2.1 Measures Of Economic Performance Flashcards
Economic growth
The increase in the long term productive potential of the country
measured through % change in real GDP per annum or shift in PPF
Sustainable economic growth
Economic growth that meets the needs of today without compromising the needs of future generations
Real GDP
The total value of goods and services produced in a country within a year adjusted for inflation (not adjusted = nominal)
Total GDP
Overall GDP for the country
GDP per capita
The total GDP divided by the number of people in a country
GDP indicates?
Standard of living in a country
GDP per capita growth
GDP per capita increases if national output grows faster than population over a given time period as there are more goods and services to enjoy per person
Real values
Volume of national income
Nominal values
Value of national income
Value equation
volume x current price level
GNI
The value of goods and services produced by a country over a period time plus net overseas interest payments and dividends.
GNP
The value of goods and services over a period of time through labour or property supplied by citizens both domestically and overseas
Comparison of growth overtime
Growth figures over a set period of time can be compared against similar countries to see whether the country has done well or not
Can compare standard of living / economic welfare
Comparisons of growth between countries
When countries have a difference in population, a different in total GDP per capita so GDP per capita is used
Purchasing Power Parities
An exchange rate of one currency for another which compares how much a basket go goods in the country costs compared to another country
PPP advantage
Takes into account cost of living when comparing countries
Informal economy
Estimated to take up 10-15% of GDP
Problems of GDP comparing standard go living
Inaccuracy of data - some countries may be inefficient at collecting/calculating data, Informal economy
Errors in calculating inflation rate
Doesn’t take into account quality of goods and services
Issue go which unit should be used to compare different currencies/ figures
Some types of expenditure, e.g defence, does not increase standard of living but may increase GDP
National happiness
Qualitative measure of progress or development which includes factors such as sustainable and equitable socio-economic development
Easterlin Paradox
An increase in consumption of material goods will increase happiness if basic needs aren’t met however, once these needs are met, an increase in consumption won’t increase long term happiness
Actual growth
Where aggregate demand is equal to aggregate supply
Potential growth
Where aggregate supply is operating at full capacity (where all resources are fully employed)
Inflation
The general increase of prices in the economy which erodes purchasing power of money
Deflation
The fall of prices and indicates a slowdown in the rate of growth of output in the economy
Disinflation
A reduction in the rate in of inflation
CPI
ONS collects prices on 710 goods and serves from 20000 shops in 141 locations and prices are updated every month
New items added to list every year
Prices are combined using average household spending pattern to produce an overall price index
Average household spending
Worked out through Living costs and food survey, where 5500 families keep diaries of what they spend fortnightly
Takes into account how much is spent through each item so they are weighted
Limitations of CPI
Not totally representative as it is impossible for the figure to take into account every single good that is sold in a country
Does not include price of housing which tends to increase in price more than other goods
Difficult to make comparisons with historical data as it is very recent
Overestimates inflation as it doesn’t take into account that goods have improved in quality
Cost push inflation
A general rise in the price level because of increasing COP (decrease in SRAS), as firms will put prices up to maintain profit margin. This shows a decrease in real GDP and a fall in productive capacity
Demand pull inflation
When aggregate demand increases at a faster rate than aggregate supply. AD increases, prices increase. Shows an increase in real GDP but at an unsustainable rate
Menu costs
An inflation cost for firms as they have to change the prices on their menus
Administration costs
An inflation cost for firms as they have to renegotiate wages for labour and search for cheaper raw materials
Cost of living
The rate by which inflation reduces a households ability to buy goods and services
Wage price spiral
Where labour demands higher wages due to inflation, which in turn creates more inflation through higher costs for firms
Effects of inflation on consumers
If income does not rise with inflation, they will have less to spend which causes a fall in standard go living
Those in debt pay it off at price go cheaper value whereas those who are owed are getting cheaper value money back
Savers lose out as money saved is worthless
Psychological effects as consumers may chose not to spend even if income rises as they feel less well of
Effects of inflation on firms
Exports become more expensive and therefore less competitive if inflation in Britain is higher than other countries
Deflation causes consumers to postpone their purchases as they wait or prices to fall further. Decreases demand and therefore profit
Inflation is difficult to predict so firms cannot plan long term
Changing prices means changing menus, labelling which can be expensive
Effect of inflation on government
If gov fail to change excise taxes in line with inflation than real gov revenue will fall
If gov fail to change personal allowance in line with inflation then gov revenue increases and taxpayers have less money
Effect of inflation on workers
If workers do not receive yearly pay rises of the rate of inflation, they will be worse off
Deflation can cause staff to lose jobs as firms have to let go of labour to cut costs since demand in falling for goods.
Unemployment
Those who are willing and able to work and are actively seeking work but cannot find a job.
Claimant count
The number of people receiving benefits for being unemployed
Issues with Claimant count
Labour force survey
Issues with LFS
Economically active
Those aged 16 and over who are either in employment or unemployed
Economically inactive
People not in employment who have not been seeking work within the last four weeks and/or are unable to start work within the next two weeks
Employment rate
% of population of working age who are employed
Unemployment
% of the labour market that are unemployed
Labour productivity
Labour output per hour
Under employed
Those in part time or zero hour contracts
Those in jobs which do not reflect their skill level
Aren’t included in unemployment statistics
Significance of changes in activity
Increase in inactivity decreases size of labour force therefor causing lower productive potential of the country. Thus lower GDP and tax revenue as less people are working
Decreases in inactivity could lead to more people just being unemployed if there are no jobs available
Frictional unemployment
Unemployment that occurs when people are moving between jobs. Only short term
Causes of frictional unemployment
New workers entering labour market
People who have chosen to leave their previous job
These people may take a while to locate and gain a job that they are willing to accept
Structural unemployment
Unemployment caused by occupational immobility and declining industries. More serious as it is long term decline in demand in an industry leading to reduction in employment.
Providing skills/training in areas that are experiencing high demand will reduce this type of unemployment
Types of structural unemployment
Regional unemployment is where certain areas of a country suffer from very low levels of unemployment due to industry closures
Sectoral unemployment is where one sector suffers a dramatic fall in employment
Technological unemployment is where an improvement in tech means that jobs are replaced
Seasonal unemployment
Unemployment caused due to a reduced demand for labour over a seasonal period
Little that can be done to prevent this from occurring
Cyclical unemployment
Unemployment due to a general lack of demand of goods and services within the country. Due to lack of AD
In a recession, there is a decrease in demand causing businesses to cut employment in order to control costs and restore some of their profitability
Real wage unemployment
Unemployment caused by a wage disequilibrium resulting in surplus labour. Results from NMW being set above the natural equilibrium
Real wage inflexibility
Where the labour market is inflexible to wage changes and changes in demand due to contract law + trade union power
Occupational immobility
Where workers do not have the desired skills to find a job
Geographical immobility
Where workers cannot find a job in different areas due to the cost of moving
Migration
Increase in net inward migration leads to increased jobs. Most of these people people come to UK to work, often take lower skilled jobs and are less likely to claim benefits. Due to the circular flow of income, immigrant spending creates jobs and total employment increases without increasing unemployment (dependent on how much money immigrant workers send back home)
Migration and lower wages
UK firms are able to recruit foreign workers meaning an increased supply of labour and so price equilibrium of labour is reduced. More competition for jobs and lower skilled workers more affected.
Skills
Economies progress overtime and as a result, higher skills are needed.
For UK to maintain employment levels, it needs to increase skills of workforce.
Migrant workers may fill shortages if their skills fit
Impact of unemployment on workers
Loss of income
Stigma of being unemployed - low mental health
Long term unemployed may lose their skills
Those in jobs may suffer from lower job security and will fear being made redundant
Impact of unemployment for firms
Decrease in demand for their goods, therefore fall in profit
Smaller pool of skilled people due to long term unemployment
Can offer low wages as people will take the job anyway because they know there is a lack of jobs
Impact of unemployment on consumers
Unemployed consumers have less available to spend
Firm may lower prices and put on sales in order to increase demand for their product, cheaper for consumer
Impact of unemployment for gov
Reduced income results in fall in tax revenue and higher spending on welfare payment
Increased budget deficit
Impact of unemployment for society
Social deprivation (increased crime)
Loss of potential national output and represents an inefficient use of scarce resources
Balance of payments
A total record of the inflow and outflow of income from an economy. Payments must balance between the current and capital account
Current account
The sum of a country’s balance of:
Trade in goods and services (visibles as you can physically see them. Goods that are traded whether raw or finished)
Trade in services (invisibles. Services that are traded in or out of country)
Net income (remittances - wages from abroad)
Net transfers (payments to and from other countries e.g foreign aid)
Balance of trade in goods and services
Balance of trade + balance of invisibles
Current balance
Balance of trade + balance of invisibles + net income and current transfers
Current account surplus
Where exports are greater than imports
Current account deficit
Where imports are greater than exports
International competitiveness
The extent to which an economy is able to produce goods and services at a more efficient and cheaper rate than other countries. Influence by E.R, COP and quality of goofs.
Supply side policies work best to improve international competitiveness
