2.1. Measures of Economic Performance

Question 1

List the macroeconomic objective

Answer 1

Economic Growth
Low Inflation (2% target)
Low Unemployment
Balance of Payments
- Sustainable Growth
- Reduce Inequality
- Balanced Budget

Question 2

Define “economic growth” and explain the main way it is measured

Answer 2

The long run expansion of an economy’s productive potential
Measure by a rise in real GDP

Question 3

What are the benefits of achieving economic growth

Answer 3

Increased job opportunities and living standards
more money -> more demand -> more profit for firms
Increased satisfaction

Question 4

Distinguish between “real” and “nominal”

Answer 4

Nominal - GDP that hasn’t been adjusted for inflation
Real - GDP that has been adjusted for inflation

Question 5

Distinguish between “total” and “per capita”

Answer 5

Total - the total amount of goods and services overtime
Per Capita - total GDP / population = NY per person

Question 6

Distinguish between “value” and “volume”

Answer 6

Nominal GDP is sometimes referred to as the value of NY
Real GDP is sometimes referred to as the volume of NY

Question 7

Distinguish between “value” and “volume”

Answer 7

Nominal GDP is sometimes referred to as the value of NY
Real GDP is sometimes referred to as the volume of NY

Question 8

Explain how GNP and GNI differ from GDP

Answer 8

GDP = National Income + National Output + National Expenditure
GNP = GDP + net property income from abroad
GNI = sum value of output by resident produce + sum of income abroad + product taxes not included in valuation

Question 9

Explain the problems with attempting to compare the GDP of the UK today with the GDP of the past

Answer 9

Raw GDP would have to be adjusted for inflation, cost of living and population, all of which have risen

Question 10

Explain how purchasing power parties help to make comparisons of GDP between countries easier

Answer 10

Measure how much of one country’s currency it takes to buy a basket of good against buying the same basket in another country’s currency
In countries with high cost of living, there will be downward adjustment

Question 11

Explain how the UK government measures national wellbeing

Answer 11

The ONS conducts a survey to measure satisfaction:
Overall, how satisfied are you with life nowadays?
Overall, to what extent do you feel the things you do in your life are worthwhile?
Overall, how happy did you feel yesterday?
Overall, how anxious did you feel yesterday?

Question 12

Explain the Easterlin Paradox

Answer 12

Rich people tend to be much happier than poor people
But richer societies tend to be much happier than poor ones
As countries get richer they do not get happier
- Satisfaction is proportional to Income up until a point
- Depends mainly on relative income and not nominal income

Question 13

Define “inflation”

Answer 13

A sustained rise in the average price level over time

Question 14

Define “deflation”

Answer 14

A sustained fall in the average price level over time

Question 15

Define “disinflation”

Answer 15

A fall in the rate of inflation

Question 16

Explain the inflation rate

Answer 16

The rate of change in average prices in an economy over a given time period

Question 17

Explain how the rate of inflation is measured using the consumer price index (CPI)

Answer 17

A measure developed to compare inflation, used by the bank of england
It uses the idea of a “basket of goods and services” which are weighted according to consumption
It is designed to reflect the average household and the data is gathered by a family expenditure survey
Calculated as an index number against a base year

Question 18

Explain the limitations of using CPI in measuring the rate of inflation

Answer 18

It is difficult to define what exactly the “average household” is
Changing quality of goods and services
Slow to respond to new products

Question 19

Explain the key difference between CPI and RPI

Answer 19

RPI includes housing, CPI does not

Question 20

Explain how demand pull inflation can be caused

Answer 20

Anything that causes a right shift in AD can increase inflation.

Question 21

Explain how cost push inflation can be caused

Answer 21

Supply reduces but demand stays the same/ growns causing higher prices

Question 22

Explain how the growth of money supply might lead to inflation

Answer 22

More money circulating in the economy for the same level of production will just increase the price level
If the government increases the supply of money by printing money its likely to increase deflation

Question 23

Define “unemployment”

Answer 23

Those who are able, available and willing to work and currently out of work

Question 24

Define “underemployment”

Answer 24

When workers skills are underused or workers are not working as many hours as they would like

Question 25

Define "employment rate"

Answer 25

The proportion of the working age population in employment

Question 26

Define "unemployment rate"

Answer 26

The proportion of the working age population considered to be unemployment

Question 27

Define "inactivity rate"

Answer 27

The proportion of the working age population that are not economically active

Question 28

Explain how unemployment is measured through the claimant count

Answer 28

This uses the number of people who are claiming unemployment benefits

Question 29

Explain how unemployment is measured through the UK labour force survey

Answer 29

It is a telephone survey conducted by the ONS It asks 100,000 people per month: - If they have actively sought work in the past four weeks - If they are available to start in the next two weeks

Question 30

Explain the causes of structural unemployment

Answer 30

- Mismatch of skills and job opportunities as labour demand changes over time - Occupational immobility of labour

Question 31

What are possible solutions for structural unemployment

Answer 31

- Retraining programmes targeted in particular areas or training of the whole labour force by increasing standards - Incentives to businesses to move to this area to create jobs

Question 32

Explain the causes of frictional unemployment

Answer 32

- Short term unemployment between jobs - A dynamic economy that is flexible will always have a level of frictional unemployment

Question 33

What are possible solutions for frictional unemployment

Answer 33

- Provision of job centers - Improve the information about job vacancies - Funding improved access to the internet across the country - Introduce initiatives to help the unemployed find jobs

Question 34

Explain the causes of seasonal unemployment

Answer 34

- Regular seasonal changes in unemployment - Unemployment data is usually given a seasonal adjustment to reflect this

Question 35

What are possible solutions for seasonal unemployment

Answer 35

- Provision of start up grants for businesses providing work in the off-season

Question 36

Explain the causes of cyclical unemployment

Answer 36

- Demand deficient unemployment caused by a fall in AD - If actual output grows more slowly than potential output

Question 37

What are possible solutions for cyclical unemployment

Answer 37

- Cuts in taxation to increase spending power of consumers and allow businesses to expand their workforce - Lower interest rates or use of quantitative easing to encourage greater consumption - Any policy that boosts AD and helps to move the economy from a recession to a boom - Government spending on projects to increase AD and jobs

Question 38

Explain the causes of real wage inflexibility unemployment

Answer 38

- Created when real wage rates are stuck at too high levels that reduce employment - Rises in the national minimum wage - Trade unions driving up wages

Question 39

What are possible solutions for real wage unemployment

Answer 39

- Reducing the level of unemployment benefits to create greater incentive to take paid work - Reduction in trade union influence - Ensuring the national minimum wage is not raised too quickly or scrap it altogether

Question 40

Explain how migration affects employment levels

Answer 40

Migrants are likely to be of working age and therefore will look for work - could cause competition and increase unemployment Their spending adds to AD - creating further jobs in long term Should be no negative effect on employment

Question 41

Explain a skilled workforce affects employment levels

Answer 41

Skills in the workforce have increased over time - increased productivity - higher value good and services - greater wages for workers Some industries have a lack of skilled workers - possibility for structural unemployment

Question 42

Define "the current account of balance of payments"

Answer 42

A statement of all transactions made between entities in one country and the rest of the world over a defined period of time

Question 43

List the four components of the current account on the balance of payments

Answer 43

Measures the inflow and outflow of goods Services Investment incomes Transfer payments

Question 44

Explain why all countries in the world can't achieve a simultaneous current account surplus

Answer 44

An export that leaves a country will count positively, however it ends up somewhere as an import which counts negatively

Question 45

Explain the benefits of export-led growth

Answer 45

Funded from outside the economy - provides a boost regardless of the domestic situation Achieves economic growth with limited of any inflationary pressure Achieves improved current account

Question 46

Explain how the UK current account might improve when their is economic growth within the EU

Answer 46

Economic growth in the EU creates more demand for Uk exports - 50% of UK trade is with the EU Demand for exports improves economic growth and the current account