2.1. Measures of Economic Performance Flashcards
List the macroeconomic objective
Economic Growth
Low Inflation (2% target)
Low Unemployment
Balance of Payments
- Sustainable Growth
- Reduce Inequality
- Balanced Budget
Define “economic growth” and explain the main way it is measured
The long run expansion of an economy’s productive potential
Measure by a rise in real GDP
What are the benefits of achieving economic growth
Increased job opportunities and living standards
more money -> more demand -> more profit for firms
Increased satisfaction
Distinguish between “real” and “nominal”
Nominal - GDP that hasn’t been adjusted for inflation
Real - GDP that has been adjusted for inflation
Distinguish between “total” and “per capita”
Total - the total amount of goods and services overtime
Per Capita - total GDP / population = NY per person
Distinguish between “value” and “volume”
Nominal GDP is sometimes referred to as the value of NY
Real GDP is sometimes referred to as the volume of NY
Distinguish between “value” and “volume”
Nominal GDP is sometimes referred to as the value of NY
Real GDP is sometimes referred to as the volume of NY
Explain how GNP and GNI differ from GDP
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
Explain the problems with attempting to compare the GDP of the UK today with the GDP of the past
Raw GDP would have to be adjusted for inflation, cost of living and population, all of which have risen
Explain how purchasing power parties help to make comparisons of GDP between countries easier
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
Explain how the UK government measures national wellbeing
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?
Explain the Easterlin Paradox
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
Define “inflation”
A sustained rise in the average price level over time
Define “deflation”
A sustained fall in the average price level over time
Define “disinflation”
A fall in the rate of inflation
Explain the inflation rate
The rate of change in average prices in an economy over a given time period
Explain how the rate of inflation is measured using the consumer price index (CPI)
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
Explain the limitations of using CPI in measuring the rate of inflation
It is difficult to define what exactly the “average household” is
Changing quality of goods and services
Slow to respond to new products
Explain the key difference between CPI and RPI
RPI includes housing, CPI does not
Explain how demand pull inflation can be caused
Anything that causes a right shift in AD can increase inflation.
Explain how cost push inflation can be caused
Supply reduces but demand stays the same/ growns causing higher prices
Explain how the growth of money supply might lead to inflation
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
Define “unemployment”
Those who are able, available and willing to work and currently out of work
Define “underemployment”
When workers skills are underused or workers are not working as many hours as they would like
Define “employment rate”
The proportion of the working age population in employment
Define “unemployment rate”
The proportion of the working age population considered to be unemployment
Define “inactivity rate”
The proportion of the working age population that are not economically active
Explain how unemployment is measured through the claimant count
This uses the number of people who are claiming unemployment benefits
Explain how unemployment is measured through the UK labour force survey
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
Explain the causes of structural unemployment
- Mismatch of skills and job opportunities as labour demand changes over time
- Occupational immobility of labour
What are possible solutions for structural unemployment
- 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
Explain the causes of frictional unemployment
- Short term unemployment between jobs
- A dynamic economy that is flexible will always have a level of frictional unemployment
What are possible solutions for frictional unemployment
- 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
Explain the causes of seasonal unemployment
- Regular seasonal changes in unemployment
- Unemployment data is usually given a seasonal adjustment to reflect this
What are possible solutions for seasonal unemployment
- Provision of start up grants for businesses providing work in the off-season
Explain the causes of cyclical unemployment
- Demand deficient unemployment caused by a fall in AD
- If actual output grows more slowly than potential output
What are possible solutions for cyclical unemployment
- 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
Explain the causes of real wage inflexibility unemployment
- 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
What are possible solutions for real wage unemployment
- 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
Explain how migration affects employment levels
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
Explain a skilled workforce affects employment levels
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
Define “the current account of balance of payments”
A statement of all transactions made between entities in one country and the rest of the world over a defined period of time
List the four components of the current account on the balance of payments
Measures the inflow and outflow of goods
Services
Investment incomes
Transfer payments
Explain why all countries in the world can’t achieve a simultaneous current account surplus
An export that leaves a country will count positively, however it ends up somewhere as an import which counts negatively
Explain the benefits of export-led growth
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
Explain how the UK current account might improve when their is economic growth within the EU
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
