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Economics > 2.1 - Measures of economic performance > Flashcards

2.1 - Measures of economic performance Flashcards

1
Q

What is economic growth?

A

The rate of actual increase of real GDP or an increase in the productive capacity of an economy

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2
Q

What is GDP?

A

The total value of all goods and services produced in an economy in a given period of time (usually annually or quarterly)

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3
Q

What is the difference between real and nominal?

A

Real is adjusted for inflation whilst nominal values are based on current prices

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4
Q

What is the difference between total and per capita?

A

Total is the value of all goods and services produced but per capita is divided by the population

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5
Q

What is the difference between value and volume?

A

The value of goods/services shows what certain goods/services are worth. However, the volume shows the number of goods/services that are produced.

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6
Q

What are GNP and GNI?

A

GNP (Gross National Product) is the total value of all goods and services produced by domestic residents plus income that residents have received from abroad, minus income claimed by non-residents. GNI (Gross National Income) is GDP plus net income earned abroad.

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7
Q

What is PPP? (Purchasing Power Parity)

A

Adjusting GDP or other variables to reflect how much the local currency actually buys you, or the purchasing power of the country.

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8
Q

What is arbitrage?

A

If, at a certain exchange rate, it is cheaper to buy goods in one country than another, businesses will buy goods in the cheaper country and sell in the other for a profit. This is arbritage, it forces prices and exchange rates to align over time.

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9
Q

What are the benefits of PPP?

A
  • The PPP exchange rate remains fairly constant all year round, so can be easily compared
  • Exchange rate will often get closer to the PPP as time passes
  • Knowing the PPP will allow you to track and predict exchange rate relationships
  • PPP can allow you to examine the relative living conditions of different countries
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10
Q

What are the limitations of using GDP to compare living standards between countries?

A
  • Countries can manipulate data (inaccurate information)
  • Different proportions of spending
  • GDP doesn’t take into account population
  • Hidden economy is in different proportions in each country e.g. UK and Mexico
  • Purchasing power parity (exchange rate doesn’t take into account cost of living in each country)
  • Doesn’t take into account the quality of the goods and services being produced, only the value
  • Differences in leisure time and hours worked per day
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11
Q

What are the limitations of using GDP to compare living standards over time?

A
  • GDP doesn’t take into account population changes
  • Doesn’t take into account inflation (real GDP does)
  • Quality of goods can change
  • Not holistic - doesn’t account for all factors affecting living standards
  • Inequality could have changed (GDP per capita can be skewed by outlying statistics)
  • Statistical inaccuracies
  • Consumption vs Investment - depends where expenditure is and what are the long term gains
  • Nature of output that’s bring produced
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12
Q

What is well-being influenced by and is there a correlation between real incomes and subjective happiness?

A
  • Well- being is influenced by- the condition of family relationships. financial security, job security, supportive friends, good health
  • There is not automatically a positive correlation between wealth and happiness. Happiness is a subjective concept but arguably, people feel happier through comparing their income to others.
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13
Q

What is inflation?

A

A sustained rise in the general price level in an economy

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14
Q

What is deflation?

A

A sustained fall in the general price level in an economy

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15
Q

What is disinflation?

A

A decrease in the rate of inflation - a slowdown in the rate of increase of the general price level of goods and services

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16
Q

What is price stability?

A

A low and consistent level of inflation - 2% +/- 1% from previous year

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17
Q

What is hyperinflation?

A

When a country experiences very high and acceleratory inflation e.g. Weimar Germany

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18
Q

What is the Consumer Price Index (CPI)?

A
  • A measure of inflation
  • It measures the change in the price of a basket of goods and services consumed by households in the UK
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19
Q

What are the steps in calculating the rate of inflation in the UK
using the CPI

A

1) Living Costs & Food Survey asks 7,000 respondents per yr about spending habits
2) This sets the ‘basket’ of 650 goods and services which have the highest shares of expenditure
3) Each item is weighted to reflect its share of total household expenditure
4) Data on prices are collected monthly through a Price Survey
5) The weighted average price for the basket of goods is found: the sum of (price x weight) / sum of the weights.
6) The weighted average price is adjusted to an index figure compared to the base value.
7) For annual inflation the %change between current month and corresponding month last yr is calculated

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20
Q

What is the Retail Price Index?

A
  • Another price index, similar to the CPI, used by the UK government when adjusting state benefits and index linked gilts (a form of long term gov. borrowing)
  • Includes items related to housing costs, such as mortgage interest payments and council tax
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21
Q

How to calculate index number (inflation rate)?

A

(New value / Base year value) x100

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22
Q

What are the strengths of using CPI?

A
  • It’s used to measure inflation in most European countries - easier to compare UK inflation with the rest of Europe
  • Enables quick evaluation of changes in series of economic data due to uniformity of 100 being the base year.
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23
Q

What are the limitations of using CPI?

A
  • Excludes many housing items, like council tax, mortgage interest payments -may underestimate the true cost of living
  • Sampling errors - measure is based on small surveys so unrepresentative
  • Some households may have different tastes and spending patterns, hence different weightings - not a true estimate of an individual’s cost of living
  • Not all regions in the UK experience the same price changes, but CPI gives an index to represent the general price level - can ill advise policy makers
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24
Q

What are the 3 causes of inflation?

A
  • Demand-pull
  • Cost-push
  • Growth of money supply
25
Q

What is demand-pull inflation?

A
  • Occurs when the overall demand for goods and services in an economy outpaces the economy’s ability to supply them
  • Characterized by rising prices, increased economic activity, and potential shortages of goods and services
  • It can be seen as a result of a strong and growing economy
26
Q

What is cost-push inflation?

A
  • Occurs when the costs of production for goods and services increase, leading to higher prices -> reduces AS
27
Q

How does growth of the money supply cause inflation?

A
  • More money is pushed into the economy
  • Purchasing power of the currency decreases -> price rises
28
Q

What is the wage price spiral?

A
  • As inflation rises, people start to expect higher inflation
  • Leads to them asking for higher nominal wage rises to keep pace with the rising costs of goods in shops
  • Firms may grant this to begin with, but costs are also rising - pass this on to consumers with higher prices -> demand higher wages again
29
Q

What are the costs of inflation?

A
  • Erodes value of savings/fixed incomes: with higher prices, a given amount of money buys less output
  • Reduced international competitiveness -> fall in exports - domestic goods become less price competitive
  • Increased uncertainty: with inflation the real values of incomes and profits are uncertain
  • Menu costs: cost of updating prices - cost to firms in changing labels, updating fixed capital (e.g. vending machines),
  • Distorted price mechanism: markets work best when prices rise and fall, providing info about relative values - if average prices rise continuously, resource allocation can be distorted
  • Shoe-Leather costs: the time cost to consumers in shopping around for the best prices + transferring money between accounts to ensure that inflation isn’t eroding its value
30
Q

What are the benefits of inflation?

A
  • Workers can demand higher wages (wage-price spiral)
  • Incentivises prodcution
  • Less unemployment in a recession
  • Stable levels of consumption -> if inflation is low & stable, this incentivises you to buy now not in the future
31
Q

What are the effects of inflation on consumers?

A
  • If incomes don’t rise with inflation - less to spend - fall in living standards
  • Savers will lose out as their money is worth less
  • As prices are rising people may feel less well-off so spend less
  • Inequality rises: the more skilled workers can negotiate nominal wage increases that keep pace with inflation
32
Q

What are the effects of inflation on firms?

A
  • British goods will be less price competitive - exports will fall - worsens balance of payments
  • Business uncertainty: volatile prices may mean firms reduce investment
33
Q

What are the effects of inflation on government?

A
  • If gov fails to change excise taxes in line with inflation -> real government revenue will fall
  • If gov fails to change personal income tax allowance -> real gov income will increase + taxpayers have less money
34
Q

What is unemployment?

A

Those of working age who are willing and able to work, actively seeking work but who do not have a job

35
Q

What is full employment?

A

Where there are enough unfilled job vacancies for all the unemployed to take work

36
Q

What is under-employment?

A
  • An individual wants to work more hours than they currently work
  • They are working in a job that requires lower skills than they have
  • Often a response to cyclical unemployment -
    Workers who have lost their jobs in a weak economy are willing to take part-time jobs or accept roles outside of their main skill base
  • Also a consequence of structural unemployment - unless workers retrain/ gain new skills, it will be hard for them to gain full employment
37
Q

What are the 2 measures of unemployment?

A
  • Claimant Count
  • ILO (International Labour Organisation) Survey which uses the Labour Force Survey
38
Q

What is the Claimant Count?
What are some pros and cons?

A
  • Counts the number of people claiming job seekers allowance (JSA) in the UK
  • Requires claimants to meet regularly with a ‘work coach’
  • Difficult to compare between countries
  • Some people aren’t eligible for benefits (e.g. partner has high income) but are classed as unemployed so would appear in LFS not Claimant count → LFS is higher
39
Q

What is the ILO Survey?
What are some pros and cons?

A
  • An extensive survey sent to a random sample of ≈ 60,000 UK households every quarter
  • Respondents self-determine if they are unemployed based on the ILO criteria: ready to work within the next 2 weeks & actively looked for work in the past month
  • Same survey is used globally → international comparisons
  • Ignores hidden economy, under-employed, inactive
40
Q

What are the different types of unemployment?

A
  • Structural
  • Seasonal
  • Cyclical (demand-deficient)
  • Frictional
  • Real-wage
41
Q

What is structural unemployment?

A
  • The immobility of labour due to a long-term change in the structure of an economy
  • Occurs when there is a mismatch between job and skills in the economy
  • Usually happens as the structure of an economy changes e.g. declining secondary sector and growing tertiary sector
42
Q

What is seasonal unemployment?

A

Occurs as certain seasons come to an end and labour is not required until the next season e.g. ski instructors

43
Q

What is cyclical unemployment?

A

Unemployment in a recession due to a lack of AD
- Labour is a derived demand → lower demand for G&S→ lower derived demand for labour → unemployment
- To keep profit margins at a decent level, cut costs by getting rid of workers

44
Q

What is frictional unemployment?

A

Occurs when workers are between jobs

45
Q

What is real wage unemployment?

A
  • Occurs when wages are inflexible at a point higher than the free-market equilibrium wage
  • Usually caused by the existence of minimum wage laws
  • The higher wage creates an excess supply of labour→ this excess supply represents real wage unemployment
46
Q

What are demand-side factors affecting employment?

A
  • Health of firms, e.g. profit levels, demand for goods
  • Confidence of firms/ uncertainty
  • Overall strength of economy
  • Government intervention to encourage hiring
  • Level of labour market regulation/costs of hiring
47
Q

What are supply-side factors affecting employment?

A
  • Labour market flexibility, e.g. trade union strength.
  • Skills of workers.
  • Geographic mobility of workers.
  • Occupational mobility of workers
48
Q

What is the significance of changes in activity?

A
  • Increases in inactivity will decrease the size of the labour force →a fall in productive potential of the country → lower GDP and lower tax revenues as less people are working.
  • Decreases in inactivity could just result in more people being unemployed if there are no jobs available to them.
49
Q

What are the formulas for employment and unemployment rate?

A

Unemployment rate = no. actively seeking work / total labour force x 100

Employment rate = no. in employment / population of working age x 100

50
Q

What are the formulas for inactivity rate and labour force participation rate?

A

Inactivity rate = inactive people of working age / working age population x 100

Labour force particpation rate = labour force / total population x 100

51
Q

What is the significnace of migration on employment?

A
  • Immigrants usually fill vacancies that the local citizens won’t fill → tend to be manual labour, dangerous & low skilled jobs
  • Increased supply of labour may push down wages in the economy, especially for low-skilled jobs → lower average wages increase employers’ incentive to hire more workers → employment rises
  • Immigration results in an increased population which increases consumption in the economy → greater output requires more labour → creates more jobs
52
Q

What is the significance of migration on unemployment?

A
  • Immigrants may displace some local workers increasing the level of unemployment
  • Dependents of immigrants may be unable to find work and register as unemployed
53
Q

What is the significance of skills on employment and unemployment?

A
  • Economies progress over time, and as a result, higher skills are needed to work in them
  • For the UK to maintain its employment levels, it needs to increase the skills of its workforce over time, otherwise structrual unemployment occurs
  • If firms won’t train staff, the government has to step in to correct the market failure (costly) → people become long-term unemployed as their skills don’t fit the jobs on offer (de-skilled)
  • Migrant workers may fill these shortages if their skills fit
54
Q

What are the effects of unemployment on consumers?

A
  • Consumers in areas of high unemployment lose out because local shopping centres tend to be run down and don’t offer the range of shops available to those in areas of low unemployment → less choice + low quality
  • Unemployed consumers lose out as they have less available to spend.
  • Firms may put on sales in order to increase demand for
    their products
55
Q

What are the effects of unemployment on firms?

A
  • Decrease in demand for their goods (depends on YED) → fall in profit
  • 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
  • Can offer low wages as they know people will take the job due to lack of job options
56
Q

What are the effects of unemployment on the government?

A
  • Reduced income results in a fall in tax revenue and higher spending on welfare payments → opportunity cost as money could be spent elsewhere
  • Budget deficit → may need to increase borrowing
57
Q

What are the effects of unemployment on workers?

A
  • Those made unemployed normally have a loss of income → decline in their living standards.
  • They often suffer from the stigma of being unemployed and feel degraded by the process of signing on to receive benefits to support themselves → mental health issues
  • The long-term unemployed (more than 12 months) often find it more difficult to get another job → deskilled
  • Those in jobs will suffer from lower job security and will fear being made redundant.
58
Q

What are the effects of unemployment on society as a whole?

A
  • Rising unemployment is linked to social deprivation
  • results in a loss of potential national
    output and represents an inefficient use of
    scarce resources → negative affects on LRAS and PPF

Economics (32 decks)

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