2.1 - Measures of Economic Performance Flashcards
What is the definition of economic growth
an increase in real GDP, an increase in the real value of goods and services produced in the borders of an economy in a given period of time, usually calculated on an annual or quarterly basis and is given as a growth rate.
What is the formula for value and what is the value of national income
Value = volume x current price level
Value of national income is the monetary value of the basket at the prices of the day, the volume is the national income adjusted for inflation and is expressed either as index number or in money terms
What is national income
the total value of goods and services produced in an economy over a given time, same as national output (or GDP)
What is gross national income (GNI)
GDP + net receipts from abroad + property income + net taxes
Total value of everything produced by a country and the income its residents receive whether it is earned at home or abroad
What is purchasing power parity (PPP)
an additional exchange rate adjustment that equalises the price of internationally traded goods across countries
What does arbitrage mean
if 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 arbitrage and forces prices and exchange rates to align over time
What are benefits of PPP (4)
- Exchange rate remains fairly constant year round so it can be easily compared
- Exchange rates 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 help you to examine the relative living conditions of different countries
What factors does national happiness take into consideration (5)
Condition of family relationships
Financial security
Job security
Supportive friends
Good health
What is the correlation between wealth / income and happiness
Happiness and income are positively related at low incomes but higher levels of income do not associate happiness with increases in income. Depending on the people around us, if you are the richest you will be happier. Income is linked with social status and higher social status makes us happier
What is deflation
a persistent decrease in the general price level over a given period of time, prices are going down
What is disinflation
a decrease in the rate of increase of prices (inflation falling from 5% to 2%)
What is inflation
a persistent increase in the general price level over a given period of time
What are the two measurements of inflation
Consumer Price Index (CPI)
Retail Prices Index (RPI)
How is RPI different to CPI (3)
Unlike CPI, RPI includes housing costs such as payments on mortgage interest and council tax thus RPI is usually higher
Excludes top 4% of earners and low income pensioners
Doesn’t take into account that higher prices cause switches to cheaper goods
What are causes of inflation (3)
Cost-push- rise in costs of production
Growth in money supply
Demand-pull- increases in AD outstrip increases in AS
What is the impact of a currency depreciation on exports and imports
the price of imports rises in domestic currency terms, another country’s exchange rate could appreciate which could cause the £ to depreciate
What are causes of cost push inflation (7)
National minimum wage increases
Trade union wage increases
Increase in world commodity prices (oil)
External supply-side shocks
Rise in indirect taxes (VAT)
Rise in corporation tax
Falling productivity
What are causes of demand pull inflation (6)
Excessively loose fiscal policy
Excessively loos monetary policy- quantitative easing
Exchange rate depreciation
Rising animal spirits (confidence)
Excessive borrowing
Global economy growing quickly
What are consequences of inflation on firms
Businesses uncertainty
Falling international competitiveness
What are consequences of inflation on the government
Must increase spending on state pension and welfare payments
What are consequences of inflation on workers
Real incomes fall- reducing disposable income
Firms face higher costs leading to redundancies
What is the wage price spiral
as inflation rises people start to expect higher inflation and this leads to - them asking for higher nominal wage rises to keep pace with the rising cost of goods in shops. Firms may grant this to begin with but as their costs are also rising they may have to pass this on to consumers with higher prices and so they demand higher wages again
What are the 2 measures of employment
Claimant Count
International Labour Organisation (ILO)
What is the Claimant Count’s measure of insurance
a person who is receiving the Job Seeker’s Allowance
What is the International Labour Organisation’s measure of insurance
defines unemployment as someone who has been actively seeking work for the past four weeks but ready and able to start in the next two weeks. It is collected in the UK by the Labour Force Survey
Are you employed if you do not get paid e.g. charity workers
Yes
What is real-wage inflexibility unemployment
when real wages are too high in a market and they are above the ‘market-clearing’ (equilibrium) wage rate. This is known as Classical unemployment
What are causes of real-wage unemployment (3)
High trade union power
High national minimum wages
‘Sticky’ wages (slow to adjust)
What impact does unemployment have on the fiscal balance
Higher fiscal deficit as tax revenues fall and welfare payments rise
What is the capital account made of
Sale / transfer patents, copyrights, franchises, leases and other transferable contracts, and goodwill
Transfer of ownership of fixed assets
What is the current account made of
Trade in goods and services (X-M)
Net primary income- net factor income from abroad (e.g. remittances, profits, interest on dividends)
Net secondary income- net unilateral transfers (e.g. foreign aid)
What is the financial account made of
Net foreign ownership of domestic assets
Hot money flow
How does trade make economies interconnected
if the USA is running a current account deficit, to fund this deficit it has to have a capital account surplus. It does this by selling US government debt (called treasuries) to foreign governments and international private investors. If international investors and international governments no longer wanted to buy US government debt, then the US would have to balance its current account. International trade allows current account surpluses and deficits to develop
What are the components of GDP
GDP = C+I+G+(X-M)
Consumption
Investment
Government spending
Exports
Imports
What does a current account deficit mean for inflation
a current account deficit may show that a nation is importing lots of goods and services, however if labour and input costs are cheaper overseas, they may reduce inflationary pressure. If the price of goods made in China is a lot lower than the price of goods made in the UK, then a current account deficit could reduce inflationary pressure
