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Old Macro > 2.1 Measures of Economic Performance > Flashcards

2.1 Measures of Economic Performance Flashcards

1
Q

Economic Growth

A

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

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2
Q

Gross Domestic Product

A

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

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3
Q

Total GDP

A

Overall GDP of a country

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4
Q

GDP Per Capita

A

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

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5
Q

Real GDP

A

GDP after the effects of inflation

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6
Q

Nominal GDP

A

GDP before effects of inflation

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7
Q

Real Values vs Nominal Values

A

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

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8
Q

National Income Measures

A

Gross Domestic Product (GDP)
Gross National Income (GNI)
Gross National Product (GNP)

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9
Q

Gross National Income

A

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

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10
Q

Gross National Product

A

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

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11
Q

Comparisons about growth

A

Over time
Between countries

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12
Q

Comparisons about growth over time

A

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

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13
Q

Comparisons about growth between countries

A

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

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14
Q

Purchasing Power Parities

A

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

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15
Q

Limitations of using GDP to compare living standards

A

Inaccuracy of data
Inequalities
Quality of goods and services
Comparing different currencies
Spending

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16
Q

Limitations of using GDP to compare living standards
Inaccuracy of data

A

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

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17
Q

Limitations of using GDP to compare living standards
Inequalities

A

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

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18
Q

Limitations of using GDP to compare living standards
Quality of goods and services

A

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

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19
Q

Limitations of using GDP to compare living standards
Comparing different currencies

A

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

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20
Q

Limitations of using GDP to compare living standards
Spending

A

Some expenditure does not increase living standards but increases GDP - spending on defence or military
=> Difficult to make comparisons

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21
Q

National Happiness

A

GDP only measures income but there are other factors affecting welfare such as happiness

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22
Q

National Happiness Factors

A

Real GDP per capita
Health
Life Expectancy
Having someone to count on
Perceived freedom to make life choices
Freedom from corruption
Generosity

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23
Q

National Wellbeing

A

Measure of how lives are improving

Factors:
Self-reported health
Relationship status
Employment status

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24
Q

Real Incomes and Subject Happiness Correlation

A

Happiness and income are positively related at low incomes
High levels of income are not associated with increases in happiness
Easterlin Paradox

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25
Q

Easterlin Paradox

A

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

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26
Q

Inflation

A

General increase of prices in the economy which erodes the purchasing power of money
Low inflation is considered to be better than high inflation

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27
Q

Deflation

A

Fall of prices and indicates a slowdown in the rate of growth of output in the economy

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28
Q

Disinflation

A

Reduction in the rate of inflation

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29
Q

Indices

A

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

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30
Q

Indices Examples

A

Consumer Price Index (CPI)
Retail Price Index (RPI)

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31
Q

Inflation Formula

A

(Current CPI - Previous CPI) / Previous CPI * 100

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32
Q

Indices Formula

A

(New Figure / Base Figure) * 100

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33
Q

Consumer Price Index

A

Measure of households’ purchasing power with the family expenditure survey (FES)

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34
Q

Family Expenditure Survey

A

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

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35
Q

Consumer Price Index Limitations

A

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

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36
Q

Retail Price Index

A

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

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37
Q

Causes of Inflation

A

Demand Pull
Cost Push
Growth of Money Supply

38
Q

Demand Pull

A

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

39
Q

Cost Push

A

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

40
Q

Growth of Money Supply

A

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

41
Q

Fisher Equation

A

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

42
Q

Effects of Inflation
Consumers

A

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

43
Q

Effects of Inflation
Firms

A

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

44
Q

Effects of Inflation
Governments

A

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

45
Q

Effects of Inflation
Workers

A

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

46
Q

Measures of Unemployment

A

Claimant Count
International Labour Organisation and UK Labour Force Survey (ILO and LFS)

47
Q

Claimant Count

A

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

48
Q

International Labour Organisation

A

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

49
Q

Employed

A

1 hour paid work a week
Temporarily away from work (holiday)
Government supported training scheme
15 hours unpaid work for family business

50
Q

Unemployed

A

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

51
Q

Economically Inactive

A

Neither employed nor unemployed
People of working age not seeking employment
Of working age who are unable to work

52
Q

Labour Force Survey

A

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

53
Q

Claimant Count and LFS Comparisons

A

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

54
Q

CC and LFS Limitations

A

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

55
Q

Rates
Economically Active

A

Employed and unemployed
Engaged in labour market
People employers can look to recruit

56
Q

Rates
Workless

A

Unemployed and inactive

57
Q

Employment and Unemployment Rate

A

Employment Rate - Percentage of population of working age who are employed

Unemployment Rate - Percentage of economically active who are unemployed

58
Q

Activity / Participation Rate

Inactivity Rate

A

Percentage of population of working age who are economically active

Percentage of population of working age who are inactive

59
Q

Underemployment

A

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

60
Q

Significance of Changes in Activity

A

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

61
Q

Types of Unemployment

A

Frictional Unemployment
Structural Unemployment
Seasonal Unemployment
Cyclical Unemployment
Real Wage Inflexibility

62
Q

Types of Unemployment
Frictional Unemployment

A

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

63
Q

Types of Unemployment
Structural Unemployment

A

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

64
Q

Types of Structural Unemployment

A

Regional Unemployment
Sectoral Unemployment
Technological Unemployment

65
Q

Types of Structural Unemployment
Regional Unemployment

A

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

66
Q

Types of Structural Unemployment
Sectoral Unemployment

A

Where one sector suffers a dramatic fall in employment

67
Q

Types of Structural Unemployment
Technological Unemployment

A

Where an improvement in technology leads to jobs being replaced

68
Q

Types of Unemployment
Seasonal Unemployment

A

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

69
Q

Types of Unemployment
Cyclical Unemployment

A

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

70
Q

Types of Unemployment
Real Wage Inflexibility

A

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

71
Q

Migration

A

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

72
Q

Skills

A

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

73
Q

Impact of Unemployment
Workers

A

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

74
Q

Impact of Unemployment
Firms

A

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

75
Q

Impact of Unemployment
Consumers

A

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

76
Q

Impact of Unemployment
Government

A

Fall in tax revenues and higher spending on welfare payments => opportunity cost
Increase in budget deficit

77
Q

Impact of Unemployment
Society as a whole

A

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

78
Q

Balance of Payments (BOP)

A

Record of all financial dealings over a period of time between economic agents of one country and all other country

79
Q

Imports

A

Purchasing of foreign goods and services
Money goes out
Negative on BOP

80
Q

Exports

A

Selling of goods and services to foreign consumers
Money comes in
Positive on BOP

81
Q

Components of BOP

A

Current Account
Capital and Financial Account

Money flowing into the country is positive
Money flowing out the country is negative

82
Q

Current Account

A

Trade in Goods
Trade in Services
Income and Current Transfers

83
Q

Current Account
Trade in Goods

A

Visible and can be physically seen (tangible)
Goods that are traded
Different between visible exports and imports is known as balance of trade

84
Q

Current Account
Trade in Services

A

Invisible as they cannot be seen (intangible)

85
Q

Current Account
Income and Current Transfers

A

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

86
Q

Primary Income

A

Result of loans of the factors of production abroad

Interest
Profits
Dividends

87
Q

Secondary Income

A

Range of mainly government transfers to overseas organisations

88
Q

Current Balance

A

Balance of trade + Balance of invisibles + Net income and current transfers

89
Q

Current Account Deficits and Surpluses

A

Surplus:
When exports are greater than imports
Balance is positive

Deficit:
When imports are greater than exports
Balance in negative

90
Q

Macroeconomic Objectives

A

Low unemployment
Low and stable inflation
Economic growth at a similar rate to other economies
Balance of payment equilibrium (including current account balance)

91
Q

Achieving a BOP Equilibrium Difficulties

A

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

92
Q

Interconnectedness of Economics

A

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

Old Macro (11 decks)

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