2.1 Measures Of Economic Performance Flashcards
Measures of economic performance
- unemployment numbers
- rate of inflation
- rate of economic growth
- balance of payments position on current account (inflow and outflow of goods, services, investment incomes and transfer payments)
- government budget
- degree of inequality
- quality of environment
Indexes
A technique for measuring and observing movements in variables that cannot be directly measured (inflation, confidence)
Index number for base period = 100
Formula for index number
Index number = (raw number in period / raw number in base period) x 100
(round to 1 d.p)
GDP (gross domestic product)
Measures quantity of goods & services produced in an economy
How does GDP and economic growth relate
Economic growth occurs when there is a rise in the value of real GDP
Increase in national output = rise in economic growth
Income = output = expenditure
As GDP can be measured by expenditure method (consumer expenditure, investment, gov spending, net trade)
Or by income method (wages, interest, profits, rents)
What does economic growth lead to
- higher living standards
- more employment opportunities
Real GDP vs Nominal GDP
Real GDP: value of GDP adjusted for inflation (uses GDP deflator)
Nominal GDP: value of GDP (goods and services within an economy) without being adjusted for inflation
Total GDP vs GDP per capita
Total GDP: total value of all goods & services produced within a country in a year
GDP per capita: value of total GDP / population of country (average output per person in economy) (easier to compare living standards amongst different countries)
Volume of GDP vs Value of GDP
Volume of GDP: number of goods/services produced
Value of GDP: what goods/services produced are worth (volume x current price level)
(Important for trade, country may import more goods/services than export so trade surplus as value of exports exceed value of imports, but volume doesn’t)
Gross national income (GNI) as another national income measure
GDP figure + net income paid into country from abroad including interest payments & dividends (& removed remittances sent home by migrant workers)
(GNI figure may be much lower than GDP in countries with large foreign populations as high remittances. Eg. Ireland has lots of MNCs due to low corporation tax rate
GNI increasing used instead of GDP due to growing size of remittances and aid)
GNI per capita more useful for comparisons
Comparison of rates of growth between countries & over time
Use economic date to compare economic performance between different countries/ determine level of success caused by country’s policy decisions
- comparing GDP per capita more useful than GDP as takes into account population differences
- use real date rather than normal data as high inflation rate can artificially boost GDP growth rate but consumers real incomes may not have risen by much
Limitations of using GDP to compare living standards between countries & over time
- doesnt include unofficial or unpaid work eg. Charity, childcare
- difficult to measure value of innovation (apps, free software/ improving quality of goods
- doesn’t include factors affecting / impacts on living standards (pollution, stress levels, national welfare, happiness) (increase in GDP often has negatives effects on standards of life)
- doesn’t take into account black markets (underground economy) as not registered (so countries with lots of black markets like Mexico have GDP underestimated)
- increase in real GDP may not be shared equally among economy’s population (doesn’t show how income is distributed, masks levels of inequality or true living standards of majority of population)
Purchasing Power Parities (PPPs)
Help compare costs of living between countries
So gives more accurate comparison of different countries GDP rates
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
The use of PPP-adjusted figures in international comparisons
if basket of goods in UK equivalent of $400 (after pounds converted to dollars),
but basket of goods in America worth $800,
= purchasing power parity is 1:2.
So even if America has higher GDP per capita than UK, cost of living much higher so American citizens worse off
If GDP per capita in UK = $80,000 and GDP per capita in US = $100,000,
then UK GDP (PPP) = $80,000 and US GDP (PPP) = $50,000.
So when adjusted to PPP, UK has higher GDP per capita rate than America, suggesting higher living standards in UK
National happiness (and UK national wellbeing stats)
National happiness index used alongside economic indicators to give better idea of standard of living between countries (to resolve limitations of GDP)
UK ranked 19th out of 156 nations in UN happiness report in 2018 using 6 key factors:
- GDP per capital (23rd)
- Generosity (6th)
- Absence of corruption (24th)
- social support (13th)
- perceived freedom (40th)
- healthy life expectancy (26th)
Relationship between real incomes & subjective happiness
Easterlin paradox suggests life satisfaction rises with average incomes but only up to a certain point.
After this point, marginal gain in happiness derived from increases in income declines
so larger income increase needed to generate same increase in happiness as before the marginal happiness gain
Economic Growth & how to calculate it
an increase in the amount of goods and services produced per head of the population over a period of time
= Calculate percentage change in GDP from 1 year to another
How is inflation calculated
Percentage rate of change in prices over time
The balance of payments
Record of all financial dealing over a period of time between economic agents of one country and all other countries
What is the balance of payments account made up of
- the current account (records payments for purchase and sale of goods & services )
- the capital and financial account (records flows of money associated with saving, investment, speculation & currency stabilisation)
What components is the current account split into?
- balance of trade in goods (difference between value of visible exports and visible imports)
- balance of trade in services (difference between value of invisible exports and invisible imports)
- income (remittances)
- transfers (payments eg. EU fees, aid contribution)
Balance of trade in goods
Trade in raw materials, manufactured goods
(tangible)
- visible exports = inward flow of money = positive sign on balance of payments account
- visible imports = outward flow of money = negative sign on balance of payments
= value of visible exports - value of visible imports
Balance of trade in services
Eg. Financial services, transport (intangible)
- invisible exports = inward flow of money = export credits in services (positive) on balance of payments accounts
- invisible imports = outward flow of money = export debits in services (negative) on balance on payments accounts
= value of invisible exports = value of invisible imports
Primary income
Results from loan of factors of production abroad (interest profits & dividends on assets owned abroad)
Net income = income sent back to domestic country by workers abroad - income sent to foreign countries from workers in domestic country (remittances)
Secondary income (transfers)
Range of mainly government transfers to and from overseas organisations (European Union)
Eg. EU fees or aid contribution
What does the Trade of invisibles include?
- trade in services
- primary income
- secondary income (transfers)
Current balance
Difference between value of exports and total imports
(Balance of trade in goods + balance of trade in services + income and current transfers (primary & secondary income))
Current account surplus
Exports greater than imports (monies flowing into country greater than monies flowing out of country from all components of current account (net trade, income, transfers) )
= current balance (X-M) is positive
Current account deficit
Imports greater than exports (monies flowing out of country greater than monies flowing into country from all components of current account (net trade, income, transfers) )
= current balance (X-M) is negative
Inflation definition
An increase in the general price level of goods/services within an economy resulting in a decrease in the purchasing power of money
Deflation definition
A decrease in the general price level of goods/services within an economy resulting in an increase in the purchasing power of money
Disinflation definition
A decrease in the rate of inflation (the general price level is increasing, but at a slower rate than before)
How to use the CPI to calculate the rate of inflation
- family expenditure survey for UK households (how much money spent on what goods/services)
- around 700 most popular household goods/services out into a basket of goods/services
- basket of goods has weighting system to indicate percentage of household income spent on each item
- base year is chosen (index = 100)
- index numbers calculated = gives measure of changes in rate of inflation
(new basket of goods made each year to keep up with changes in consumer spending)
Consumer price index (CPI)
= UK gov’s preferred measure of inflation, measures changes in average cost of living for a representative household & is a weighted price index
Retail price index (RPI)
= measure of inflation published monthly by Office for National Statistics, measures change in cost of representative sample of retail goods/services
Doesn’t meet international statistical standards, emphasises CPI instead
Limitations of CPI in measuring rate of inflation
- basket of goods may not represent all consumers spending habits = may be inaccurate for some households
- different measurements of inflation used by different countries (eg. RPI or CPI) = difficult to compare
- prone to inaccuracy / errors as its data collection = inflation may be under/over valued
- difficult to compare to previous years as content of basket of goods/services keeps changing (less relevant/useful)
- consumption habits can change in less than a year = items in basket of goods can become outdated = less accurate representation
Alternative measure of rate of inflation
How does it differ from CPI
= retail price index (RPI)
Unlike CPI, RPI takes into account housing costs = often higher than CPI as housing costs increase at higher rate
Causes of inflation
- Demand pull inflation (caused by increase in components of AD)
- Cost push inflation (caused by decrease in AS & increase in firms cause of production)
- Growth of money supply
Demand pull inflation (with graph)
- increase in AD (AD1 to AD2) causes increase in real GDP (Y1 to Y2) & increase in price level within economy (P1 to P2)
- moves economy closer to full employment = pressure on existing factors of production = prices rise (wage inflation due to harder work, scarce workers)
- consumers have more disposable income to spend on goods/services = increases inflation further
Any increase in components of AD (C, I, G, X-M) causes demand pull inflation
Cost push inflation (with graph)
- decrease in AS (AS1 to AS2) causes decrease in real GDP (Y1 to Y2) & increase in price level within economy (P1 to P2)
- caused by supply side shocks (decrease in value of pound = imports more expensive = firms increase prices to compensate for increased costs)
Anything that causes decrease in AS & increase in firms cost of production causes cost push inflation (oil prices, wages, VAT, corporation tax)
Which type of inflation is worse & why
= cost push inflation if worst type of inflation for economy as real GDP is decreasing while inflation is increasing = results in stagnation, negative economic growth
Growth of the money supply
Price level of goods/services within economy equal to money supply (if more money chasing same quantity of goods, price will rise to compensate)
Monetary policy of quantitive easing = increasing money supply (encourages banks to lend money to consumers / firms to increase spending to increase general price level of goods/services within economy)
Effect of inflation on consumers
- reduction in purchasing power = weekly spending buys lower quantity of goods/services than before
- bigger impact on lower incomes as essentials increase in price (spend much higher percentage of weekly income on each item in basket of goods)
+ real value of debt/loan repayments will decrease (doesn’t align with inflation) = more disposable income to spend = consumption increases
Effect of inflation on firms
- results in increase in interest rate (to control inflation by deterring consumption) = upward pressure on prices, increase loan repayments for firms
- employees likely to ask for pay rise to compensate for reduction in purchasing power, increases costs of production,
+ but firms may be able to give wage increases to workers below rate of inflation = wage costs decrease & workers remain happy (still a pay increase)
- domestic firms less competitive globally as inflation increase price of exports relative to other countries = reduced demand for exports, & imports cheaper so domestic consumers demand increase for imported goods/services
Effect of inflation on government
- increase cost of living for citizens = gov has to increase state pensions & welfare payments = increase in gov spending
+ helps to reduce national debt in real terms (requires smaller % of gov total tax revenue, easier to pay back)
Effect of inflation on workers
+ wage increase likely to compensate for increase in cost of living
- but may lose out if wage increase is less than inflation rate
- higher wages may push workers into higher income tax bracket = may not gain wage increase by increased rate of tax
- increases costs of production for firms = redundancies made to reduce costs & maintain competition = unemployment within economy will increase
Unemployment
Those who are willing, able and registered to work, but cannot find a job
The measures of unemployment
- the claimant count
- the international labour organisation (ILO) & the uk labour force survey
The claimant count
(Definition, negatives)
= measures no. of ppl claiming job seekers allowance in uk
- figure often lower than labour force survey as ppl who fit ILO not always eligible to claim job seekers allowance
The international labour organisation (ILO) & UK labour force survey
ILO definition of unemployment
(Definition, positives, negatives)
= labour force survey given to random sample of households within UK, makes unemployment statistic
ILO definition of unemployment = ready to work within 2 weeks & activity looked for work in past month, but cant find a job
+ labour force survey used worldwide, easy to compare internationally
- just a sample of houses = prone for sampling errors = figure may be inaccurate
Difference between unemployment and under-employment
Unemployment = dont current have a job despite actively searching, willing & able to work
Underemployment = currently working, but overqualified for job, skill set isn’t fully utilised
Underemployment big issue in UK
Significance of changes in rate of employment (what causes it)
- employment can increase (while unemployment increases) due to increased immigration = boost no. of ppl in workforce (evaluation)
- employment can decrease if no. of ppl not actively searching for job = aren’t in workforce
Significance in changes in unemployment (what causes it)
- increase in unemployment (while employment increases) due to increase in no. of ppl economically inactive (not searching for work) = not in work, but not counted in unemployment figure
Significance of changes in rate of inactivity (problems with economically inactive)
- roughly 9000 aged 16-64 in UK economically inactive (long term sickness, lack of motivation, dont find jobs in short term = unmotivated = drop out of workforce)
- economically inactive not counted in unemployment = doesn’t represent problems with increase in economically inactive = con of unemployment measures
Types of unemployment
- structural unemployment
- frictional unemployment
- seasonal unemployment
- demand deficiency & cyclical unemployment
- real wage inflexibility
Structural unemployment (definition, causes)
= when the demand for labour is less than its supply in an individual labour market in the economy (regional unemployment)
Causes:
- geographical immobility (workers unwilling to move to find a job eg. Cost, family ties) - regional unemployment
- occupational immobility (workers have no skills, skills that are no longer needed) - sectoral unemployment
Frictional unemployment
(definition, how to reduce it)
= short-term unemployment when workers lost their job and are searching for a new one
Always in a mixed economy
Reduce:
- educational & careers advice (better job info) = shorter time searching for job
- higher level of unemployment benefits = more time to search for better job, but may be over-reliant & never find new job
Seasonal unemployment
= some jobs only available in certain seasons, become unemployed when season changes (tourism, construction worker, ski instructor)
tends to rise in winter when some workers laid off, but falls in summer when they are taken on again
Demand deficiency & cyclical unemployment (definition, why, graph)
= decease in AD (AD1 to AD2) = decrease in demand for goods/services = demand for labour falls = unemployment increases (firms need/can afford less labour to meet demand), causes real gdp to fall (Y1 to Y2) & price level to rise (P1 to P2)
Real wage inflexibility / unemployment
= difference between demand for labour & supply for labour
Wages fixed above equilibrium rate (minimum wage) = supply of labour is more than demand for labour (excess supply), full unemployment cant be attained
Significance of skills for employment & unemployment
- high levels of occupational immobility causes unemployment rate to be high (workforce has lack of relevant skills), created long term unemployment for workers who don’t get retrained
- skills brought in by migrants substitute skills in domestic market = domestic skilled workers are replaced
+ but some migrants have complementary skills = higher productivity levels = unemployment decreases
Significance of migration for employment & unemployment
- migration = expansion in workforce (most of working age searching for work) = supply of labour increases = reduces domestic work wages
(People most affected = low end of pay scale as migrants willing to earn less & replaced them)
+ increase in migrants increases demand for uk good/services = demand for labour increases = reduces excess labour supply
- skills brought in by migrants substitute skills in domestic market = domestic skilled workers are replaced,
+ but some migrants have complementary skills = higher productivity levels = unemployment decreases
Effect of unemployment on consumers
- loss of income = fall in living standards, health issues (depression), reduction in self-esteem
Effect of unemployment on firms
- increase in consumers with no disposable income = reduced demand for goods/services = fall in firms revenue, may shut down
+ increases no. of workers searching for job = wider choice of skills for firms & workers willing to take pay cut (high skilled workers for cheaper labour = reduction in costs)
Effect of unemployment on government
- reduction in tax revenue (fall in income tax & consumption = fall in VAT)
- more gov spending on welfare payments = decrease gov budget & increase national debt
Effect of unemployment on society
- increase in crime & unhappiness = negative externalities (vandalism) increases
- unhappy population = lack of motivation = increase in economically inactive
Causes of a current account deficit
- strong domestic growth (increase in AS = increase in domestic income = demand for imported goods/services increases (majority from abroad) = trade deficit
- overseas recession = reduction in income overseas = decrease in demand for domestic goods/services = reduction in revenue from exports = trade deficit
- strong exchange rate = cheaper imports, more expensive imports = domestic goods/services less competitive = demand for exports decreases & demand for imports increases = trade deficit
- high cost of production for domestic firms (low investment, low production, high unit labour cost) = rise in cost of domestic goods/services = rise in price of domestic goods/services = reduction in demand for domestic exports = trade deficit
- high relative inflation = increase in price of domestic goods/services compared to other countries = less competitive exports = reduction in export revenue = trade deficit
- poor quality goods = decrease in demand for domestic goods/services (less desirable) = export revenue low = trade deficit
- depletion of resources = domestic country may run out of resources (finite resources eg. Oil) they’re reliant on for export revenue = exports decrease = export revenue decreases = trade deficit
Supply side causes more damaging than demand side causes (long term problems, cant be solved easily)
4 main gov macroeconomic objectives
- low unemployment, achieving full employment
- low and stable inflation, avoiding deflation
- economic growth on a par with similar economies
- balance of payments equilibrium, including equilibrium on the current account
What macroeconomic objectives are affected by a current account deficit
- stable economic growth
= reduction in AD = negative economic growth - low unemployment
= less demand for goods / services = less demand for labour (derived) = increase in unemployment
What macroeconomic objectives are affected by a current account surplus
- low & stable inflation
- balance of payments equilibrium
= increase in AD = increase in real GDP & price level = inflation increases past stable rate if price already high
Problems with high inflation:
- reduce purchasing power, consumers can’t buy as much, fall in living standards
- exports less competitive, current account surplus hard to maintain in long run
Interconnectedness of economies through international trade (problems of international trade)
- country’s trade heavily relies on economic conditions of other country’s (one country’s exports is another countries imports)
(If one country experiences a recession, spending on imports will decrease so other countries exports will decrease, reduction of export revenue = contraction in AD = increase in unemployment)
