2.1 Measures of economic performance Flashcards
What are the 4 factors of production (acronym)
C - Capital
E - Enterprise
L - Land
L - Labour
What is economic growth and the 2 types
An increase in the productivity capacity
Short-run: The actual annual percentage change in real national output
Long-run: An increase in the potential productive capacity of the economy
Define gross and real domestic product
Gross: The value of goods and services produced in the economy over a period of time
Real: The value of goods and services produced in the economy over a period of time taking inflation into account
How are both short & long run growth measured
Long-run: The maximum potential output of the economy using all factor resources as shown on the PPF
Short-run: The annual percentage change in real nations output or income and real GDP
Define both volume and value
Volume: Looks at the quantity of goods and services produced in a country
Value: Looks at the monetary worth of the goods and services produced in a country
Define and differentiate gross national product and gross national income
Gross national product: A countries value of all goods and services produced by domestic businesses both at home and abroad including overseas assets
Gross national income: A countries total level of income
What is the purchasing power parities
A method that allows us to look at the relative value of different currencies.
It takes real GDP and divides it by the number of people within the country.
It then takes the income and converts it to dollars to allow a comparison.
This allows us to see how much an individual from each country can purchase.
What are the costs (4) and benefits (4) of growth
+ Higher disposable income
+ Higher employment
+ Higher profits for firms
+ Increase in tax revenue
- Current account deficit
- Inflation
- Environmental costa
- Income inequality
Define actual and potential growth
Actual: An increase in the equilibrium output of a nation that is producing below its full employment level (inside its PPC)
Potential: An increase in the production possibilities of a nation or the long-term potential level of output
Define inflation and the 2 ways to measure it
The rate of change in average price level over time
Consumer price index (CPI)
Retail price index (RPI)
Causes of inflation (3)
Demand pull
Cost push
Growth of the money supply
How is demand pull inflation caused and give 5 examples
Is caused by excessive demand in the economy for goods and services
- Reduced taxation
- Increase in consumer spending
- decrease or weak exchange rate
- Increase in confidence and/or certainty
- Improved availability of credit
How does cost push inflation occur
Occurs when firms respond to rising costs of production by increasing prices.
This typically happens when firms want to protect profit margins
What are 5 causes of cost-push inflation
- Wage increases
- Higher raw materials
- Higher taxes
- Higher import prices
- Natural disasters
Growth of money supply
How can the government increase the money supply (4)
- Printing more notes through the BOE
- Reduce deposit holdings of banks
- Use quantitative easing
- BOE can buy bonds off financial institutions
What is quantitative easing and what does it do
It involves a central bank creating new money and using it to buy assets owned by financial institutions and other firms.
This increases money supply which will enable individuals and firms to spend more or lend it to others to spend.
Is used when its necessary to adapt a ‘loose’ monetary policy to stimulate AD at a time when IR are already very low.
How does quantitative easing work
Central banks create money electronically - This is then used to buy up financial assets from financial institutions - Price of Gov bonds then increase and yield (IR) decrease - Financial Institutions either loan this money out or invest in riskier corporate bonds or share.
Price of corporate bonds increases and yield (IR) decreases reducing the cost of borrowing money - Access to credit improves, general IR decrease and willingness to lend should increase at lower IR
This stimulates borrowing, spending & investment = AD and growth increase.
What is the formula for yield
coupon rate (IR) / Market price x 100
What is the formula for yield maturity
coupon - capital losses or gains / market price of bond x 100
What is budget deficit and national budget
Budget deficit: Where government spending exceeds taxation revenue in a fiscal year
National debt: The accumulation of budget deficits over years
Define deflation and the causes and problems of it
A decrease in the general price level. Not a falling rate of inflation, the average level of prices must be falling. This tends to happen during periods of very low or stagnant growth.
Deflation tends to indicate that demand is very low or suppressed so as prices fall consumers tend to delay purchasing decisions as they think prices will fall in the future.
As a result consumption slows significantly which is likely to mean that firms will lose confidence to invest harming AD
Define disinflation
Occurs when the inflation rate is positive but falling
What policies can be used reduce demand pull inflation but which one is more suited
Contractionary monetary policy, by an increase in IR or contractionary fiscal policy, by a cut in government spending or increases in taxation.
Contractionary monetary is more suited to target inflation because monetary policy transmission mechanism has got q variety of ways for IR changes to feed through into the economy.
Evaluate contractionary monetary policy to reduce demand pull inflation 2- & 1+
- Conflict of objectives as demand pull will come down but at the cost of lower economic growth and higher unemployment
- Impact on indebted: If IR go up and households default on their loans and go bankrupt and living standards suffer. Businesses defaulting can create unemployment.
+ Higher IR could strengthen exchange rates and as it is strengthened could widen current account deficit so money inflows into the country as savers chase the best interest rates so move their money to the UK increasing demand for the pound and strengthening it
What is unemployment VS underemployment and the rate of unemployment VS the level of unemployment
Unemployment is the level of people looking for work but who cannot find a job at a point in time.
Underemployment occurs when workers can not find a job that is suitable for their qualifications and experience or who cannot find enough hours to work
Level= Number of people looking for work but who are unemployed
Rate= Number of people unemployed as a % of the labour force.
What is the claimant count VS labour force survey
Claimant count: The number of people claiming job seekers allowance.
Labour force survey: A quarterly survey of approximately 60,000 households compiled by the office of national statistics studying the employment circumstances of the UK population.
What are the 6 problems of the claimant count
Underestimate unemployment statistics:
- Not everyone who is eligible signs on
- Self-employed workers who are temporarily unemployed tend not to claim.
- Under 18s and over 60s don’t count
- Constantly changing criteria
Overestimate unemployment statistics:
- Some people who claim JSA aren’t actively looking for work
- Some have jobs in black economey but continue to claim benefits
What are 5 advantages and 2 disadvantages of labour force survey
+ It is internationally recognised
+ Picks up trends in sectors
+ Potential for analysis of data
+ Better guide for policy makers
+ Generally accepted to be more accurate
- Costly to compile
- Subject to sampling and extrapolation errors
What is structural unemployment, the causes for it (5) and 3 examples
This occurs when long term shifts in the structure of the economy impact upon the job market. Arises from the mismatch of skills and job opportunities as the pattern of labour demand changes - labour immobility.
- Decline of manufacturing
- Occupational immobility
- Geographical immobility
- Robotics replacing jobs
- Foreign competition; rising imports
Primary sector: Mining, fishing, oil extraction
Secondary sector: Manufacturing / processing
Tertiary sector: Service delivery; banking, education, finance
What is cyclical unemployment and classical VS Keynesian
Caused by a fall in or persistent weakness of AD leading to a decline in GDP and jobs. (Demand deficiency) Is heavily linked to the economic cycle and occurs when there is a negative output gap.
Classical: If the economy is in a recession then firms don’t need to employ as many workers.
Keynesian: Is a cyclical relationship between demand, output, employment and unemployment. Caused by a fall in AD = a decrease in RNO and employment. A slowdown can lead to a business laying off workers as they lack confidence.
What is frictional unemployment
Transitional unemployment due to people moving between jobs such as new entrants to the labour market. It is typically short-term and often because workers do not have perfect and immediate information about every job opportunity available to them.
Assumed there will always be some frictional unemployment that persists in an economy.
What is seasonal unemployment
Regular seasonal changes in employment / labour demand such as tourism, retail and construction. It tends to happen at seasonal industries such as leisure, tourism and farming. Also possibly retail industries as more workers are employed over busy periods.
As a result, this can distort unemployment figures so there will often be seasonally adjusted which seeks to smooth out the fluctuations to provide more accurate statistics.
What are 2 other types of unemployment
Voluntary: Turning down the opportunity to work at the going rate (as a result of better / generous unemployment benefits system)
Classical: Also known as real wage , increases and decreases in this are a function of the law of supply and demand. Occurs when the wages a worker is willing to accept (real wages) is in excess of those an employer is willing to pay (market clearing wages)
What are the effects of unemployment on the government (3)
- Increased spending on employment programmes and benefits. Possible government borrowing.
- Fall in revenue from income tax and taxes on consumer spending. Consumption decreases.
- Lost output as there is a wastage of economic resources so likely the economy will produce within PPF.
What are the effects of unemployment on firms (3)
- Reduced demand for goods / services
- Reduced productivity and profitability
- Less incentive to invest
What are the effects of unemployment on consumers and workers
- Lower living standards
- De-skilling / de-minishing human capital
- Social and financial costs
- Reduced chances of finding work
What are the economic (4) and social (3) costs
Economic:
1. lost output, the economy is inside the PPF
2. fall in real incomes and lower living standards
3. drop in taxes revenues and higher welfare
4. possible decline in labour supply as unemployed move overseas
Social:
1. Increase in relative poverty and welfare dependency
2. Extra demands on national health service
3. Link between persistent unemployment and social problems
