2.1 Measures of Economic Performance Flashcards
What are the Macro-economic objectives?
Strong, sustainable growth
Low unemployment
Low and stable inflation 2% (+/- 1%)
Balance of Trade
Fair distribution of income
What is the circular flow of income?
A model of the economy in which the major exchanges are represented as flows of money, goods and services between economic agents.
What are the leakages of the circular flow of income?
Taxation
Imports
Savings
What are the injections of the circular flow of income?
Government Spending
Exports
Investment
What is the equation for “Aggregate Demand”?
Aggregate Demand = Consumption + Investment + Gov. Spending + (Exports - Imports)
Causes of economic growth
Lower Interest Rates
Lower Income/Corporation Tax
Higher Consumer/Business Confidence
Increased Gov. Spending
Weaker Exchange Rate
What is an output gap?
When actual growth in the business cycle is less or greater than the potential growth.
Characteristics of an Economic Boom
Growth faster than the trend rate of growth
Increased Business and Consumer Confidence
High Demand for Imports
Rising Tax Revenues
Low Unemployment
Inflation
Characteristics of a Recession
Declining Aggregate Demand
High Unemployment
Falls in Consumer and Business Confidence i.e. Consumption and Investment
Fall in house prices
Lower Inflation
Increased Government Spending
Lower Tax Revenue
Lower Demand For Imports
Characteristics of a Recovery
Rising Consumer Confidence
Higher House Prices
Rising Business and Consumer Confidence
Higher Investment
Increased Gov. Spending
What is Monetary Policy?
The Government using Interest Rates or the Money Supply to Change the Level of Aggregate Demand and National Income
What is Fiscal Policy?
The means by which a government adjusts its spending levels and tax rates to monitor and influence a nation’s economy
What is unemployment?
The unemployed consist of those who are of working age, who are willing and able to work, actively seeking work but do not have a job
What is Nominal GDP
Gross Domestic Product without taking inflation into account
What is Real GDP
Gross Domestic Product with Inflation taken into account
What is quantitative easing?
The central bank purchasing illiquid assets from the open market to increase the money supply in the economy and encourage lending and investment.
What are Purchasing power parities
Measurement of prices in different countries that uses the prices of specific goods to compare the absolute spending power of the countries’ currencies.
Limitations of using GDP to compare living standards
No indication of the distribution of income
May need to be recalculated in terms of purchasing power, to account for international price differences
Large hidden economies such as the black market which aren’t taken into account.
No indication of welfare
What is Deflation?
When there is a sustained drop in the average price level. Negative Inflation rate
What is Inflation?
The general increase of prices in the economy which erodes the purchasing power of money.
What is Disinflation?
A reduction in the rate of inflation
What is the Consumer Price Index (CPI) ?
A measure that examines the weighted average price of a basket of consumer goods and services.
Limitations of CPI when measuring inflation
Basket of goods is only representative of the average household
Different demographics have different spending patterns
CPI is slow to respond to new goods and services
What is the Retail Price Index (RPI) ?
Alternative measure of inflation to CPI, Includes housing costs such as payments on mortgage interest and council tax. It excludes the top 4% of earners and low income pensioners.
Demand side factors in inflation
A depreciation in the exchange rate (causing imports to become more expensive and exports to be cheaper)
Fiscal stimulus in the form of lower taxes or more Gov. Spending. I.e. more disposable income
Lower interest rates to discourage saving and encourage borrowing and investment
High growth in UK export markets means UK exports increase and AD increases
Supply Side Factors in Inflation
Raw materials become more expensive
Labour becomes more expensive
Expectations of inflation (wage price spiral)
Indirect taxes causes goods to become more expensive
Depreciation in the exchange rate causing imports to be more expensive pushing the price of raw materials
Monopolies using their dominant market position to exploit consumers with higher prices
Effects of inflation on consumers
Those on fixed or low incomes are hit hardest by inflation as they will have less purchasing power decreasing their disposable income thus decreasing their standard of living
Loans are cheaper to pay as the amount owed does not increase with inflation, so the real value of the debt decreases
Effects of inflation on Firms
High inflation means interest rates are likely to be higher discouraging investment
Workers might demand higher wages increasing cost of production
Less price competitive on a global scale if inflation is high
Effects of inflation on the Government
Must increase the value of the state pension as cost of living is increased
Must increase the value of welfare payments as cost of living is increased
Effects of inflation on Workers
Real incomes fall with inflation, so workers will have less disposable income
Firms may face higher costs, meaning there could be more redundancies when firms try to cut their costs
Who are the Underemployed?
Those who have a job, but their labour is not used to its full productive potential. E.g. those who are in part time work but are looking for a full time job, and those who are working below their skillset
Effects of unemployment on Consumers
If consumers are unemployed, they have less disposable income and their standard of living may fall as a result
Psychological consequences of losing a job which could affect mental wellbeing of the workers
Effects of unemployment on Firms
Firms have a larger supply of labour to employ from, causing wages to fall which would help firms reduce their costs
Higher rates of unemployment mean consumers have less disposable income thus meaning consumer spending falls causing firms to lose profits.
Producers which sell inferior products might see a rise in sales
Effects of unemployment on Workers
There is a waste of workers’ resources. Could lose existing skills if they aren’t fully utilised. Those in jobs are likely to see a fall in their wages as supply of labour increases.
Effects of unemployment on the Government
Government may have to spend more on job seekers allowance, incurring an opportunity cost
Receives less revenue from income tax, and from indirect taxes as consumption is down
Effects of unemployment on Society
Opportunity cost to society since workers could have produced goods and services if they were employed
Crime and vandalism could increase if unemployment rate increases
Who are the economically inactive?
Those who are not actively looking for jobs. Includes children, disabled, carers for the elderly or those who have retired and some who are discouraged from the labour market
What is Structural Unemployment?
Unemployment resulting from industrial reorganisation, typically due to technological changes rather than fluctuations in supply and demand
What is frictional unemployment?
Unemployment which exists in any economy due to people being in the process of moving from one job to another.
What is Seasonal Unemployment?
Occurs during certain points in the year when demand for labour is decreased, i.e. during summer more people will be employed in the tourist industry
What is Cyclical Unemployment?
Caused by a lack of demand for goods and services, typically occurs during periods of economic decline or recessions. Firms are either forced to make workers redundant or close because their profits are falling.
Could be caused by increases in productivity which means output per worker is higher so less workers are needed.
What is real wage inflexibility?
When wages are above the market equilibrium typically causing unemployment.
Components of the current account
Trade in goods
Trade in services
Investment incomes
Net transfers
What is a current account surplus?
There is a net inflow of money into the circular flow of income. The UK economy has a surplus with services but a deficit with goods.
