2.1 measures of economic performance Flashcards
what are the macroeconomic objectives?
-high sustainable economic growth
-low unemployment
-low inflation
-balanced current account
-reducing budget deficit
-reducing inequality
-environmental
what is the benefits from high sustainable economic growth?
UK trend growth is 2.5%, higher living standards, higher income so people are better off, improved government finances, greater tax revenues from increased economic activity
what is the benefits from low unemployment?
full employment, 4% is full capacity, increased spending power for individuals, less crime and mental health issues, improved government finances, less to spend on benefits
what are benefits to low inflation?
price stability, target is 2%, protects real terms spending power, encourages investment as firms are more likely to invest when prices are stable, makes firms more competitive if inflation is lower
what are benefits to a balanced current account?
reducing current account deficit, country can pay for imports that it consumes, a deficit means each year there is an outflow of money
what are benefits to reducing budget deficit?
the key objective of conservatives 2010-2016, makes any borrowing more sustainable, failing to reduce a large deficit leads to a rapid increase in national debt
what are benefits to reducing inequality?
reducing child poverty, fairness argument, incentive
what are benefits to environmental?
sustainable growth in the future, not causing environmental ‘armageddon’
what is economic growth?
long run expansion of an economy’s productive potential, measure of an increase in real gross domestic product
how is economic growth measured?
measured total amounts of goods and services produced in a country in 1 year/ total amount spent/ total amount earned
what is real GDP?
GDP which is adjusted for inflation
what is nominal GDP?
money value of all goods and services produced by a country within a year
what does total mean?
whole country
what does per capita mean?
divided by the population
what does value mean?
number of goods x value of what their worth
what does volume mean?
number / amount of goods produced
what is GNI?
measures income received by a country both domestically and overseas
what is GDP?
put into GNI
what are the benefits of using GDP to measure living standards?
it isn’t just about money, includes, quality of life, environment, safety/housing, health
what are the disadvantages of using GDP to measure living standards?
difference in population, has to be GDP per capita, difference in exchange rates, method of calculation/reliability of data may differ
adjusting GDP for inflation?
if GDP increases, but inflation rises more, then individuals are actually worse off
adjusting GDP for population?
if GDP increases, but the population rises by more, then individuals are actually worse off
what does PPP mean?
purchasing power parity
what is the purpose of PPPs?
used to compare GDP in different countries, and take into account the cost of a ‘basket of goods’ creates an adjusted exchange rate reflecting this cost of living difference
how does PPPs measure?
measures how many units of one countries currency are needed to buy exactly the same basket of goods and services as can be bought with a given amount of another countries currency
what is HDIs?
human development index
what does HDI do?
composite statistic using life expectancy, educations and incomes, aggregates the three areas into one index, broader picture than GDP, can’t tell from a index whether there is strengths or weakness lie for a country.
what are other quality of life statistics?
life expectancy, doctors per 1000 people, access to clean water, each indicator tends to be very narrow so limited on its own
what is the Eastern Paradox?
within a society rich people tend to be happier, but rich societies are not happier, paradox argues that life statistic does rise with average incomes up to a specific point
what is inflation?
sustained rise in the average price level over time
what is inflation rate?
the rate of change in average prices in an economy over a given amount of time
what is deflation?
sustained fall in the average price level over time
what is disinflation?
a fall in the rate of inflation
what is RPI?
retail price index
what does RPI do?
measures average consumer prices
what is CPI?
consumer price index
what does CPI do?
measure developed to compare inflation across the EU, used by BoE as inflation target since 2003, excludes various housing related costs
what do both CPI and RPI do?
designed to reflect the average household, with a basket of goods weighted according to consumption
what does inflation demand pull mean?
rise in AD, reduction in direct taxation, more disposable income, rising consumer confidence, rising economic growth in other countries, more government spending
what does inflation cost-push mean?
left-shift in SRAS, exogenous shocks, depreciation in exchange rate, rising wages from ‘tight’ labour market, spiralling inflation
what are causes of inflation?
increases in the money supply,more money circulating the economy for the same amount of production will just increase the price level, if government increases the supply of money by printing money it is more likely to create inflation
what are consequences of inflation?
money loses value, inflation can get out of control, employees in poor bargaining positions lose out, favours borrowers at expense of savers, disruption of business planning (less investment), can lead to higher unemployment, exports more expensive and imports relatively cheaper
how is the rate of inflation measured with the CPI?
index number, as shown as percentage relative to base year, change/ original x 100, price survey taken by civil servants
inflation demand-side policies?
government forces trade-off whenever attempting to manage AD, monetary policy, fical policy
what is monetary policy with demand side policy?
greater credibility since monetary policy made independant in 1997, BoE base rate, monetary policy committee has inflation target of 2%
what is fiscal policy with demand side policy?
changed to spending and taxation to influence AD
inflation supply-side policies?
boosting aggregate supply, (right shift in LRAS on diagram), policies to improve productivity and so reduce costs, improvements in infrastructure of the economy, encouraging greater flexibility of labour markets, supply-side policies should represent longer-term impacts on inflation.
how will the growth of money supply lead to inflation?
when the money supply in a economy grows faster than the economy’s ability to produce goods and services
what are causes of demand pull inflation?
-decrease in interest rates
-rise in the level of business and consumer confidence
-increase in government spending
-exports rising relative to imports
-depreciation of exchange rates
what are causes of cost-push inflation?
-rise in oil prices and raw material prices
-fall in the exchange rate
-rise in taxes on businesses
-increase in the minimum wage or wages generally
-increased regulations e.g environmental regulations
what are the effects of inflation on consumers?
on fixed incomes: rate of inflation is higher than the interest rate on savings real value o savings will decrease
savings: rate of inflation higher than interest rates on savings, real value of savings will decrease
loans or mortgages: rate of inflation higher than the interest rates of loans the real value of loans will fall, more manageable
what are the effects of inflation on firms?
fall in exports: international competitiveness will fall, tends to worsen the balance of trade
uncertainty: difficult for firms to set budgets, fall in investment
lower profits: lower investment, some inflation is desirable
impact on monetary policy: cause increase to interest rates, tight monetary policy
what are the effects of inflation on the government?
-fall in real value of national debt: reduce the value of debt owed by government
increased equality: more difficult for government to reduce income inequality
deterioration of the balance in trade: export likely to fall and imports increase
what are the effects of inflation on workers?
for those in a weak bargaining position: wage rises means that workers will be progressively worse off
unemployment: low inflation means that there is a low level of demand
what is unemployement?
number of people out for work, but unable to find it
what is underemployement?
people who are seeking/ available for other jobs, those who are overqualified for their jobs
what is employment rate?
number of people who are in work as a percentage of working age population
what is unemployment rate?
number of people unemployed as a percentage of labour force
what is inactivity rate?
those without a job, not classed as unemployed, e.g student in full-time education/ retirement
what is the significance of an increase in employment rate?
increased GDP, increased revenues and profits, increased incomes, improved skills, higher government taxation revenue
how do you measure unemployment?
Claimant count
how do you measure the claimant count?
the number of people claiming jobseekers allowance, 100000 people surveyed each month, unemployed, available to start within a fortnight, looked for work in the past fortnite, standardised measure of international labour organisation
what types of unemployment is there?
structural, frictional, seasonal, cyclical, real wage
what is structural unemployment?
mismatch of skills and job opportunities as labour demand changes overtime, occupational mobility of labour
what are solutions to structural unemployment?
training progressions, improve skills of unemployed workers, regional policies to target areas where structural unemployment is high
what is frictional unemployment?
short term unemployment between jobs, dynamic economy that is flexible will always have people moving between jobs
what are solutions to frictional unemployment?
improving information of job vacancies for those seeking work, provision of job centres, funding improved internet
what is seasonal unemployment?
regular seasonal changes in unemployment, unemployment data usually given seasonal adjustment to reflect this
what are solutions to seasonal unemployment?
provision of start up grants for businesses providing work
what is cyclical unemployment?
demand deficient unemployment caused by AD, actual output grows more than potential output cyclical unemployment more likely
what are solutions to cyclical unemployment?
plan on what to do, any policy boosting aggregate demand and helps move economy from recession to recovery, interest rates, cuts in taxation, higher levels of government spending
what is real wage inflexibility?
created when real wage rates are stuck at too high a level to reduce unemployment
what are solutions to real wage inflexibility?
ensure minimum wage is not raised too quickly, reduce trade union influence, reduce levels of unemployment benefits
what is the significance of migration for employment?
leads to an increase in employment if looking for a job, if finding work they will pay taxes
what is the significance of migration for unemployment?
leads to an increase in unemployment if unable to get a job, if sending money home, will adversely affect current account
how does skills of a workforce affect employment?
higher skilled, less likely to be unemployed, stable and secure employment
how does skills of a workforce affect unemployment?
inequality and poverty likely to become lower than if large proportion of unskilled workers in labour force
how does unemployment affect individuals?
loss of skills (not up to date training), loss of income, lower living standards, long-term unemployment
how does unemployment affect firms?
easier to recruit new employees, can hold their costs due to surplus labour in economy holding wages, falling sales- less consumer spending
how does unemployment affect the government?
increased spending on welfare benefits, less revenue from income taxes and indirect taxes, opportunity cost
how does unemployment affect society?
inequality may increase resulting in more crime or political unrest, lost output operating inside PPF
what is the balance of payment?
record of international payments over the course of the year?
what is the current account?
records payments for transactions between countries in the present year
what are the elements of the balance of trade?
the trade in goods balance + trade in services balance = balance of trade
what are the elements of the current account?
balance of trade + primary balance (investment income) + secondary balance (current transfers)
what is the trade in goods balance?
value of goods exported - value of goods imported
what is the trade in services balance?
value of services exported - value of services imported
what is the primary balance?
earnings of foreign investments (interest, profits and dividends) - payments made to foreigners
what is the secondary balance?
relates to transfers in the form of money or of goods and services e.g taxes/ aid
what is meant by current account surpluses?
surplus implies that a countries’ current account is positive (combined balance value of net trade balance)
what is it meant by the current account deficits?
deficit implies the combined value of a countries’ current account is negative
what are causes of the current account deficit?
currency too strong relative to other countries, high rate of inflation relative to other countries, high wage costs relative to other countries, high rate of economic growth in a country- higher incomes more imports from abroad
what are causes of a current account surplus?
currency is too weak relative to other countries, low rate of inflation relative to other countries, low wage costs relative to other countries, low rate of economic growth in a country- less income to buy imports from abroad
why can’t all countries in the world simultaneously achieve a current account surplus?
countries exports are larger than imports, would be impossible for all countries to do this
what are the benefits to an economy of ‘export led’ growth?
rise in aggregate demand an expansion of output, raise per capita income and reduce extreme poverty especially in developing/ emerging economies
what’s the relationship between current account imbalances and other macroeconomic objectives?
might imply that the country’s goods are uncompetitive - increasing level of unemployment, might lead to fall in economic growth, cause a fall in the country’s exchange rate against other currencies
how does real incomes affect the current account balance?
income goes up, imports rise and the current account is reduced
how does exchange rates affect current account balance?
depreciation in the value of currency will increase the current account balance
how does the state of the world economy affect current account balance?
surplus in indicative that an economy is a net creditor to the rest of the world
how does protectionism affect current account balance?
increase import tariffs/ import quotas which would improve current account, can decrease due to other countries
how do non-price factors affect current account balance?
decrease in competitiveness (UK decline in manufacturing sector)
what does interdependent mean?
countries rely on each other e.g global supply chains
