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Economics Theme 2 > 2.1 Measures of economic performance > Flashcards

2.1 Measures of economic performance Flashcards

1
Q

Define macroeconomics

2.1.1

A

the study of interrelationships between economic variables at an aggregate level

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2
Q

What are the possible macroeconomic objectives?

2.1.1

A
  1. economic growth
  2. low unemployment
  3. low and stable rate of inflation
  4. balance of payments equilibrium on current account (trade)
  5. balanced government budget
  6. protection of the environment
  7. greater income equality
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3
Q

What is a measure of actual economic growth?

A

Gross Domestic Product (GDP)

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4
Q

Gross Domestic Product (GDP)

2.1.1

A

The total market value of all output (i.e. goods and services) produced, incomes and expenditure in a domestic economy over a period of time

GDP = consumption + investment + gov spending + (exports - imports)
GDP = C + I + G + (X-M)
looking at expenditure

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5
Q

Nominal GDP

2.1.1

A

measures value of GDP based on current prices, taking no account for changing prices and inflation through time

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6
Q

Real GDP

2.1.1

A

an estimate of the volume of GDP, taking account of changing prices through time and adjusted for inflation.

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7
Q

Converting nominal measurements to real

2.1.1

A

100 x (Nominal GDP/Real GDP) = Price Index

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8
Q

Calculating % change

2.1.1

A

(New - Old / Old) x 100

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9
Q

Index number

2.1.1

A

A device for comparing the value of a variable in one period or location with a base observation (e.g. the consumer price index measures the average level of prices relative to a base period)

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10
Q

Potential economic growth

2.1.1

A

an expansion in the productive capacity of the economy

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11
Q

Gross National Income (GNI)

2.1.1

A

GDP plus net income from abroad

i.e. GDP + income from abroad - income sent abroad

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12
Q

What GDP growth does the UK aim for?

2.1.1

A

2-3%

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13
Q

What makes GDP difficult to model accurately?

2.1.1

A

Brexit/COVID-19 brings uncertainty, commodity prices, inflation, rate of business creation difficult to forecast, globally integrated; events outside of the UK can have an impact, fluctuating exchange rates and time lags/uncertain outcomes to gov policy changes

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14
Q

Actual economic growth
How does it differ from potential economic growth

2.1.1

A

the rate of growth in real GDP in a period

differs from potential economic growth as the economy is not always operating at full capacity

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15
Q

The trade/business cycle

2.1.1

A

a phenomenon whereby GDP fluctuates around its underlying trend, following a regular pattern

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16
Q

seasonal adjustment

2.1.1

A

a process by which seasonal fluctuations in a variable are smoothed to reveal the underlying trend.
removes the distraction of seasonal variations e.g. higher GDP in Christmas

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17
Q

GNI per capita

2.1.1

A

the average level of GNI per head of population

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18
Q

Advantages of GNI

2.1.1

A

Available for almost every country so able to compare income levels across countries.
Widely understood.

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19
Q

Is GDP or GNI preferred when looking at standards of living?

2.1.1

A

GNI more closely reflects people’s income, including net flows of income between countries. Important for countries e.g. Pakistan/Philippines where there are relatively large inflows of income from people working abroad and remitting income to their families.

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20
Q

Difficulties of measuring standard of living

2.1.1

A

Inequality in income distribution
- income per cap may be misleading if there are wide differences in the distribution of income across diff countries

The informal sector & accuracy of data
Accuracy with which data is collected is never consistent between countries.
All economies have unrecorded transactions, prevalent in dev, countries where substantial amounts of economic activity takes place w/o exchange of money e.g subsistence agriculture; households prod food for own consumption, no reason for money.

Exchange rate problems
- international comparison data often expressed in $USD currencies can:
- float freely against dollar (influenced by the price of internationally traded goods)
- be managed in relation to it
- be pegged to the US dollar (government intervention, more likely to reflect gov policies than relative purchasing power of incomes in the country)
GNI initially calculated in local currencies then converted to USD using local exchange rate

Social indicators
- Health & Education
- Environmental factors
trade-off between economic growth & environmental standards.
Environmental issues distort GNI measure of resources.
e.g. oil spill at beach degrades landscape & enjoyment of beach, therefore, reduces quality of life.
BUT clearing damage adds to GNI so net effect can increase GNI.
Pollution & depletion of natural resources has adverse effect on standards of living + impact the ability of a country to sustain itself in the future.

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21
Q

Purchasing power parity (PPP) exchange rate

US dollar issues?

2.1.1

A

an exchange rate adjusted to reflect the relative purchasing power of incomes in different countries.

US dollar exaggerates gap in living standards between rich and poor countries. Tends to underestimate the real incomes of lower-income countries and overestimate the real incomes of them for higher-income compared with PPP-dollar.

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22
Q

Measuring happiness & wellbeing

2.1.1

A

William Nordhaus & James Tobin 1972: Measure of economic welfare (MEW)

2010 UK ONS launched Measuring National Well-Being Programme w/ 10 dimensions of the quality of life e.g. health, education, relationships.

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23
Q

Relationship between real incomes and subjective happiness.

2.1.1

A

Easterlin paradox:
the hypothesis that happiness increases with average incomes, but only up to a point.

People’s subjective perception of happiness related to things other than material prosperity.

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24
Q

Issues of GDP as a measure of growth

A

Double counting
- inc. value of output in primary sector and inc. again once primary commodity has been prod. in secondary sector (overcome by looking at final value)

Informal activity
- subsistence agriculture, washing dishes, gardening, black market; all not recorded

Errors given vast data collection

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25
Q

Issues of GDP as a measure of living standards

A

Negative externalities
Occurs when consumption/prod of a good causes a negative effect on a third party e.g. cost of loss of biodiversity

Income inequality & distribution

Type of output produced
e.g. cpatial goods/output do not increase living standards until long term

Other quality of life aspects that impact living standards e.g. level of healthcare & education (use HDI)

Level of individual income

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26
Q

Why are national income statistics important?

A
  • to measure economic performance
  • gov’s can see if they are meeting their objectives
  • evaluate policy & see effects/success
  • allows forecasting
  • measure of living standards
  • allows for comparison between other economies/countries
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27
Q

HDI and GNI

A

The standard of living dimension in the HDI is measured by GNI per capita (PPP$)

28
Q

Inflation

2.1.2

A

The rate of increase in the average price level in an economy.

Sustained increase in the average price level & fall in the value of money.

29
Q

Disinflation

A

A fall in the rate of inflation - decrease in the rate of which average price levels are rising.

30
Q

Deflation

A

A sustained fall in the average price level & a rise in the value of money.
(negative inflation)

31
Q

How is inflation measured?

A

Measure the average level of prices in the economy and then calculate inflation s a percentage rate of change of prices over time.

32
Q

Consumer price index (CPI)

A

a measure of the general level of prices in the UK, the rate of change of which has been used as the government’s inflation target since January 2004.
Index based on the prices of a bundle of goods and services measured in different points in time.

33
Q

The process of calculating the rate of inflation in the UK using the CPI

A
  • 180,000 individual prices quotes on ~ 700 different products collected by ONS.
  • Data on spending from the Household Final Monetary - Consumption Expenditure survey used to compile the weights for the items included in the index.
  • Weights are updated each year as changes in consumption patterns of households need to be accommodated if the index is to remain representative.
34
Q

CPIH

A

March 2013; version of CPI that takes into account housing costs of owner-occupier’s and council tax.
March 2017 new headline measure for ONS.

35
Q

Difference between CPI/CPIH and inflation

A

CPI/CIH are a measurement of the level of prices.
CPI assets to measure the way inflation affects a representative family but individual consumption varies from norm e.g. pensioners spend diff & experience inflation diff.

Inflation is the rate of change of prices i.e. the percentage change of CPI provides an estimate for the inflation rate.

36
Q

Limitations of CPI

A
  • Not representative of everyone; personal inflation rates differ
  • Certain goods subject to significant price fluctuations e.g. gas, electricity, fuel.
    Weighted heavily & price inelastic; big influence
37
Q

Retail price index (RPI)

A

a measure of the average level of prices in the UK in the UK.
traditional measure before replaced by RPIX (Tony Blair 1997; excluding mortgage interest payments), which was then replaced by CPI.
excludes top 4% of earners and low income pensioners

38
Q

Advantages of CPI

A

EU uses same methodology to calculate.

39
Q

Differences between CPI and RPI

A

RPI excludes pensioner households & higher income households; CPI does not

RPI tends to be higher rate of change than CPI.

2008 RPI went negative due to low interest rates & RPI affected by mortgage interest payments.

40
Q

UK inflation rate

A

Pre-2003 was 2.5%
Post-2003 2%
Since 1997 Bank of England responsible for keeping it +-1% of the target.

41
Q

Issues of deflation

A
  • People may postpone purchases in the expectation of being able to buy at a lower price in the future.
  • means fall in demand in economy, perpetuating recession.
42
Q

Demand-pull inflation

A

When AD is growing unsustainably, there is pressure on resources. Producers increase their prices and earn more profits.
Triggered by:
- Depreciation in exchange rate; imports more expensive, exports cheaper
- Fiscal stimulus in form of lower taxes/inc. gov spending. Consumers inc. dispos. income
- Lower interest rates, borrowing more.
- High growth in UK exports

43
Q

Cost-push inflation

A

Occurs when firms costs rise:

  • raw materials/oil more expensive
  • labour costs inc. e.g. trade unions
  • expectations of inflation; workers ask for higher wages to compensate
  • indirect taxes could increase; can pass onto buyer
  • depreciation in exchange rate; imports & raw materials more expesnive.
  • monopolies exploit consumers w/ high prices
44
Q

Money supply

A

the quantity of money in the economy.

When money supply grows more rapidly than real output, inflation increases.
If money supply increases, firms & households have more purchasing power than expected; impulse to increase spending. Increase AD.

If BofE printed more money, money supply increases causing hyperinflation (rate of inflation is uncontrollable). Only inflationary if money supply increases at a faster rate than real output.

45
Q

Costs of inflation

A
  • menu costs (firms amending price lists)
  • shoe-leather (opportunity cost of holding money becomes great so people try to keep money in interest-bearing accounts for as long as they can)
  • reluctance to use money for transactions
  • uncertainty reduces incentives for investment
  • prices fail to be reliable signals for resource allocation
46
Q

Benefits of LOW inflation

A

Firms can:

  • cut real wages by offering below-inflation nominal wage rises
  • adjust prices to increase/decrease profit margins
  • more inclined to borrow & spend if they know the real value of debt will fall over time
47
Q

Costs of DEFLATION

A

e. g. Japan (1995-2014)
- sustained fall in the average price level * a rise in the value of money

falling prices due to lack of demand leading to further falls in consumer confidence (households deferred purchases to buy at lower prices in the future)
lack of consumer confidence - lower businesses confidence
deflation increase real interest rates and the real value of debt. decrease in borrowing and spending & investment, reducing AD.

48
Q

Effects of inflation on consumers

A
  • Low/fixed incomes hit hardest due to regressive effect; necessity costs (food/water) inc.
  • Purchasing power of money falls
  • Value of repayment on loans will be lower, real value of debt decreases
49
Q

Effects of inflation on firms

A
  • Low interest rates means borrowing/investing more attractive. High inflation, interest rates tend to be higher, costs of investing higher.
  • Workers demand higher wages
  • Less price competitive on global scale
  • Unpredictable inflation reduces business confidence
50
Q

Effects of inflation on the government

A
  • Gov to increase value of state pension & welfare payments because cost of living is increasing
51
Q

Effects of inflation on workers

A

Real incomes fall with inflation so workers have less disposable income.
More redundancies if firms face higher costs.

52
Q

Define unemployed

A

those of working age (16-64) who are willing & able to work but do not have a job

53
Q

Measures of unemployment

A

International Labour Organisation (ILO) and the UK Labour Force Survey
Criteria:
- been out of a work for 4 weeks
- able & willing to start working within 2 weeks
- workers should be available for 1 hour per week
- part time unemployment included
Gives higher unemployment figure than Claimant Count as part time unemployed less likely to claim JSA

Claimant count
Counts the number of people claiming unemployment related benefits e.g. JSA (Job Seeker’s Allowance).
They must prove they are actively seeking work.

54
Q

Issues with the ILO & UK labour force survey

A

Sampling errors
Expensive to carry out
‘Hidden unemployed’ i.e. Discouraged workers
Underemployed - counted as fully employed.
Tends to be higher than claimant count

55
Q

Issues with the claimant count

A

The total number of people who are claiming unemployment benefits e.g. JSA

  • Difficult to compare between countries
  • some have no unemployment benefits & those that do have diff criteria to claim
  • Not everyone will claim, not everyone needs/wants to (embarrassment)
  • Not everyone is eligble
  • Could be subject to fraud e.g. those working informal sector.
56
Q

Types of unemployment

A

Cyclical (demand-deficient)
Lack of AD for labour.
Labour is a derived demand - growth in the economy
Demand for labour id derived from the demand for goods and services.
Or increases in productivity meaning each worker can producer higher output. Fewer workers needed.

Structural
When skills of workers do not match those required for jobs. Immobility of labour
- Occupational; can't transfer jobs
- Geographical; not willing to move
- New technology; replace jobs
Globalisation contributes.

Frictional
Time between leaving a job and looking for another job. Not damaging, temporary. e.g. post-grad from uni
Rare for 100% employment, always be people moving between jobs

Seasonal
Occurs during certain points in the year.
e.g. tourism

Real wage inflexibility
When wages are above market equilibrium e.g. minimum wage set.
Classical economists argue to let wages be flexible. Remove trade union power and NMW, wages fall and unemployment would fall to 0.

57
Q

Distinction between unemployment and under-employment

A

Unemployed:
Those able and willing to work but not employed. Actively seeking work and looking to start within the next two weeks.

Underemployed:
Labour is not used to its full productive potential. Those are in part-time work, but are looking for a full-time jobs are underemployed.

58
Q

The significance of changes in the rates of employment and unemployment on consumers

A

Consumers unemployed, less disposable income and their standard of living may fall.
Psychological consequences of losing a job, affect mental health of workers

59
Q

The significance of changes in the rates of employment and unemployment on firms

A

Higher rate of unemployment, firms have larger supply to employ from. Wages fall, reduce firms costs
But consumers will have less disposable income, spending falls, firms lose profits. Producers sell inferior goods might see a rise in sales.

60
Q

The significance of changes in the rates of employment and unemployment on workers

A

Waste of workers’ resources with unemploymen. Could lose existing skills if not fully utilised. Those in jobs likely to see fall in wages as supply of labour increases

61
Q

The significance of changes in the rates of employment and unemployment on the government

A

If unemplyoment rate increases, gov may have to spend more on JSA and benefits. Incurs opportunity cost as money could be invested elsewhere.
Gov would receive less revenue from income tax & indirect taxes on expenditure as unemployed have less disposable income to spend.

62
Q

The significance of changes in the rates of employment and unemployment on society

A

Opportunity cost to society. Workers could have produced goods and services if employed.
Negative externalities; crime or vandalism if unemployment rate increases.

63
Q

Inactivity

A

The economically inactive are those not actively looking for jobs. Include carers for elderly, students, retired. Some workers are discouraged from the labour market, since they have been out of work for so long..

64
Q

The significance of migration and skills for employment and unemployment

A
  • Supply of labour at all wage rates increases with more migration (migrants usually working age/looking for job)
  • Migrants tend to bring high quality skills to the domestic workforce; inc. productivity & inc. skillset of the labour market. This could increase global competitiveness.
  • Lowers the wages of lowest paid in the domestic market. Migrants are usually from economies with lower average wages than UK NMW.
  • Generally, higher skilled work force is more employable.
  • Economies progress over time and so higher skills are needed to work in them.
65
Q

Balance of payments

A

a set of accounts identifying the transactions between residents of a country and the rest of the world.
Made up of:
- current account
- capital account
- financial account
- balancing item (net errors & omissions)

66
Q

Define exports and imports

A

Exports are goods and services sold to foreign countries. Positive in BoP. Inflow of money.

Imports are goods and services bought from foreign countries. Negative BoP. Outflow of money.

67
Q

Current account on the BoP

A

3 components: trade in g&s, primary & secondary accounts)

the balance of trade in goods and service =
exports of goods & services - imports of goods & services

Export more services than import.
Import more goods than export.
Decline of manufacturing in 1980s made gap widen.

Economics Theme 2 (6 decks)

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