
When is it preferred to use GNI instead of GDP, and why?
When measuring standard of living because it reflects the incomes of the residents
Define GNI per capita
The average level of GNI per head of the population
What are the 4 main limitations of using GDP or GNI to compare living standards over time?
1) Inequality in income distributions
2) The informal sector and accuracy of data
3) Exchange rate problems
4) Social indicators
Explain the issues of the informal sector and accuracy of data
- Given some data collection agencies may be more reliable than others, not all international data may be reliable
- Especially in the informal sector, many transactions go unrecorded, so will not be included in GNI data
Explain the issues of exchange rates when using GDP or GNI
GNP and GNI tends to be turned into US dollars for international comparison.
However, the exchange rates may not be a reliable indicator of purchasing power of incomes, given exchange rates can either be affected by govt policies or by prices of internationally traded goods.
How have the UN combatted the issue of exchange rates when using GDP or GNI?
By adjusting GNI figures to the purchasing power parity of each country
What is purchasing power parity?
A theory that measures prices at different locations using a common good to contrast the real purchasing power between different currencies.
Describe the issue of a lack of social indicators in GNI or GDP
GNI and GDP refer to the value of resources in an economy, but do not consider education levels, access to healthcare etc, which are social indicators of standard of living
Describe the trends of rates of growth of countries between 1950 and 1960
Countries in North America, Western Europe and Japan were early developers, whilst Sub-Saharan Africa and Latin America were later in development
How does the trends of rate of growth in countries change between 1960 and 1980?
The gap between countries begin to widen, where Nepal and India had very low growth.
Latin America had diverse growth, whilst East Asian countries like Korea and Malaysia began to catch up to early developers.
Describe the general trends of growth of countries between 1990s and 2012
International growth on average was low due to the financial crash of 2008.
Sub-Saharan Africa had very low growth, whilst China experienced nearly 10% growth per annum.
How may gross national happiness be calculated? (2)
- By adjusting GNI to only include variables that positively contribute to economic wellbeing
- To ask people whether they are happy or not
How did the UK try and measure levels of happiness in 2010?
The ONS launched its ‘Measuring National Wellbeing Programme’ in 2010.
It used indicators such as personal wellbeing, relationships, health, education and the environment.
Is there likely to be a relationship between real incomes and happiness?
The relationship is positive, but not likely to be very close, given that people’s subjective perception of happiness will be related to a whole host of different factors.
How is inflation in the UK calculated?
Using the consumer price index (CPI)
Define the consumer price index
A measure of the general level of prices in the UK, the rate of change of which has been used as the government’s target of inflation since Jan 2004.
How is CPI calculated?
It measures the general level of prices, not the rate of change of prices
What is an alternative measure of the rate of inflation that is not CPI?
The retail price index (RPI)
Describe what the RPI is and how it is different from the CPI
The RPI measures the average level of prices in the UK.
The RPI excludes interest on mortgage repayments, as well as pensioner households and the highest income earners, whereas CPI does not.
What is the target rate of inflation in the UK?
2% +/- 1%
What is a common issue with CPI and RPI, and how is this combatted?
Products may have a fixed weight in the index.
If prices of these products fall or rise rapidly, consumers will buy a substitute, however the weights will stay constant.
Thus, the index may not reflex the cost of a typical basket of goods.
They combat this by updating weightings each month.
What is the difference between deflation and disinflation?
Deflation is a fall in the average level of prices.
Disinflation is a fall in the rate of inflation.
Why is deflation bad for the economy?
If prices are falling, consumers may hold off purchases if they expect prices to continue to fall, creating an even deeper recession
Describe the trend of inflation in the UK between the 1950s and early 1960s
Between 1951-52, the Korean War generated inflation, however this period is typified by a low rate of inflation
Define inflation
The rate of increase in the average price level in an economy
What occurred during the 1970s which led to price instability?
- Oil prices rose dramatically between 1973-74 and 1979-80
- UK abandoned the fixed exchange rate system under which the government was dedicated to maintain the value of the pound against the US dollar
After what year did controlling inflation become a major focus of macroeconomic policy?
1976
What does it mean when people are in employment?
They are either working for firms or other organisations, or self employed
Define the term economically inactive
Those people of a working age who are not looking for work
Define the term discouraged workers
People who have been unable to find work and are now not looking for work
Define the workforce
People who are economically active, either in employment or unemployed
Define the term unemployed
Those not in work, but are able, available and willing to work
Define the term full employment
A situation where people who are economically active in the workforce and are willing and able to find work are able to find full employment
Why does full employment not mean zero employment?
Because there will always be some frictional unemployment in a society
Historically, how has unemployment been measured in the UK?
The claimant count.
This is the number of people claiming the jobseeker’s allowance each month
How does someone claim a jobseeker’s allowance? (3)
- Must prove they are able, available and willing to work
- Must be able to start within a fortnight
- Must have searched for jobs in the last four weeks
What are the problems of using the claimant count? (2)
- It doesn’t include people who would like to find work, but are not eligible to make a claim
- People wanting to claim benefits may lie about actively seeking for, and being able to work
What is now the preferred unemployment measure in the UK?
The ILO unemployment rate, which is based on the data provided by the ‘UK Labour Force Survey’
It measure the % of the workforce who are without jobs, but are available for work, willing to work and are looking for work.
Give examples of the type of people who are excluded from the claimant count.
- People returning to the workforce after childbirth
- People who are on government training schemes
What are the 2 problems associated with using the ILO unemployment rate?
- It extrapolates data to try and give an overall picture, but it may not be fully representative
- It doesn’t tell you how many people are unemployed because of the wages being not desirable
What is the problem of measuring unemployment in developing countries?
In countries where there is no social security system, the unemployed would have no incentive to register as unemployed.
What is underemployment?
Those working less hours than desired or at a lower skill level than they are able
Define frictional unemployment
Unemployment associated with job search, where people are usually between jobs
What are the benefits of some frictional unemployment?
Where some sectors are expanding, and others are declining, it enables the transfer of workers from one sector to another.
What is structural unemployment? What are the problems with it?
Unemployment arising because of changes in the pattern of economic activity within an economy.
It usually leads to long-term unemployment as workers have an immobility of skills
Define cyclical unemployment
Unemployment that arises during the downturn of the economic cycle, such as a recession
Define demand-deficient unemployment
Unemployment that arises because of a deficiency for aggregate demand in the economy, so that the equilibrium level of output is below full employment
Define seasonal unemployment
Unemployment that arises in seasons of the year when demand is relatively low
If wages rise above equilibrium what will happen?
It may lead to excess supply of labour, and thus unemployment
Define voluntary unemployment
A situation arising when an individual chooses not to accept a job at the going wage rate
What is the significance of migration for employment and unemployment?
When the skills provided by migrants are complementary to native workers, then it may lead to an increase in national incomes. However, if their skills are substitutes, it may lead to a decrease in the equilibrium wage.
Define involuntary unemployment
A situation arising when an individual who would like to accept work at the going wage rate is unable to find employment
Define the balance of payments
A set of accounts showing the transactions conducted between residents of a country and the rest of the world
What are the three categories of the balance of payments?
The current account
The capital account
The financial account
Describe what the capital account is
It involves transactions in fixed assets, mainly involving migrants
Describe what the financial account is
It records the transactions in financial assets
What does the balance of payments always equal and why?
0 because any deficit or surplus in the current account or capital accounts will be balanced by the financial account
What is the current account comprised of?
Balance of trade in goods (net good exported) +
Balance of trade in services (net services exported) +
Net primary income +
Net secondary income (transfer payments)
What is meant by current account equilibrium?
The flows of money leaving the country= the flows of money entering the country
What should the current account deficit not go over?
The equivalent of 5% of GDP
What is a current account deficit?
Outflow of money is greater than the inflow of money.
What does the UK’s trade balance usually look like?
Overall trade deficit.
Trade deficit in goods outweighs the trade surplus in services.
What are the three causes of inflation?
Demand-Pull
Cost-Push
Growth of the money supply
Explain demand-pull inflation
An increase in aggregate demand without an increase in aggregate supply.
Explain cost-push inflation
Reduction in aggregate supply because of increasing costs of production for firms
Explain how growth in the money supply causes inflation
If banks increase lending, AD will increase
Define activity/participation rate
Those in work or unemployed divided by the number of the working age population
What is the problem with high levels of inflation? (5)
- Lower real earnings
- Savings devalued
- Hurts those on fixed incomes (pensioners)
- Uncertainty leading to decreased spending and investment
- Hurts exports
