2.1 Measures of Economic Performance Flashcards
Economic Growth
Rate of change of output
Increases in the long term production potential of the country
Increase in amount of goods and services produced by a country
Measured by percentage change in real GDP per annum
Showed through shift of PPF
Gross Domestic Product
Standard measure of output allowing to compare countries
Total value of goods and services produced in a country within a year
Indicator of standard of living in a country
Total GDP
Overall GDP of a country
GDP Per Capita
Total GDP divided by the population of the country
Grows if national output grows faster than population over a given time period
More goods and services to enjoy per person
Real GDP
GDP after the effects of inflation
Nominal GDP
GDP before effects of inflation
Real Values vs Nominal Values
Real is described as volume of national income
Nominal is described as value of national income
Value = Volume * Current Price Level
Value of NI is its monetary value at the prices of the day
Volume is NI adjusted for inflation and expressed as an index number or in money terms
National Income Measures
Gross Domestic Product (GDP)
Gross National Income (GNI)
Gross National Product (GNP)
Gross National Income
Value of goods and services produced by a country over a period of time plus net overseas interest payments and dividends
Adds a country’s net trade (exports - imports)
Affected by profits from oversea businesses and remittances
Increasingly used rather than GDP due to growing size of remittances and aid
Gross National Product
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
Value of all goods produced by citizens of a country whether they live in the country or not
GDP is value of goods produced inside a country whether they citizens or not
Comparisons about growth
Over time
Between countries
Comparisons about growth over time
Changing NI levels show whether the country has grown or shrunk over a period of time
Data compared to similar countries to see if the country has done well or not
Figures make judgements of economic welfare as NI growth leads to rise in living standards
Use real, per capita figures for accurate comparisons
Comparisons about growth between countries
When countries have a difference in population, difference in total GDP does not necessarily mean difference in living standards
=> GDP per capita used
Real GDP needs to be used as GDP can increase simply because of an increase in prices in the country and inflation is different in all countries
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
Provide alternative to using exchange rates
Useful when comparison countries as it accounts for cost of living so easier to compare living standards
Big Mac Index
Limitations of using GDP to compare living standards
Inaccuracy of data
Inequalities
Quality of goods and services
Comparing different currencies
Spending
Limitations of using GDP to compare living standards
Inaccuracy of data
Some countries are inefficient at calculating data
Use of black market => GDP underestimated
Does not account for home-produced services
Errors in calculating
Different methods used by countries => making comparisons difficult
Important to take away transfer payments
Limitations of using GDP to compare living standards
Inequalities
Increase in GDP may be due to growth of income of only one group of people
=> Growth in NI may not increase living standards of all
Income distribution changes over time and varies between countries making comparison difficult
Limitations of using GDP to compare living standards
Quality of goods and services
Quality has increased over time but does not reflect in real price
=> Living standards may have increased more than GDP suggesting quality of goods and services has improved significantly
Improved technology allows prices to fall suggesting falling living standards when that is not the case
Limitations of using GDP to compare living standards
Comparing different currencies
Issues over which unit should be used to compare
Usually converted to US dollars due to size of American economy
Some argue PPP should be used to take into account impact of differences in cost of living in different countries
Limitations of using GDP to compare living standards
Spending
Some expenditure does not increase living standards but increases GDP - spending on defence or military
=> Difficult to make comparisons
National Happiness
GDP only measures income but there are other factors affecting welfare such as happiness
National Happiness Factors
Real GDP per capita
Health
Life Expectancy
Having someone to count on
Perceived freedom to make life choices
Freedom from corruption
Generosity
National Wellbeing
Measure of how lives are improving
Factors:
Self-reported health
Relationship status
Employment status
Real Incomes and Subject Happiness Correlation
Happiness and income are positively related at low incomes
High levels of income are not associated with increases in happiness
Easterlin Paradox
Easterlin Paradox
An increase in consumption of material goods will increase happiness if basic needs are not met, but once these needs are met, an increase in consumption will not increase long term happiness
Inflation
General increase of prices in the economy which erodes the purchasing power of money
Low inflation is considered to be better than high inflation
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
Indices
Nominal figures must be changed into real figures to make comparisons
Done by choosing a base year and adjusting all other figures into equivalent figures
Indices Examples
Consumer Price Index (CPI)
Retail Price Index (RPI)
Inflation Formula
(Current CPI - Previous CPI) / Previous CPI * 100
Indices Formula
(New Figure / Base Figure) * 100
Consumer Price Index
Measure of households’ purchasing power with the family expenditure survey (FES)
Family Expenditure Survey
Finds what consumers spend their income on
Creates a basket of goods and weighs goods according to how much income is spent on each item
Basket is updated each year to account for changes in spending patterns
Consumer Price Index Limitations
Impossible to account for all goods => not completely representative
Does not include price of housing
Difficult to make comparisons with historical data as figure is more recent than RPI
Retail Price Index
Similar to CPI
Includes housing costs
Excludes top 4% and low income pensioners as they are not average
CPI takes into account price changes result in switching of product to substitute goods while RPI does not
Causes of Inflation
Demand Pull
Cost Push
Growth of Money Supply
Demand Pull
Prices in a market are determined by demand and supply
A shift in either causes price to change
Increase in AD pushes price up
Inflation can therefore be caused by an increase in AD
If any factor which increases AS was to increase, inflation would increase
Cost Push
While an increase in AD pushes prices up, a decrease in AS also pushes prices up
When businesses find costs have risen, they increase prices to maintain profit margins
When a factor which decreases AS increases, prices increase
Increase prices leads to increased inflation
Growth of Money Supply
When there is too much money in the economy, inflation increases
If people have access to money, they will want to spend it
If there is no increase in AS, prices rise
Government can also increase money printed and decisions to increase government borrowing can also increase money supply
Fisher Equation and Bank Multiplier
Fisher Equation
MV = PT
M is money supply
V is speed of money circulating in economy
P is price level
T is number of transactions
Increase in money supply will lead to an increase in price level, ceteris paribus
Effects of Inflation
Consumers
Fall in living standards if incomes do not rise
Those in debt can pay off price which is of cheaper value but those who are owed money lose because money they get back is of lower value
Psychological effects affecting spending
Effects of Inflation
Firms
If British inflation is higher, goods become more expensive meaning they become less internationally competitive making it difficult to export - affects BOP
Deflation encourages postpone of purchases
Difficult to predict inflation
New prices have to be calculated
Effects of Inflation
Governments
If governments fail to change excise taxes in line with inflation then real government revenue falls
If fail to change personal income tax allowances, then real government income increases and taxpayers have less money
Effects of Inflation
Workers
Living standard decreases if there are no yearly pay rises - weaker union members mostly affected
Could lead to loss of jobs as there is a lack of demand and firms need to maintain profit margin
Measures of Unemployment
Claimant Count
International Labour Organisation and UK Labour Force Survey (ILO and LFS)
Claimant Count
Number of people receiving benefits for being unemployment
Provides the number of claimants on participial day each month the numbers joining and leaving the count each month
International Labour Organisation
Office of National Statistics (ONS) uses ILO definition of unemployment and employed
Through ILO, anyone over 16 can be classed as employed, unemployed or economically inactive
Employed
1 hour paid work a week
Temporarily away from work (holiday)
Government supported training scheme
15 hours unpaid work for family business
Unemployed
Those of working age without work
Able to work and seeking work and have actively sought work in last 4 weeks and are available to start work in the next 2 weeks
Economically Inactive
Neither employed nor unemployed
People of working age not seeking employment
Of working age who are unable to work
Labour Force Survey
Sample of people living in households and is a legal requirement for every country in the EU
Asks questions about personal circumstances and activity in the labour market to class people as employed, unemployed or inactive
Only an estimate as it is a sample
Claimant Count and LFS Comparisons
Claimant Count includes those working in hidden economy or fraudulently claiming benefits
Some people aren’t eligible for benefits so appear on LFS but not CC => LFS is higher than CC
Rates can be going in different directions
CC and LFS Limitations
Both underestimate figures
Do not include:
- Working part time but want to work full time
- On government training schemes who prefer employment
- Classed as sick or disabled
- Not actively looking for jobs but would take one if offered
Hidden Unemployed
Rates
Economically Active
Employed and unemployed
Engaged in labour market
People employers can look to recruit
Rates
Workless
Unemployed and inactive
Employment and Unemployment Rate
Employment Rate - Percentage of population of working age who are employed
Unemployment Rate - Percentage of economically active who are unemployed
Activity / Participation Rate
Inactivity Rate
Percentage of population of working age who are economically active
Percentage of population of working age who are inactive
Underemployment
Those in part time or zero hour contracts who prefer to be full time
Self employed but prefer to be employees
In jobs below their skill level
Not included in any unemployment statistics
Increases during recessions as hours are reduced
Significance of Changes in Activity
Increases in inactivity will decrease size of labour force causing a fall in productive potential of country. Lower GDP and lower tax revenues as less people are working
However, decreases in inactivity could result in more being unemployed if there are no available jobs
Types of Unemployment
Frictional Unemployment
Structural Unemployment
Seasonal Unemployment
Cyclical Unemployment
Real Wage Inflexibility
Types of Unemployment
Frictional Unemployment
Moving between jobs
Due to new workers entering labour market or people choosing to leave previous job
May take a while to locate and gain a job they are willing to accept
Short term
Types of Unemployment
Structural Unemployment
Long term decline in demand in an industry leading to reduction in employment
Due to increasing international competition or technology
Demand for labour is lower than supply
Lack of geographical and occupational mobility means people remain unemployed
Different Types
Types of Structural Unemployment
Regional Unemployment
Sectoral Unemployment
Technological Unemployment
Types of Structural Unemployment
Regional Unemployment
Certain areas of a country suffer from low levels of employment due to industry closures
Made even worse when loss of jobs mean a fall in demand for other businesses in the area forcing more closures and job losses
Types of Structural Unemployment
Sectoral Unemployment
Where one sector suffers a dramatic fall in employment
Types of Structural Unemployment
Technological Unemployment
Where an improvement in technology leads to jobs being replaced
Types of Unemployment
Seasonal Unemployment
Some employment is strongly seasonal in demand
Once the time of year passes, labour force is drastically reduced
Little can be done to prevent this from occurring in a free market economy
Types of Unemployment
Cyclical Unemployment
Due to general lack of demand of goods and services within the country
Keynesian Demand Deficient Unemployment
When there is a reccession or sever slowdown in economic growth, there is rising unemployment due to closures and business failures
Due to decrease in demand
Types of Unemployment
Real Wage Inflexibility
Result of real wages being above their market clearing level leading to excess supply of labour
Workers may be prepared to work for less than minimum wage but it is illegal so unemployed workers cannot get a job
Economists believe minimum wage risks creating unemployment in industries where international competition is sever - little evidence yet
Could be caused by some workers thinking they receive more in welfare benefits than low wage jobs
Migration
Increase in net inward migration tends to lead to increased jobs
Most people come to UK, working age and often take low skilled jobs and are less likely to claim benefits
Due to circular flow of income, immigrants’ spending creates jobs and employment increases
Leads to lower wages
Foreign workers leads to increased supply of labour => price equilibrium of labour is reduced
More competition for works => affects low skilled
Skills
Higher skills needed to work in developed economies
Need to increase skill of workforce over time
Structural unemployment is causes by a lack of skills
If firms do no train staff, government has to step in to correct market failure but this is costly => increase in long term unemployment
Migrant workers may fill shortages if skills fit
Impact of Unemployment
Workers
Loss of income => decline in living standards
Suffer from stigma of being unemployed and feel degraded by process to receive benefits => stress
Long term unemployed find it difficult to get jobs due to loss of skills
Those in jobs suffer from low job security as they may be made redundant or see a fall in wages
Impact of Unemployment
Firms
Decrease in demand for goods (depends on income elasticity of demand) => profit falls
Smaller pool of skilled workers to employ due to loss of skills from long term unemployed
Offer low wages as more people will accept
Impact of Unemployment
Consumers
Lose out as shopping centres tend to be run down and don’t offer range compared to areas with low unemployment
Unemployed consumers have less to spend
Firms may lower prices and put on sales to increase demand
Impact of Unemployment
Government
Fall in tax revenues and higher spending on welfare payments => opportunity cost
Increase in budget deficit
Impact of Unemployment
Society as a whole
Social depreciation, correlation between crime and social dislocation
Fall in demand for local goods and services => fall in income => further unemployment
Loss of potential national output, representing inefficient use of scarce resources => negative effect on LRAS and not achieving desired PPF
Fall in national output
Balance of Payments (BOP)
Record of all financial dealings over a period of time between economic agents of one country and all other country
Imports
Purchasing of foreign goods and services
Money goes out
Negative on BOP
Exports
Selling of goods and services to foreign consumers
Money comes in
Positive on BOP
Components of BOP
Current Account
Capital and Financial Account
Money flowing into the country is positive
Money flowing out the country is negative
Current Account
Trade in Goods
Trade in Services
Income and Current Transfers
Current Account
Trade in Goods
Visible and can be physically seen (tangible)
Goods that are traded
Different between visible exports and imports is known as balance of trade
Current Account
Trade in Services
Invisible as they cannot be seen (intangible)
Current Account
Income and Current Transfers
Wages, interests profit or dividends
Current transfers usually done by governments and are when they transfer money into or out of overseas organisations
Split into primary and secondary incomes
Primary Income
Result of loans of the factors of production abroad
Interest
Profits
Dividends
Secondary Income
Range of mainly government transfers to overseas organisations
Current Balance
Balance of trade + Balance of invisibles + Net income and current transfers
Current Account Deficits and Surpluses
Surplus:
When exports are greater than imports
Balance is positive
Deficit:
When imports are greater than exports
Balance in negative
Macroeconomic Objectives
Low unemployment
Low and stable inflation
Economic growth at a similar rate to other economies
Balance of payment equilibrium (including current account balance)
Achieving a BOP Equilibrium Difficulties
High economic growth means current account becomes a deficit as there is increased import due to increased demand and it is during times of high unemployment that the current account deficit tends to improve
Governments tend to want export led growth which causes economic growth, high employment and improve current account balance although it could lead to inflation
Interconnectedness of Economics
Proportion of output of an individual economy which is traded internationally is growing
Many more people own assets in other countries
Increasing migration
More technology being shared on a faster basis
Means countries become more interdependent so a change in economic condition of one affect another
In theory, all current balances should add up to zero as what one country exports, another imports
