2.1 Measures Of Economic Performance Flashcards
1
Q
Gross National Product (GDP)
A
- the value of all goods / services provided in an economy in a given year (national output)
- an increase in GDP is a sign of economic growth, which leads to higher living standards and more employment opportunities
2
Q
real and nominal GDP
A
- nominal; the value of GDP based on current prices, without taking inflation into account
- real; GDP adjusted for inflation
3
Q
total and per capita GDP
A
- total; the combined monetary value of GDP
- per capita; the value of total GDP divided by the population of the country (useful for comparing standards of living between countries)
4
Q
value and volume of GDP
A
- value; monetary value of GDP which can be calculated by volume x current price level (i.e. it’s the nominal figure)
- volume GDP; the physical number of items produced
5
Q
other measures of national income
A
- Gross National Income (GNI); GDP plus net overseas income, i.e. interest payments and dividends
- Gross National Product (GNP); GDP plus income from abroad - income earned by overseas residents, e.g remittances
- GNP/capita provides a more realistic view of a country’s wealth than GDP/capita
6
Q
comparisons of growth rates between countries
A
- national income statistics help make comparisons between countries and over different time periods
- using real GDP/capita provides better info than real GDP as it considers population differences
- using real GNI/capita is more realistic for analysing income available per person than GDP/capita
- using real GNP/capita provides info on the income that’s actually within a country’s borders, which can be very different from GDP/capita
7
Q
purchasing power parities (PPP)
A
- a conversion factor that shows how much things would cost if all countries used the same currency
- e.g. if a basket of goods cost $150 in Vietnam after currency conversion and the same basket cost $450 in the US, PPP would be 1:3
- aims to make more accurate comparisons of the standard of living between countries where goods / services cost different amounts
8
Q
limitations of using GDP for comparisons
A
- doesn’t give any indication on the distribution of income, so 2 countries with similar GDP/ capita may have different distributions which lead to different living standards
- may need to be recalculated using PPP to account for international price differences
- large hidden economies, e.g. the black market, aren’t accounted for in GDP
- no indication of welfare
- no info on quality of goods/services, e.g. worse quality and lower prices will be judged as an increase in standard of living, when the poor quality may actually decrease it
9
Q
national happiness
A
- measured in the UK by the Office for National Statistics (ONS) through the Measuring National Wellbeing report
- happiness focuses on health, relationships, environment, education, satisfaction at work and living conditions
- yields more normative data
- the link between income and happiness found can be explained by the Easterlin Paradox which says that they’re positively related at low levels of income up to a certain point, after which higher income doesn’t lead to higher happiness
10
Q
inflation
A
- a sustained rise in the general price level over time
- macroeconomic objective for inflation to be @% (+/-1) in the UK
- it erodes the purchasing power of money
11
Q
deflation
A
- where the average price level falls, i.e. a negative inflation rate
12
Q
disinflation
A
- a lower rate of inflation, i.e. average price level is still rising but at a slower rate
13
Q
Consumer Price Index (CPI)
A
- measures change in consumer prices based on a basket of goods/services over time
- a household expenditure survey is conducted to determine what goes into a ‘household basket’ of around 700 goods
- each month, prices for these goods are gathered from 150 locations in the UK and averaged out
- the total price x weighting of all goods determines the final value of the basket
- CPI = cost of basket in year X / cost of basket in base year x 100
- measures average price change in goods and % difference in CPI between the years is the inflation rate
- it’s updated annually
14
Q
limitations of using CPI
A
- the basket of many households isn’t the average one
- different demographics have different spending patterns
- it’s slow to respond to new goods and services
- comparisons with other countries are less meaningful if they use another measure of inflation
- doesn’t capture the quality of products which changes over time so comparisons with different time periods are less useful
- prone to errors in data collection as it’s a small sample out of the entire population and respondents have no incentive to answer carefully and accurately
15
Q
Retail Price Index (RPI)
A
- calculated in the same way as CPI, but it includes other goods / services such as housing costs, council tax, payments on mortgage interest, etc.
- so it tends to have a higher value than CPI
- argued that it’s more accurate of a household’s inflation
16
Q
causes of inflation
A
- demand-pull
- cost-push
- growth of the money supply
17
Q
inflation; demand-pull
A
- when AD is growing unsustainably, there’s pressure on resources, so producers increase prices and earn more profits
- usually occurs when resources are fully employed so it causes upward pressure on prices due to shortages in supply
- main causes;
- depreciation in ER, so imports more expensive and exports cheaper, so AD rises
- fiscal stimulus through lower taxes or more govt. spending, so consumers have more disposable income and spend more
- lower IR makes savings less and borrowing more attractive, so consumer spending rises
18
Q
inflation; cost-push
A
- from the supply-side as it occurs when firms face rising costs, e.g. if;
- raw materials become more expensive, e.g. oil due to Russia-Ukraine war
- labour becomes more expensive, e.g. through trade unions
- indirect taxes which can increase costs of goods if producers pass costs onto consumers
- depreciation in ER which causes imports to be more expensive which increases prices of raw materials
- monopolies using their dominance to exploit consumers with high prices
- if consumers expect prices to rise, they may ask for high wages, which can trigger more inflation
19
Q
inflation; growth of the money supply
A
- if the BoE printed more money, there would be more money flowing in the economy
- extreme increases in money supply usually cause hyperinflation, when the rate of inflation is incredibly high and uncontrollable
- it’s only inflationary if the money supply increases at a faster rate than real output
20
Q
effects of inflation on consumers
A
- decrease in purchasing power
- fall in real income for those on fixed incomes / pension
- decrease in real value of savings
21
Q
effects of inflation on firms
A
- with high inflation, IR is likely to be higher so cost of investing will be higher and firms are less likely to invest
- workers may demand higher wages which can increase costs of production for firms
- firms may be less price competitive on a global scale
- unpredictable inflation reduces business confidence, so there may be less investment
22
Q
effects of inflation on workers
A
- real income falls with inflation, so workers will have less disposable income
- if firms face higher costs there could be redundancies as firms try and cut costs
23
Q
effects of inflation on the govt.
A
- trade-offs in tackling inflation, e.g. reducing it may increase unemployment
- govt. will have to increase the value of welfare payments and state pension as the cost of living rises
24
Q
measures of unemployment
A
- the claimant count
- the international labour organisation (ILO) and UK labour force survey (LFS)
25
Q
the claimant count
A
- counts the number of people claiming unemployment related benefits like Job Seeker’s Allowance (JSA) in the UK
- people claiming JSA have to prove they’re actively looking for work
- however, it generally underestimates the level of employment as not all unemployed people can claim JSA, e.g. if their partner’s are on high incomes
26
Q
the ILO and UK labour force survey
A
- the LFS is taken on by the ILO
- this extensive survey is sent to 60,000 UK households every quarter
- they have to determine if they meet the criteria of being out of work for 4 weeks, able to start work within 2 weeks, and have actively looked for work
- the same survey is used globally so it’s useful for making international comparisons
- since the part-time unemployed are less likely to claim unemployment benefits, this gives a higher figure than the claimant count
27
Q
unemployment and underemployment
A
- the unemployed are willing and able to work but aren’t employed
- the underemployed are those who have a job but their labour isn’t used to its full productive potential, i.e. those in part-time work looking for a full-time job
- unemployment figures don’t consider the underemployed, so they under represent the issue of joblessness
28
Q
employment rate
A
- no. in employment / population of working age x100
- rate may increase even as unemployment rate is increasing, e.g. increased immigration causes working age population to increase
29
Q
unemployment rate
A
- no. of those actively seeking work / total labour force x100
- doesn’t capture long-term unemployment, e.g. if workers give up looking for work and become inactive, it’ll improve the rate as fewer people are actively seeking work
30
Q
inactivity rate
A
- inactive people of working age / working age population x100
- the economically inactive are those who aren’t actively looking for jobs, e.g. those who have retired
31
Q
causes of unemployment
A
- structural unemployment
- frictional unemployment
- seasonal unemployment
- cyclical (demand deficiency) unemployment
- real wage (classical) unemployment
32
Q
structural unemployment
A
- occurs when there’s a mismatch between jobs and skills in the economy
- e.g. when industries are in decline and worker’s skills are becoming obsolete (out-dated), i.e. car manufacturing, coal and ship building
- worsened by immobility of labour as they’re likely to remain unemployed in the long-run
- globalisation / technological change contributes to it as manufacturing sectors move production abroad to countries with lower labour costs / workers are replaced by machinery
33
Q
frictional unemployment
A
- usually short-term unemployment as it occurs when workers are between jobs
- always exists as there will always be people moving between jobs
- e.g. time between graduation and finding a job or between leaving / being made redundant and finding a job
34
Q
seasonal unemployment
A
- occurs when labour isn’t required in some seasons
- e.g. during summer, more people will be employed in the tourist industry, when demand increases
35
Q
cyclical unemployment
A
- caused by a fall in AD in an economy
- labour demand is a derived demand, so as AD falls, output falls and firms lay off workers as they need to cut costs to maintain profits
- e.g. during a recession
36
Q
real wage (classical) unemployment
A
- occurs when wages are inflexible at a point higher than the free-market equilibrium wage
- usually caused by minimum wages, e.g. NMW
- higher wage create an excess supply of labour which represents this unemployment
37
Q
significance of migration on employment / unemployment
A
- migrants are usually of working age, so the supply of labour tends to increase with more migration
- if migrants come in and fill vacancies, there will be an increase in employment
- however this increased supply of labour may push down wages for low skilled jobs, as firms can hire more workers if average wages are lower
- if they don’t find work or displace others from jobs, then employment remains unchanged and unemployment may increase
38
Q
significance of skills for employment / unemployment
A
- generally, a higher skilled work force is more employable
- so, the skills of the workforce need to continuously improve to maintain employment, or else structural unemployment will occur
- e.g. many engineering vacancies but many people don’t have the right skillset
39
Q
costs of unemployment
A
- consumers; lower standard of living as they have to spend less, and the stigma of being unemployed is a psychological barrier
- firms; falling sales, revenue and profits as there’s less consumer spending, and in the long-run there may be a smaller pool of labour
- govt; lower tax revenues, i.e. income tax, and higher expenditure on benefits, e.g. JSA
- workers; taxpayers may more to cover for increased govt. spending
- society; high unemployment means economy is operating below full capacity and is inefficient, leading to lower output and a fall in GDP. areas of high unemployment tend to have increased crime as it becomes run-down, e.g. with shop closures, limited money / space in households, etc.
40
Q
balance of payments
A
- a record of all financial transactions made between one country and the rest of the world
- states the value of exports (inflows) and how much is spent on imports (outflows)
- made up of;
- the current account (goods / services)
- the capital account (fixed assets, e.g houses)
- the financial account (financial assets)
41
Q
the current account of the balance of payments
A
- considered the most important account
- records the net income an economy gains from international transactions
- exporting goods (visible) / services (invisible) = money comes in
- importing goods (visible) / services (invisible) = money comes out
42
Q
current account deficits and surpluses
A
- deficit; when imports > exports (value of outflows is greater than value of inflows)
- surplus; when exports > imports (value of inflows is greater than value of outflows)
- UK aims to get their current account balance as close to equilibrium as possible, but it’s running a current account deficit
- export led economic growth helps it and rising imports makes it worse
43
Q
relationship between current account imbalances and other macroeconomic objectives
A
- a trade-off may occur as setting policies to target one macroeconomic objective may complicate the possibility of achieving another one
- e.g. an improved current account on the balance of payments may occur due to decreased demand for imports which may be due to a recession, meaning there’s high unemployment - the govt. don’t want this as they aim for export led economic growth
44
Q
the interconnectedness of economies through trade
A
- high interdependence between economies, so economic conditions in one country affect another, as the quantity they import / export will change
- e.g. Ukraine war showed how disruptions in one part of the world caused widespread issues in others
