2.1 - Measures of Economic Performance Flashcards
Economic growth
The rate of change of output, so an increase in the long term
productive potential of the country, meaning there is an increase in the amount of goods and services that a country produces
Gross Domestic Product
The total value of goods and services produced in a country within a year
Total Gross Domestic Product
The combined monetary value of all goods and services produced within a country’s borders during a specific time period
Gross Domestic Product per capita
The value of total gross domestic product divided by the population of the country
Real Gross Domestic Product
The value of gross domestic product adjusted for inflation
Nominal Gross Domestic Product
The value of gross domestic product without being adjusted for inflation
Gross National Income
The value of goods and services produced by a country over a period of time plus net overseas interest payments and dividends
Gross National Product
The value of goods and services over a period of time through labour or property supplied by citizens of a country both domestically and overseas
Purchasing Power Parity
An 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
Problems of using Gross Domestic Product to compare standards of living
- Inaccuracy of data
- Inequalities
- Quality of goods and services
- Comparing different currencies
- Spending
Gross National Happiness
A measure of economic and social progress that prioritizes well-being and quality of life over GDP, considering factors like psychological well-being, health, education, and environmental sustainability
Inflation
A sustained increase in the general price level of goods and services in an economy over time
Deflation
A sustained decrease in the general price level of goods and services in an economy over time
Disinflation
A decrease in the rate of inflation, meaning prices are still rising but at a slower pace than before
Consumer Price Index
A measure of inflation that tracks the average change in the prices of a basket of goods and services commonly purchased by households over time
Limitations of the Consumer Price Index
- Not totally representative as different households spend different amounts on each good
- Does not include the price of housing
- Difficult to make comparisons with historical data. It was only used since 1996
Retail Price Index
A measure of inflation that tracks changes in the cost of a fixed basket of goods and services, including housing costs such as mortgage interest payments
Demand pull inflation
Inflation caused by excessive aggregate demand exceeding aggregate supply, leading to rising prices
Cost push inflation
Inflation caused by rising production costs like wages or raw materials, which lead firms to increase prices to maintain profitability
Growth of money supply as a cause of inflation
Inflation occurs when the money supply increases faster than the economy’s ability to produce goods and services, leading to higher demand and rising prices
Effects of inflation on consumers
- If people’s incomes do not rise with inflation then they will have less to spend , which could cause a fall in living standards
- Those who are in debt will be able to pay it off at a price which is of cheaper value, but those who are owed money lose because the money they get back is of cheaper value
Effects of inflation on firms
- If inflation in Britain is higher than other countries, British goods will be more expensive making them less competitive and making them more difficult to export, which will also affect the balance of payments
- Deflation isn’t good as it encourages people to postpone their purchases as they wait for the price to fall further
- Workers might demand higher wages, which could increase the costs of production for firms
Effects of inflation on governments
- If the government fails to change excise taxes in line with inflation then real government revenue will fall
- The government will have to increase the value of the state pension and welfare payments because the cost of living is increasing
Effects of inflation on workers
- Real incomes fall with inflation, so workers will have less disposable income
- Deflation could cause some staff to lose their jobs as there is a lack of demand meaning firms see a fall in profit and have to decrease staff to cut costs
Unemployment
Those of working age who are without work, able to work and
seeking work and have actively sought work in the last 4 weeks and are available to start work in the next 2 weeks
Measures of unemployment
- Claimant count
- Labour Force Survey
Claimant count
The number of people receiving benefits for being unemployed, such as Job Seeker’s Allowance
Labour force survey
A survey conducted to measure unemployment by assessing the number of people actively seeking work and available to start within two weeks
Inactive
Those who are neither employed nor unemployed; they are people of working age not seeking employment as well as those seeking employment but not able to start work e.g. those in study and those who do not want or need a job
Underemployment
A situation where workers are employed but in jobs that do not fully utilise their skills, qualifications or available working hours
Types of unemployment
- Structural unemployment
- Frictional unemployment
- Seasonal unemployment
- Cyclical unemployment
- Real wage inflexibility
Structural unemployment
Long-term unemployment caused by changes in the economy, such as technological advancements or industry decline, leading to a mismatch between workers’ skills and available jobs
Frictional unemployment
Short-term unemployment that occurs when workers are between jobs or entering the workforce, often due to job search time and career transitions
Seasonal unemployment
Unemployment that occurs due to predictable changes in demand for labor at different times of the year, affecting industries like tourism, agriculture, and retail
Cyclical unemployment
Unemployment caused by a lack of demand during economic downturns, where businesses reduce output and lay off workers
Real wage inflexibility
Unemployment caused when wages are kept above the market equilibrium (e.g., due to minimum wages or trade unions), leading to excess supply of labour and job shortages
Geographical mobility
The ability of workers to move between different locations to find employment, including factors like housing costs, family ties and regional economic conditions
Occupational mobility
The ability of workers to change jobs or industries based on their skills, training, and qualifications, which can be limited by factors like education requirements and industry-specific expertise
Impacts of unemployment on workers
- Those who are made unemployed normally have a loss of income which usually results in a decline in their living standards
- The long-term unemployed (those unemployed for more than 12 months) often find it more difficult to get another job as they lose skills
- Those who are in jobs will suffer from lower job security and will fear being made redundant
Impact of unemployment on firms
- If disposable incomes decrease there will be a decrease in demand for their goods
- Long term unemployment can lead to loss of skills and reduce employability of workers, so firms have a smaller pool of skilled people to employ
- They can offer low wages as people will take the job anyway because they know there is a lack of jobs so have few options
Impact of unemployment on consumers
- Consumers in areas of high unemployment lose out because local shopping centres tend to be run down and don’t offer the range of shops available to those in areas of low unemployment so they suffer from less choice
- Firms may lower prices and put on sales in order to increase demand for their product
Impact of unemployment on the government
- Reduced income will result in a fall in tax revenues and higher spending on welfare payments for families with people out of work, incurring an opportunity cost as the money could be better spent elsewhere
- Will result in an increase in the budget deficit likely causing the government to raise taxation or scale back plans for public spending on public and merit goods, such as the NHS or education
Balance of payments
Record of all financial dealings over a period of time between economic agents of one country and all other countries
Imports
Goods and services purchased from foreign countries, leading to an outflow of money from the domestic economy
Exports
Goods and services sold to foreign countries, generating an inflow of money into the domestic economy
Components of the balance of payments
- Current account
- Capital account
- Financial account
Current account
Records trade in goods and services, primary income (e.g., investment income), and secondary income (e.g., foreign aid, remittances)
Capital account
Records transfers of assets, such as debt forgiveness and migrant asset transfers
Financial account
Records investment flows, including foreign direct investment, portfolio investment, and reserve assets
Current account surplus
When a country’s total exports of goods, services, and income receipts exceed its total imports and income payments, leading to a net inflow of money into the economy
Current account deficit
When a country’s total imports of goods, services, and income payments exceed its total exports and income receipts, leading to a net outflow of money from the economy
UK government’s macroeconomic objectives
- Low unemployment
- Low and stable inflation
- Sustainable economic growth
- Balance of payment equilibrium, including current account balance
