2.1 Measures of economic performance Flashcards

Question

consumers price index (CPI)

Answer 1

The Office for National Statistics (ONS) collects prices on 710 goods and services from 20,000 shops in 141 locations and online sites and the prices are updated every month, with collectors visiting the same retailers to monitor identical goods. New items are added to the list every year, such as microwaveable rice and nail varnish , whilst others are taken away, including organic carrots. All these prices are combined using information on the average household spending pattern to produce an overall price index. The average household spending is worked out through the Living Costs and Food Survey, where around 5,500 families keep diaries of what they spend over a fortnight. It takes into account how much is spent on each item so they are weighted i.e. we spend more on petrol than on postage stamps so an increase in petrol will have a bigger impact on the overall rate of inflation.

Answer 2

weight*price change

Answer 3

Erodes the value of money, savings and wages Uncertainty leads to lower consumer and business confidence less internationally competitive so leads to fewer exports menu costs- the price of changing price listings shoe leather costs: the cost of using money today political and psychological costs

Answer 4

Consumers: ● If people’s incomes do not rise with inflation then they will have less to spend , which could cause a fall in living standards. ● Those who are in debt will be able to pay it off at a price which is of cheaper value, but those who are owed money lose because the money they get back is of cheaper value. Consumers who have saved will lose out as their money is worth less. ● Inflation has psychological effects on consumers: because prices are rising, they may feel less well-off, even if their income is rising in line with inflation, and so this may cause them to decrease their spending.

Answer 5

If inflation in Britain is higher than other countries, British goods will be more expensive. They will become less competitive and make them more difficult to export. This will also affect the balance of payments. ● Deflation isn’t good as it encourages people to postpone their purchases as they wait for the price to fall further. People will be more likely to save as the value of their money will rise in the future and they will be prevented from borrowing as deflation means the real value of their debt increases. This can lead to a fall in demand for goods, leading to a fall in firms’ profit, and in business confidence which can lead to a long term reluctance to invest. ● In general, inflation/deflation/disinflation is difficult to predict and so this means that firms cannot plan for the future. ● Another effect of changing prices is that firms will have to calculate new prices then change their menus, labelling etc. and this can be expensive.

Answer 6

If workers do not receive yearly pay rises of the rate of inflation, they will be worse off and their living standard will decrease. Those in weaker unions tend to be most affected as they are unable to win wage rises in line with inflation. ● Deflation could cause some staff to lose their jobs as there is a lack of demand meaning firms see a fall in profit and have to decrease staff to cut costs.

Answer 7

If the government fails to change excise taxes (taxes at a set amount e.g. £1) in line with inflation then real government revenue will fall. However, if they fail to change personal income tax allowances (the amount a worker can earn tax free) then real government income will increase and taxpayers will have less money.

Answer 8

a sign of economic slowdown discourages consumer spending : downwards spiral debt value increases in real terms. borrowers worse off

Answer 9

Prices in a market are determined by demand and supply and a shift in either will cause price to change. Inflation can therefore be caused by an increase in aggregate demand (AD), total demand for goods and services in the economy. ● If any factor which increases AD was to increase , then inflation would increase

Answer 10

Whilst an increase in aggregate demand can push prices up, a decrease in aggregate supply may also push prices up. ● When businesses find their costs have risen, they will put up prices to maintain their profit margins. This can be caused by any factor which decreases AS

Answer 11

Another potential cause of inflation is there being too much money in the economy. If people have access to money they will want to spend it but if there is no increase in the amount of goods and services supplied, then prices will have to rise. ● The government can also increase the amount of money that they print and decisions to increase government borrowing can also increase the money supply.

Answer 12

wealth effect, more confidence and spending, demand-pull sprending

Answer 13

higher costs of production, passed onto consumers, cost push inflation

Answer 14

increased import prices, increase in exports (injection), cost-push and demand-pull inflation

Answer 15

cheaper burrowing, more spending, demand-pull inflation

Answer 16

lower cost of production, passed onto consumers, cost-push disinflation/ deflation

Answer 17

demand higher wages, higher costs of products passed on to consumers, cost-push and demand-pull inflation

Answer 18

not fully representative- median household/ basket of goods basket of goods not updated fast enough fails to take into account- quality- technological improvements, quantity "shrinkflation" data handling/ collection issues doesn't include hosing prices more recent than RPI so hard to make comparisons with historical data

Answer 19

because they don’t take into account the fact that goods and services have improved in quality, and so will obviously be more expensive. For example, a car in the 1950s would be far less comfortable and reliable than today’s. It has no way of indicating the change of goods that is bought.

Answer 20

The RPI is very similar to the CPI. However, there are some differences between the data included and the way it is calculated. ● RPI includes housing costs such as mortgage and interest payments and council tax, whereas CPI does not. ● CPI takes into account the fact that when prices rise people will switch to product that has gone up by less. Therefore, the CPI is generally lower than the RPI. ● RPI excludes the top 4% of income earners and low income pensioners as they are not ‘average’ households whilst CPI covers all households and all incomes. RPI is no longer considered as the best method and has had its national statistic status removed, although the Office for National Statistics still calculates it every month.

Answer 21

all those between the aged 16-64 years

Answer 22

all those able and willing to work

Answer 23

the proportion the working-age population that is working

Answer 24

the proportion of the working age population that is actively seeking work but not working

Answer 25

employed but seeking more hours over qualified for their job

Answer 26

records the number of people claiming unemployment-related benefits

Answer 27

easy and cheap to collect

Answer 28

may be susceptible to political manipulation exclude people who are out of work, actively seeking but do not claim(training schemes) fraud could lead to overestimating unemployment have to be unemployed for 4 weeks to claim job seekers allowance

Answer 29

surveys and estimated the number of people whoa are without a job + actively seeking work + available to start in the next two weeks

Answer 30

more accurate based on international standards

Answer 31

more costly to compile only need to work for 1 hour to be counted as employed time lag (out of date?)

Answer 32

Some people may not be included in the LFS unemployment measure but would be in the Claimant Count. These may include people working in the hidden economy or those who fraudulently claim benefits. ● However, some people aren’t eligible for benefits but are classed as unemployed so would appear in the LFS but not the Claimant count. This can be if their partner is working, if they are looking for work along full-time study or if they are around State Pension Age. The LFS tends to be higher than the Claimant Count because of these reasons. ● Sometimes, the claimant count and LFS rates can be going in different directions. This could be due to the fact that the LFS is only a sample and different types of people have been asked which can lead to short term changes in the rate. Also, there may be things happening in the labour market not covered by the Claimant Count, for example more students could look for work along their studies or more people above State Pension Age may look for work. It is argued that both underestimate the figure as they do not include those: o working part time but would like to work full time o on government training schemes who would prefer employment o classed as sick or disabled o who aren’t actively looking for jobs but would take a job if offered or are in education because they can’t get a job

Answer 33

seasonal frictional geographical structural real wage cyclical

Answer 34

Some employment is strongly seasonal in demand . Industries such tourism are only prominent during certain times of the year so only demand large numbers of workers at a specific time. Once that time of the year has passed then the labour force is drastically reduced

Answer 35

Frictional unemployment is due to people moving between jobs. This could be due to new workers entering the labour market or people who have chosen to leave their previous job. These people may take a while to locate and gain a job that they are willing to accept. ● This isn’t a serious problem as it is only short term.

Answer 36

unemployment due to location

Answer 37

This is a much more serious form of unemployment as it is a long term decline in demand in an industry leading to reduction in employment perhaps because of increasing international competition or technology. It is where the demand for labour is lower than the supply in an individual labour market e.g. ship building. www.pmt.education ● The lack of geographical and occupational mobility means that people will remain unemployed, so need to be retrained in order to gain a job. ● There are different types of structural unemployment. o Regional unemployment is where certain areas of a country suffer from very low levels of employment due to industry closures; this is made even worse by the fact that the loss of jobs can mean a fall in demand for other businesses in the area, forcing more closures and job losses. o Sectoral unemployment is where one sector (primary, secondary and tertiary) suffers a dramatic fall in employment. o Technological unemployment is where an improvement in technology means that jobs are replaced.

Answer 38

This is unemployment considered to be the result of real wages being above their market clearing level leading to an excess supply of labour. Some workers might be prepared to work for less than the minimum wage and companies may be prepared to take on more workers if they could pay them less than the minimum wage, but this is illegal and so unemployed workers cannot get a job. ● Some economists believe that the minimum wage risks creating unemployment in industries where international competition from low-labour cost producers is severe. As yet, there is relatively little evidence that the minimum wage has created rising unemployment on the scale that was feared. ● It can also be caused by unemployed workers refusing to take low paid jobs because they can receive more in welfare benefits.

Answer 39

This is unemployment due to a general lack of demand of goods and services within the country. This is also known a Keynesian ‘demand deficient’ unemployment. ● When there is a recession or severe slowdown in economic growth, we see a rising unemployment because of plant closures, business failures and an increase in worker layoffs and redundancies. This is due to a decrease in demand causing businesses to cut employment in order to control costs and restore some of their profitability.

Answer 40

An increase in net inward migration tends to lead to increased jobs. Since the 1990s, the UK has seen a large increase in immigration from mainly Eastern European countries. Most of these people come to the UK to work, are of working age and often take lower skilled jobs; they are less likely to claim benefits than the existing population. Due to the circular flow of income, immigrants’ spending creates jobs and total employment increases without an increase in unemployment. This depends how much money immigrant workers send back home. ● However, it also leads to lower wages, particularly for lower-paid, low skilled jobs. UK firms are able to recruit foreign workers meaning that supply of labour is increased and so the price equilibrium of labour is reduced. There is more competition for jobs and UK workers who have low motivation to work and are low skilled are most affected as they are competing in the job market with hard working, more skilled workers prepared to take the same jobs as them. The impact of this is only small and middle and higher income wages are rarely affected.

Answer 41

Economies progress over time, and as a result, higher skills are needed to work in them. In the UK 50 years ago, many jobs were available for those who couldn’t read or write but now there are few. ● For the UK to maintain its employment levels, it needs to increase the skills of its workforce over time. Structural unemployment is caused by a lack of, or the wrong, skills. For example, engineering companies struggles to recruit skilled workers even though there are unemployed workers in the local area. ● If firms will not train staff, the government has to step in to correct the market failure but this is costly. As a result, people become long-term unemployed as their skills don’t fit the jobs on offer. ● Migrant workers may fill these shortages if their skills fit.

Answer 42

economic growth flexible labour markets fill job vacancies working migrants provide a net fiscal benefit (tax> welfare)

Answer 43

potential fall in real wages increased pressure on public services dependents can be a fiscal drag (welfare> tax

Answer 44

pros: forces workers to retrain/ become more competitive/ productive cons: loss of income fall in living standards psychological and social cost loss of skills (hysteresis) less attractive to potential future employer

Answer 45

pros: less pressure to increase wages reduced risk of industrial strike action can offer offer lower wages cons: fall in the demand of goods/ services fall in the demand further along the supply chain (negative multiplier) decrease in profits Long term unemployment can lead to loss of skills and reduce employability of workers, so firms have a smaller pool of skilled people to employ. redundancy/ downsize costs

Answer 46

pros: less ppl demand higher wages- dampens wage growth demands, therefore helps government manage inflation cons: increase in welfare spending fall in tax revenue- income, corporation, VAT This will result in an increase in the budget deficit. It will be likely that the government will have to raise taxation or scale back plans for public spending on public and merit goods, such as the NHS or education. They may need to increase borrowing. increase in government spending political pressure

Answer 47

pros: creative destruction ( forces workers, businesses and government to reconsider current plans) cons: loss in GDP under utilisation of factor inputs (productively inefficient) hysteresis

Answer 48

Rising unemployment is linked to social deprivation. There is a relationship with crime and social dislocation (increased divorce rates, worsening health and lower life expectancy). ● Areas of high unemployment often see a fall in demand for local goods and services, leading to a fall in income for those working in the services and sometimes further loss of jobs. ● It results in a loss of potential national output and represents an inefficient use of scarce resources. If people chose to leave the labour market permanently, then this will have a negative effect on LRAS and therefore damage the economy’s growth potential so the country is unable to achieve their desired PPF. ● Taxpayers paying money to the unemployed is not a loss for the economy as it is a transfer payment but the economy is affected because there is a fall in national output and the social costs of the unemployed e.g. violence and crime.

Answer 49

claims recession can have permanent negative impacts on the economy/ labour market bargaining power- still employed workers have greater bargaining power and can prevent real wages from falling opportunity cost- whilst unemployed, individuals lose out on training opportunities, permanently decreasing their productivity levels- therefore harms potential growth