2.1 Measures of economic performance Flashcards
Big Mac Index
Measures PPP between diff countries.
Average national Big Mac prices in dollars allows goods to be informally compared.
Constant prices
Data has been inflation adjusted
Economic development
LR improvements in measures of income per capita, education, health, poverty, inequality
Economic growth
SR: increase in real GDP
LR: increase in country’s productive capacity
GNI
Gross national income - income generated from resources owned by inhabitants and businesses of a country
GDP
Gross domestic product - total value of output of G/S produced in a country
GDP per capita
GDP per person
HDI
Human Development Index - compares levels of development in countries (life expectancy)
National income
EQUALS GDP - total income earned by all FOP in economy in given time frame
Nominal GDP
National income unadjusted for the effects of inflation
Purchasing power
buying power of a unit of currency.
inversely related to rate of inflation
PPP
Purchasing power parity - assumption that exchange rates are in equilibrium
takes living costs into account
how many units of one country’s currency are needed to buy the same basket of goods and
services as can be bought with a given amount of another currency
DIFFICULTIES IN MEASURING GDP
unrecorded/illegal transactions
quality of life ignored
subsistence production (DIY) ignored
distribution of income not considered
data collection may have errors
value of leisure ignored
difficult to measure value of innovation
CPI
Consumer price index - weighted basket of G/S based upon importance excludes mortgage interest repayments
Basket of 700 G/S updated each year
Problems with CPI
only average families: no pensioners, students
people have different spending patterns
tastes and preferences change over time and CPI slow to react
ignores regional differences in living costs
ignores improvements in quality of goods (which may cause increase in price of good)
not fully representative
price fluctuations of certain goods
Cyclical unemployment
caused by low levels of aggregate demand,
reducing the demand for labour across many industries
Disguised unemployment
Labour force left without work or in redundant manner where worker productivity is essentially zero
Economically active
unemployed and actively seeking employment
Economically inactive
working age but neither in work or actively seeking word
Frictional unemployment
moving between jobs.
Seasonal unemployment
unemployed at particular times in the year when demand for labour is lower than usual
Structural unemployment
decline in industry which leaves people unemployed because they do not have skills for growing industries
demand for labour is less than its supply
e.g. regional, sectoral, technological
Under-employment
willing to supply more hours than employer is offering
over qualified for a job
Unemployment trap
prospect of the loss of unemployment benefits dissuades those without work from taking a new job
LFS
Labour Force Survey - survey of 60k random households to find out their employment status
ILO international so allows comparisons between different countries
Problems with LFS
Only 60k households - sampling errors
Costly and time consuming
Biased survey
Outdated information (time lag when findings are published)
Not representative
Claimant Count
number of people claiming unemployment related benefits JSA
Problems with claimant count
People may work and claim JSA
Pride issues - some may not wish to claim JSA
Not eligible - you need to over 18
Underemployment ignored
BOP
Balance of payments - record of all financial transactions between economy and rest of world
Capital account
Flows of money associated with savings, investment, speculation and currency stabilisation
Current account
Difference between money going in and out of economy
Remittances
sending money to people in another country
Primary income
citizens net income from abroad (returns on FOP)
Secondary income
net transfers abroad (one-sided, aid)
Issues with current account deficit
loss of AD, slower rate of real GDP growth, reduced living standards
currency weakness, higher inflation
may show lack of international competitiveness
Causes of current account deficit
Poor price competitiveness: higher relative inflation compared to other countries, low levels of investment and R+D
Strong exchange rate
Recession in trading partner, cuts value of exports
Booming domestic economy - need to import raw materials from abroad
Explain effect of a high consumer confidence level
Positive wealth effect
Less incentive to save, more incentive to spend
Consumption is a major component of AD in UK around 60% causes big increase in AD
Less leakages and faster rate of growth due to multiplier effect
However, demand pull inflation occurs
AS must increase to have sustainable and stable growth rate
Low interest rate effect
Cost of borrowing low
Cheaper to borrow, Reward for saving is low
Firms encouraged to invest
Investment is a direct component of AD
Diagram
In addition, high investment will cause increase in AS
Productivity likely to increase
Investment is also injection to Circular flow model
Multiplier effect large, high growth rate.
However, too much investment can lead to automation, workers replaced by machines, unemployment rises, lower confidence and AD decreases
effects of increased education training and healthcare
increase in skills and productivity
occupational mobility increases
higher employability
increase in LRAS
lower unemployment = higher household income
higher consumption
higher AD
white collar unemployment - overqualified
Problems with high econ growth
Inflation: reduces international competitiveness, lowers purchasing power cost of living increases standard of living goes down HOWEVER growth due to shift in PPF causes LRAS increase and inflation rate decreases
Inequality: higher investment (accelerator effect), rich get more opportunity to invest, workers replaced by machines (automation), widen distribution of income and wealth, poverty increase, low econ development, HOWEVER high growth = lower unemployment, more household income
Causes of econ growth
Higher real wages
Tax cuts
Increased gov spending
Lower interest rates
Increased investment
Higher labour productivity
Discovering raw materials
Increased labour force (immigration)
Improved technology
High unemployment cause
Low incentive to work: high income tax, generous welfare system, low OC of not working, less motivation to actively seek job, poor infrastructure and transport links can cause geographical immobility
HOWEVER low minimum wage will cause firms to hire more workers whereas high minimum wage will cause workers to not be interested
Negatives of high unemployment
Budget deficit: less tax revenue from income tax, more benefits to unemployed, GS>T, fewer funds to spend on infrastructure, high national debt DEPENDS ON existing debt situation may be in surplus already (GERMANY) MAY force an increase in income tax rate to compensate for loss of tax revenue
Poor growth: less G+S produced, less household income, less C, AD shiftinwards, AS shifts inwards, poor econ development, HOWEVER automation may ean more G+S are being produced despite high unemployment, production could be exported causing increase in AD
Deskilled workforce, retraining cost for gov, social cost (more crime), more money needed on social services, poverty, high inequality
Positives of high unemployment
Wider pool of workers available
No need to offer high wage
More productive workers can be chosen
Lower COP, increase in AS, decrease in PL, lower inflation
LR increase in international competitiveness
HOWEVER, low skills and deforced workforce likely to be less productive. Higher average cost per unit. Not taking advantage of economies of scale
Short term unemployment not as bad, opportunity to learn and update skills, increase long run productivity, HOWEVER this is provided training is available, self funded or gov?
Low unemployment better than full employment: no spare capacity, 3rd stage of LRAS. Less incentive to be more productive. AD increase just leads to increase in price level. Inflation causes less international competitiveness.
Immigration effects
Positives:
more C - greater AD
more production - greater AS
more skills
fill in gaps in labour market
solution to ageing population
Cons:
more pressure on public services
fewer jobs available for domestic workers
wages may not rise with inflation
lack of high skilled
Causes of high inflation
demand pull eval - if there was spare capacity in economy, higher AD may not cause increase in PL
in long run, AS can rise to accommodate higher AD so PL does not rise
inflation can be okay in relativity to other countries
demand pull better than cost push
pros of inflation
inequality falls due to lower wealth and lower value of
loans
better than deflation - postponing consumption
encourages cost efficiency
ilo labour force survey pros and cons
allows for inter-country comparisons
shows regional data
sampling errors - always have margin of error
costly and time consuming
conducted quarterly; may not pick up changes in labour market quickly
real wage unemployment
real wage rates are stuck at a level above that needed to reduce unemployment further
e.g. minimum wage: unemployed workers would be willing to work for less than minimum wage but business cannot afford but legally must give minimum wage.
limitations of bop
accounting errors
black market - unrecorded transactions
measured in dollars and value varies
green gdp
GDP - environment costs
however hard to quantify environment costs
cyclical unemployment
Unemployment caused by a persistent lack of aggregate demand for goods and services
structural unemployment
Unemployment that results from the decline in an industry which leaves people unemployed because they do not have the skills needed by industries that are growing.
real wage unemployment
when wages are too high, excess supply of labour
corrected by reduction in NMW and strength of trade unions
