2.1 Measures of economic performance Flashcards
What is GDP (gross domestic product)?
The value of all goods and services produced in an economy in a one year period
What does the word nominal refer to in economics?
The metric has not been adjusted for inflation. It is the actual value.
What is Real GDP
The value of all goods and services produced in a one year period whilst being adjusted for inflation
What is GDP per capita
Average economic output (GDP) of a country per person
What does GNI stand for
Gross national income
What does GNI measure
The total amount of money earned by a nations people and businesses in a one year period.
What does GNP stand for
Gross national product
What is GNP
GDP + income from abroad - income sent by non residents to their home countries
What is purchasing power parity
The exchange rate needed to buy the same quantity of products in each country
What are limitations of using GDP for comparisons
Lack of information provided (distribution of income is provided as an average, could be a large amounts of inequality)
Quality of goods and services
Environmental factors
What is inflation
The sustained increase in the average price level of goods and services
How is inflation measured?
A basket of goods of goods and services that an average household will purchase per month
What is CPI
Consumer price index. A household basket of 700 goods that an average family would purchase
What is deflation
There is a fall in the average price level of goods and services. (percentage falls below zero)
What is disinflation
The average price level is still rising but at a lower rate than before.
What is the formula for CPI?
cost of basket in year (X) / Cost of basket in base year * 100
Limitations of CPi
Ignores regional differences e.g. London inflation may be higher than in Newcastle.
The level of inflation on different goods can vary significantly
Does not capture the quality of the products in the basket
What is RPI
Retail price index. Similar to CPI but also includes extra housing costs such as mortgage repayments, building insurance and council tax
What is demand pull inflation
Caused by excess demand in the economy
What is SRAS
Total supply provided in the economy at a given average price level
What is cost push inflation
An increase in the costs of production in an economy
What are the different types of inflation
Demand pull
Cost push
What is quantitative easing?
Where the central bank purchases securities on the open market so as to increase the money supply.
What are the effects of inflation on firms?
Uncertainty. Rapid changes in price delay investment.
Menu change costs. Price changes form firms to change their prices too
What are the effects of inflation on consumers
Decrease in purchasing power
Decrease in the real value of savings
Fall in real income
What are the effects of inflation on the government
Inflation erodes international competitiveness
Trade offs involved in tackling inflation e.g. increasing unemployment
What are the effects of inflation on workers
Will demand higher wages
If the percentage increase of wage increase doesn’t meet the rate of inflation then motivation and productivity may fall.
What does unemployment refer to
Individuals who are not currently employed but are actively seeking and available for work
What is the labour force
All workers actively working and the unemployed (seeking work)
What is the non labour force
Those not seeking work e.g. children, pensioners
What is the claimant count?
Counts the number of people claiming job seekers allowance. Requires claimants to meet regularly with a work coach
What is the labour force survey
Extensive survey sent to a random sample of 60,000 UK households every quarter. Respondents self-determine if they are unemployed based on the criteria.
What is underemployment?
People who are currently in work want to work more hours or working a job that requires lower skills than they have.
What is cyclical unemployment?
Unemployment caused by a fall in AD in an economy which causes firms to lay off workers
What is structural unemployment?
Unemployment caused by a mismatch between jobs and skills as the structure of an economy changes
What is the formula for unemployment rate?
Number of people actively seeking work / total labour force *100
What is the formula for employment rate
Number of people in employment / population of working age *100
What is the formula for labor force participation rate
Labour force / Total population * 100
What is seasonal unemployment?
Occurs when certain seasons come to an end and labour is not required e.g. Christmas workers, fruit pickers
What is frictional unemployment?
Occurs when workers are between jobs (usually short term unemployment)
What is real wage unemployment?
When wages are inflexible at a point higher than the free market equilibrium.
What is minimum wage?
The lowest wage that employers can legally pay their employees
What is net migration?
Difference between inward and outward migration
Why is migration important?
Immigrants usually fill rolls that local citizens will not as they tend to be low skilled manual labour work.
Effects of unemployment on the government
Increased spending on benefits
Less tax revenue
Increased spending on retraining
Effects of unemployment on the economy
Increased crime
Vandalism
Increased anti-social behavior
Increased homelessness
Effects of unemployment on firms
Loss of sales revenue
Loss of output/ production
Changes the skill level in the economy
What is the balance of payments
A record of all the financial transactions that occur between a country and the rest of the world
Effects of unemployment on individuals
Loss of income
Health issues
Mental Instability
Sense of failure
Marital failure
Stress increases
Increase in suicide
What are the two main sections of the Balance of Payments
The current account
The financial and capital account
What does the current account section of the BoP show
All transactions related to goods/services along with payments related to the transfer of income. Measures a countries net income
What does the financial and capital account section of the BoP show
All transactions related to savings, investment and currency stabilisation
When does a current account deficit occur
The value of outflows is greater than the volume of inflows (imports > exports)
When does a current account surplus occur
The value of inflows is greater than the value of outflows (imports < exports)
What is the UK’s macroecnomic aim relating to the BoP
Get the current account to balance as close to equilibrium as possible
What is a result of of a current account deficit
Aggregate demand decreases causing the government to potentially raise tariffs. This would lead to prices of imported raw materials to increase. Therefore, higher costs of production = higher price of good for consumers.
Reducing current account deficit comes at the expense of increased inflation
