2.1 Measures of economic performance Flashcards
What are 3 stages of CPI inflation measure?
Stage 1: Living costs and food survey
ONS conducts survey to find most common goods/services and total spending on these
Stage 2: Price survey
- Average price of each product
Stage 3
Weighted average to find price level
Set base price level =100; use index formula
Limitations of CPI
Unusual spending habits
- Everyone spends on different products
Time lag
- Basket only updated once a year; demands of products may change; CPI may not include new trended products
Changes in quality
- Rise in CPI price may mean higher quality products are bought
Doesn’t include housing
- Increase in payments doesn’t affect CPI
What are differences between RPI and CPI?
Includes housing/mortgage costs
Excludes top 4% earners; not average households
Causes of inflation
Demand Pull
- When increase in demand causes increase in price
Cost push
- Increase in cost of production; cost passed onto consumers
What is deflation?
Deflation is a decrease in average price levels
What is the deflationary spiral?
When AD decreases and consumers notice prices falling; they delay purchasing goods; AD affected negatively.
Firms let go off workers; negative multiplier effect
Effect of inflation on consumers
Less purchasing power
- Fall in living standards
Consumers who save lose out
- Their money is worth less
Psychological effects of higher prices on consumers
- May feel less well-off, decrease spending
Effect of inflation on firms
Difficult to predict
- Harder to prepare for future
Calculation of new prices
- can increase cost of production
Effect of inflation/deflation on workers
Living standards decrease
- Buy less with their income; unless income increases in line with inflation
Deflation cause job losses
- Lack of demand; fall in profits; decrease staff to cut costs
What is cost push inflation?
Cost push inflation is when decrease in aggregate supply pushes price up.
When businesses find costs have risen, they pass this on by increasing consumer price; protects their profits.
What is demand pull inflation?
Demand pull inflation is when AD increases which leads to an increase in price.
What are the 5 types of unemployment?
Frictional unemployment
- People moving between jobs aren’t employed
Structural unemployment
- Mismatch between skills and employment available
Seasonal unemployment
- Some industries may not need employment during different seasons
Cyclical unemployment
- AD decreases, firms may make less profits or may not need workers; they lay off workers
Causes of frictional unemployment
Job search
Relocation
- Takes time to find job in new area
Information gaps
- Job seekers may not hv complete info about job opening; employers may not have access to all potential candidates
Causes of structural unemployment
Specialisation
- Certain skill that may not be needed
