2.1 Measures of Economic Performance Flashcards
What does National income accounting measure?
the economic activity within a country
- providing sn insight to how the country is performing
What does GDP stand for?
Gross Domestic product
What is the main method to determine economic activity?
the rate of change of output in an economy
What is the GDP?
the value of all goods and services produced in an economy in a one year period
What is economic growth?
the rate of change of output
- an increase in the long term productive potential of the country
- thus an increase in amount of goods and services that a country produces
How is economic growth measured?
percentage change in real GDP per annum
How can GDP be measured?
As income or as expenditure
What is the expenditure approach to measuring GDP?
adding up the value of all the expenditure in the economy
- includes consumption, government spending, investment by firms and net exports (AD)
What is the income approach to measuring GDP?
adds up the rewards for the factors of production used
- wages from labour, rent from land, interest from capital, and profit from entrepreneurship
What is the value of GDP?
monetary worth
What is the volume of GDP?
physical number
What does the term nominal mean in economics?
a metric not adjusted for inflation
What is Nominal GDP?
- actual value of goods and services produced in an economy in a one year period
- no adjustments to the value to the amount based on the increase in general price levels
What is the real GDP?
the value of all goods and services produced in an economy in a one-year period adjusted for inflation
What is GDP per capita?
GDP/ population
What does GDP per capita represent?
mean wealth of a citizen in a country
- makes it easier to compare standards of living between countries
When does real GDP grow?
if national output grows faster than population over a given time period,
- so there are more goods and services to enjoy per person
What does GNI stand for?
Gross national income
What is the GNI?
measurement of the income earned by citizens operating outside of the country and the GDP
- accounts for citizens who employ resources outside of the countries borders and sends the income home
What does GNP stand for?
Gross National Product
What is the GNP?
GDP + income from abroad
What is the GNP/capita?
GNP/ population
- provides a more realistic view of a country’s wealth than GDP
What are national income statistics useful for?4
- making comparisons between countries
- providing insights on the effectiveness of government policies
- allowing judgments to be made about the relative wealth and standard of living within each country
- allow comparisons to made over the same or different time periods
Why is real GDP a better comparison than nominal GDP?
a country may have a higher rate of economic growth but also a higher rate of inflations
- thus real GDP is better
What does PPP stand for?
Purchasing Power Parities
What is PPP?
- conversion factor that can be applied to GDP, GNI and GNP
- calculates the relative purchasing power of different currencies
What is the aim of the PPP?
to help make a more accurate standard of living comparison between countries where goods/ services cost different amounts
Definition of PPP?
Exchange rate of one currency for another which compares how much a typical basket of goods in the country costs compared to one in another country
If a basket goods in Vietnam is £100 and the same basket goods in England is £300. What would the PPP be, and what would this mean? 4
- the PPP would be 1:3
- this seems the cost of living in England is higher
- but if the GNP/capita is more than 3 times higher in Eng than Vietnam then England arguably has a better standard of living
- if the GNP/capita is less than 3 times that of Vietnam then enjoys a higher standard of living as they spend less income to acquire the same goods/services
What are the limitations of using GDP for comparisons? 5
- inequality
- quality of goods/ services
- uninclusion of unpaid/voluntary work
- differences in hours worked
- environmental factors
Why is ‘inequality’ a limitation of using GDP for comparisons?
- the distribution of income in an economy is provided as an average in the form of GDP/capita
- the differences in the standard of living in the same country can be significant thus does not reflect accurately
Why is ‘the quality of goods and services’ a limitation of using GDP for comparisons?
- gdp provides no information on the increase/decrease in the quality of goods/services over time
- if quality worsens but prices are lower, then the standard of living is judged to have increased
- th poor quality may actually have decreased the standard of living
Why is ‘voluntary/unpaid work not being included’ a limitation of using GDP for comparisons?
- if included gdp/ capita would be higher
- e.g. having large amounts of family child care provisions the standard of living increases but is not recorded
Why is ‘hours being worked’ a limitation of using GDP for comparisons?
- gdp data does not capture the amount of time taken to produce the GDP/capita
- if one country takes less time to generate the income than in a similar country, the standard of living would actually be. higher
Why is ‘environmental factors’ a limitation of using GDP for comparisons?
- gdp does not capture environmental and health impacts of generating the income within a country (externalities)
- in one country with fewer externalities in generating income, standards of living would be higher.
What are the 7 key factors that affect welfare other than gdp (which only measures income?
-realGDP per capita
- health
- life expectancy
- having someone to count on
- perceived freedom to make life choices
- freedom from corruption
- generosity
What most effects personal well-being3
- self reported health
- relationship status
- employment status
What is the name of the report to measure how lives are improving in the UK? who created it and when?
- in 2010
- uk prime minister
- measuring national wellbeing report
What does the ‘Measuring National Wellbeing’ report consist of? 1+4, 2
- 4 Key questions about:
- life satisfaction
- anxiety
- happiness
- worthwhileness
- questioned answered on a scale of 0-10
- report updated on a quarterly bases, rather than its former annual analysis
What did the Measuring of national wellbeing report relay in 2012-2016?3
- life satisfaction, happiness and worthwhile have risen while anxiety levels fell but have begun to rise slightly
- this may be due to a fall in unemployment or a rise in GDP
- or concerns over global security could be causing anciety
How are real incomes and subjective happiness related?
- happiness and incomes are positively related at low incomes but not associated at high levels of incomes
What is the Easterlin Paradox?
- basic increase in consumption of material goods will increase happiness if basic needs aren’t met, but once met an increase in consumption won’t increase long-term happiness
What is inflation?
Sustained increase in the general price level that erodes the purchasing power of money
- low inflation is considered to be better than high inflation
How is the general price level measured?
- by checking the prices of a basket of goods and services that an average household will purchase each month
What is the UK inflation target ?
2±1%
What is deflation?
Fall in the average price level of goods and services in an economy
- only occurs when the percentage change in prices falls below 0%
What is disinflation?
when average price level is still rising but at a lower rate than before
- inflation is increasing but at a decreasing rate
What is the inflation rate?
change in average price levels in a given time period
- calculated using an index with 100 as the base year
- if the index is 100 in year 1 and 107 in year 7 the inflation rate is 7%
What are the 2 inflation indices used by the UK?
- consumer price index
- retail price index
How is the basket goods calculated?5
- household basket goods of 700 goods/services that an average family would purchase is compiled on an annual basis.
- basket is weighted based on proportion of household spending
- each month, prices for the basket goods are gathered from 150 locations across the uk are averaged out
- the price x the weighting determines the final value of the good/service in the basket
- the final values are added together to determine the price of the ‘basket’
How is a basket goods created?
- household expenditure survey is conducted to determine what goes into the basket
- some exit while others are added
How is the CPI calculated?
CPI = (Cost of basket in year X)/(Cost of basket in base year) x 100
What does the CPI present?
the percentage difference in CPI between the two years is the inflation rate for the period
What are the limitations of using the CPI?5
- only provides average basket, not basket of many households
- one of several methods used to determine inflation
- quality of the products in basket is not captured
- only measures change in consumption on an annual basis
- prone to errors in data collection
Why is the CPI providing a level of inflation for the average basket a limitation of using CPI?
- dependent on what households buy the level of inflation for each one can vary significantly
- as an average, regional differences in inflation are not accounted for
Why is CPI being one of the several methods used by countries a limitation of using CPI?
- making comparisons between countries less meaningful as the may use other versions of CPI
Why is the quality of the products in the basket a limitation of the CPI?
- product quality changes over time
- so the comparison with different time periods is less useful
Why is the CPI only measuring changes in consumption on an annual basis a limitation of CPI?
changes can occur more frequently
- the index is always behind on these changes
Why is the CPI being prone to errors in data collection a limitation of the CPI?
- based on a survey that goes to thousands of households each year, yet is still a small sample
- respondents have no incentive to fil in the survey carefully and accurately.
How is the RPI measured?
- same way as CPI
- goods excluded from CPI are included in RPI
- usually higher than CPI due to to additions due to sensitivity to interest rate changes, affected by mortgage interest
What is included in RPI that is excluded from CPI?4
- council tax
- mortgage interest payments
- house depreciation
- other house purchasing costs such as estate agents fees
What can cause inflation?4
- demand pull inflation
- cost push inflation
- increase in the money supply
- increase in wages
What is demand pull inflation?
Increase in inflation caused by an excess in AD
How is an increase in inflation shown in an macroeconomic diagram?
- if any of the components of AD increase a rightward shift of AD curve occurs
- at the original P1 a condition of excess demand occurs
- thus a contraction of AD occurs and an extension of AS
- the general price level therefore increases
What is Cost push inflation?
caused by increases in the costs of production in an economy
How is cost push inflation shown on a macroeconomic diagram?
- if any of the costs of production increase or a fall in productivity AS will fall causing a leftward shift of AS
- at the original price there is a condition of excess demand in the economy
- as the prices rise, AD contracts and an extension of AS occurs
- causing average price levels to increase from P1 to P2 thus inflation occuring
How do changes to the Money Supply cause inflation?2
- by lowering the bank rate
- by increasing the money supply through quantitive easing
How does lowering the bank rate effect inflation?
- increased borrowing by firms and consumers is likely to occur
- causing an increase in consumption and investment
- resulting in an increase in AD thus demand pull inflation occuring
How does the Central Bank increasing the money supply through quantitive easing cause inflation? 3
- results in increased liquidity
- lower interest rates
- likely to lead to a form of demand-pull inflation
How do changes to wages cause inflation?
Increased AD causes demand pull inflation
- workers feel les well off as wages no longer have the same purchasing power
- workers may demand wage increases to compensate for higher prices
- these wage increases are now a form of cost push inflation driving prices higher
This is an economic phenomena called a wage-price spiral
What are the effects of inflation on consumers?3
- decrease in purchasing power
- decrease in the real value of savings, as money will be worth less in real terms
- fall in real income, for those on fixed incomes/pensions
What are the effects of inflation on Firms? 2
uncertainty - rapid price changes create uncertainty and delay investment
menu change costs - price changes force firms to change their menu prices too which can be expensive
What are the effects of inflation on the government?
- inflation erodes international competitiveness, of export industries
- trade-offs involved in tackling inflation, reductions may increase employment +/ reduce economic growth
What are the effects of inflation on workers?
- Demand higher wages, to compensate for reduced purchasing power
- if wage increases inflation, motivation & productivity may fall
What makes someone unemployed?
not in work but are actively seeking work
What does the labour force consist of? 3
- all workers actively working
- the unemployed
- between the ages of 16 - 65
What does the non labour force consist of?
- all those not seeking work and are out of work
what are the 2 methods used in the UK to measure Unemployment?
- International Labour Organisation Survey
- Claimant count
What does ILO stand for?
International Labour Organisation
What is the ILO and UK Labour Force Survey?3
- extensive survey sent to a random sample of around 60k UK households every quarter
- respondents self-determine if they are unemployed based of the ILO criteria
- same survey is used globally thus useful to make international comparisons
What is the ILO’s Criteria ?
- ready to work within the next 2 weeks
- actively looking for work in the past one month
What is the Claimant count?
Counts the number of people claiming the JSA in the UK
- more stringent requirement to be considered unemployed than with the ILO survey
- requires claimants to meet regularly with a work coach.
What does JSA stand for?
Job seekers allowance
What causes someone to be underemployed?
- they want to work more hours than they currently work
- working in a job that requires lower skills than they have
Why do people become underemployed?
- as a response to cyclical unemployment, losing their jobs in a weak economy can cause them to take part-time jobs or accept roles outside of their main skill base
- as a consequence of structural unemployment, unless workers retrain and gain new skills it may be difficult to gain full employment
What are the 4 commonly used metrics used when analysing the labour market in an economy?
- unemployment rate
- employment rate
- labour force participation rate
- inactivity rate
How is the unemployment rate calculated?
no. actively seeking work/ total labour force x 100
How is the employment rate calculated?
no. in employment/ population of working age x 100
How is the labour force participation rate calculated?
labour force/ total population force x 100
How is the inactivity rate calculated?
inactive people of working age/ working age population x 100
How can the employment rate and unemployment rate increase at the same time?
- increased migration causing working age population to increase
- decrease in the inactivity rate as people move from being economically inactive to employed
Why does the unemployment rate not capture hidden unemployment that occurs in the long term?
- workers look for a job but may eventually give up and become economically inactive
- improves unemployment rate as fewer people are actively seeking work
What are the 4 different types of unemployment?
- structural
- cyclical or demand deficit
- seasonal
- real wage
What is structural unemployment? 1+4
When there is a mismatch between jobs and skills in the economy
- usually happens as the structure of the economy changes
- no longer a need for a specific type of worker
- perhaps due to relocation of production
- thus unless workers retrain they are left unemployed or underemployed
What is cyclical or demand deficient unemployment?
Caused by a fall in AD in an economy
- happens during a recession
- demand for labour is demand derived from the demand for goods/services
As output falls in the economy, firms lay off workers
What is seasonal unemployment?
certain seasons come to an end and labour is not required until the next season
What is frictional unemployment?
when workers are between jobs
- usually short-term unemployment
- workers have voluntarily left their previous job to search for another
What is real wage unemployment?
when wages are inflexible at a point higher than the free-market equilibrium wage
- caused by the existence of minimum wage laws
- higher wage created an excess supply of labour
- this represents real wage unemployment
Why is migration significant in employment/unemployment?
- labour is a key factor of production
- a way to expand output in an economy is to increase the amount of labour available
- achieved through easing the inward migration policies (immigration)
What is net migration?
the difference between inward migration and outward migration
immigration - emigration
- less developed countries generally have net outward migration (more people going out the coming in)
- more developed economies generally have net inward migration and have skilled workers emigrating
What is the significance of migration on employment? 3
- immigrants usually fill fancies that the local citizens cannot or will not fill
- increased supply of labour may push down wages in the economy, especially for low skilled jobs
- lower average wages are an incentive for employers to hire more workers
- employment may increase as a result
- immigration results in an increased population thus an increase consumption in the economy
- greater output requires more labour so it creates more jobs
What is the significance of unemployment on migration?2
- immigrants may displace local workers increasing the level of unemployment
- dependents of immigrants may be unable to find work and register as unemployed
What are the effects of long term unemployment on government? 3
- increased spending on benefits
- less tax revenue
- increased spending on retraining
What are the effects of long term unemployment on the economy?4
- increased crime
- vandalism
- increased anti social behaviour
- increased homelessness
What are the effects of long term unemployment on individuals?6
- loss of income
- health issues
- mental instability
- sense of failure
- marital failure
- stress increases
What are the effects of long term unemployment on firms?3
- loss of sales revenue
- loss of output/ production
- changes the skill level in the economy
What does BoP stand for?
Balance of Payments
What is the BoP?
a record if all the financial transactions that occur between it and the rest of the world
What are the two main sections of the BoP?
- the current account
- the financial & capital account
What is the current account?
all transactions related to goods/ services along with payments related to the transfer of income
What is the financial and capital account?
all transactions related to savings, investments and currency stabilisation
What is the relationship between the current account and the financial and capital account?
should balance and be equal to 0
- thus if one balance is positive he other should be negative
What is credit?
Money flowing into the country
What is debit?
money flowing out of the country
what does the current account record?
the net income that an economy gains from international transactions
What is net income?
income transfers by citizens and corporations
- credits received from uk citizens who are abroad and send remittances home
- debits are sent by foreigners working the UK back to their countrirees
How is the current account balance expressed, and why?2
- expressed as a % of GDP
- allowing for easy international comparisons
When does a current account deficit occur?
when the value of the outflows is greater than the value of the inflows
- usually occurs when the imports> exportrs
When does a current account surplus occur?
When. the value of the inflows is greater than the value of outflows
- usually occurs when imports<exports
What is the UK governments aim regarding the current account and how successful have they been?4+1
to make it as close to equilibrium as possible
- usually runs a small deficit
- export led growth would help it become positive
- increasing income and wealth in an economy, the value of imports rise
- consumers enjoy the variety of good/services abroad
- rising imports push the balance towards a deficit.
What is affected if the current account is running a deficit?1+2
a negative impact on aggregate demans
- net exports are a component of AD
- if net exports are negative then AD decreases
Hoe could the government correct the current account deficit?1+4
By raising tariffs
- decreasing imports bought by households
- firms rely on imports for raw materials used in production, would now face higher costs of production
- higher production costs are passed onto consumers in the form of higher prices
- reducing the deficit causes increased inflation
what is the connection of economies through trade?
one countries imports are another countries exports
- thus there global value of exports will be equal to the global value of imports
