2.1 - Measures of economic performance Flashcards

Question

What is the consumer price index?

Answer 1

It is a measure of inflation used for inflation targeting in the UK. It does not include housing costs and is used to make international comparisons of inflation rates.

Answer 2

It is a number shown relative to another number in percentage terms.

Answer 3

1- It is used to make international comparisons of the rate of inflation 2- CPI is an index number. 3- The rate of inflation is measured in the UK by changes in the CPI

Answer 4

1- A survey collects information from a sample of nearly 7000 households in the UK using self reported diaries of all purchases. 2- A price survey is undertaken by civil students, who collect data once a month about changes in the price of the 700 most commonly used goods and services in a variety of retail outlets. 3- Weights are assigned to each item the household buys. The weights reflect the proportion of income spent on each item in the average shopping basket. 4- The price changes are multiplied by the weights to give a price index. The rate of inflation can then be measured by calculating the percentage change in this index over consecutive years. 4- The CPI does not include housing costs, such as rent payments and mortgage interest repayments.

Answer 5

1- It does not include housing costs, which are a significant item of expenditure for most households in the UK. 2- Sudden changes in spending patterns are not reflected in the CPI as the list of 700 representative items is only change once a year. 3- There may be sampling issues. For example households might not provide accurate information on their spending, such as underestimating the amount spent on alcohol.

Answer 6

The CPIH as it is the most comprehensive measure of consumer inflation as it extends to housing costs.

Answer 7

Retail Price Index is a measure of inflation published monthly by the Office for National Statistics. It measures the change in the cost of a representative sample of retail goods and services. However it is not reliable as CPI or CPIH for international comparisons.

Answer 8

1- Demand pull inflation 2- Cost push inflation 3- Growth of the supply of money.

Answer 9

Demand pull inflation occurs when there is an increase in aggregate demand that is greater than the increase of aggregate supply. This means that their is an excess demand of goods and services. As a result the economy will be closer to full employment (YFE). This means the factors of production are being used (overused) and become a scarce resource. Consequently the price of the factors of production rise. This means increase costs for firms. As a result firms pass the higher costs onto consumers via higher prices.

Answer 10

Cost push inflation occurs when the costs of production rises for firms. leading to a decrease in the short-run aggregate supply (SRAS) of goods and services. As firms aim to make profit, these costs will be passed on to consumers via higher prices.

Answer 11

1- A decrease in interest rates 2- A rise in the level of business and consumer confidence 3- An increase in government spending 4- Increasing demand for exports and reducing demand for imports

Answer 12

1- A rise in oil prices and/or raw materials 2- A fall in exchange rate (making imports more expensive) 3- A rise in taxes for businesses 4- An increase in the minimum wage or in wages generally 5- Increased regulations that increase costs

Answer 13

Supply and demand graph. With the supply and demand of money. An increase in supply will cause a higher price.

Answer 14

The growth of the money supply causes inflation because it increases overall demand in the economy without necessarily increasing the supply of goods and services. This is because a greater circulation of money in the economy can lead to increase in spending as people feel wealthier.

Answer 15

1- For those on fixed incomes: inflation implies that their incomes would fall in real terms. Resulting in a loss of purchasing power. 2- For those with savings: if the rate of inflation is higher than the interest rate on savings, the real value of savings will decrease. 3- For borrowers: if the rate of inflation is higher than the interest rates on loans then the real value of the debt falls. 4- Shoe leather costs: the time and effort people take to minimize the effect of inflation on the eroding purchasing power of money. 5- Uncertainty : Makes long-term financial planning difficult. 6- Increased Cost of Living – Higher prices for essential goods and services.

Answer 16

1- Increased costs: Higher wages, raw material costs, and supply chain disruptions. 2- Lower profits: Due to the higher costs 3- Fall in export competitiveness: If domestic inflation is higher than trading partners, exports may become less competitive. As a firms exports become relatively expensive in foreign markets 4- Uncertainty: a high rate of inflation may make it difficult for firms to set budgets, which, might result in a fall of investment. 5- Menu Costs: Frequent price changes add administrative costs. E.g. updating menus. 6- Reduced Consumer Spending – If wages lag behind inflation, demand for non-essential goods may fall.

Answer 17

1- Fall in the real value of national debt: inflation would reduce the value of debt owed by the government. 2- Higher Tax Revenues – More revenue from VAT and income tax due to rising wages and prices. 3- Increased Public Spending – More pressure to adjust pensions, benefits, and wages. 4- A deterioration in the balance of trade: if inflation causes a fall in the country's international competitiveness its exports are likely to fall and imports to increase. 5- Policy Challenges – Difficulty in setting interest rates and stabilizing the economy.

Answer 18

1- Reduced Real Wages – If wages do not rise with inflation, workers lose purchasing power. 2- Higher Cost of Living – Essential expenses (food, housing, transport) become more expensive. 3- Increased Wage Demands – Workers may push for higher wages to maintain their standard of living. 4- Risk of Unemployment – Firms facing higher costs may cut jobs or reduce hiring. 5- Greater Job Uncertainty – Inflation can lead to economic instability, making employment less secure. 6- Bracket Creep (If Wages Rise) – Higher nominal wages may push workers into higher tax brackets, reducing disposable income.

Answer 19

1-Increased Purchasing Power – Prices fall, making goods and services cheaper. 2- Delayed Spending – Consumers may postpone purchases, expecting further price drops. 3- Higher Real Debt Burden – Loan repayments become more expensive in real terms. 4- Increased Unemployment Risk – Falling demand may lead to job losses.

Answer 20

1-Lower Revenue & Profits – Falling prices reduce firm earnings. 2-Investment Decline – Businesses delay investments due to uncertainty. 3-Increased Debt Burden – The real value of debt rises, making repayments harder. 4-Cost-Cutting & Layoffs – Firms reduce wages or cut jobs to maintain profitability.

Answer 21

1-Lower Tax Revenue – Reduced wages, profits, and spending lead to lower tax collection. 2- Higher Real Debt Burden – The real value of government debt increases. 3- Rising Unemployment Costs – More spending on welfare and unemployment benefits. 4- Monetary Policy Challenges – Central banks struggle to stimulate demand if interest rates are already low (liquidity trap).

Answer 22

1- Demand - side deflation (bad): Occurs when aggregate demand (AD) falls, leading to lower prices and economic slowdown 2- Supply - side deflation (good): Occurs when aggregate supply (AS) increases, reducing production costs and allowing firms to lower prices. 3- Decrease in the supply of money

Answer 23

It is the number of people in work as a percentage of the working age population.

Answer 24

Unemployment refers to individuals who are not currently employed but are actively seeking and available for work. It is the number of unemployed people as a percentage of the labour force.

Answer 25

Under-employment occurs when individuals are employed but their job does not fully utilize their skills and qualifications. This can result in part-time work, low wages, or jobs below their skill level. ONS measures underemployment as all those workers wanting to work more hours than they currently do and are available to work in 2 weeks.

Answer 26

Measures the proportion of the working-age population that is not in the labor force. It can indicate a lack of job opportunities or demographic factors.

Answer 27

The labour force is those aged 16 and over who are either employed or unemployed. The proportion of the working-age population that is neither in work nor actively seeking work (e.g., students, retirees, long-term sick).

Answer 28

1- The Claimant count 2- The international labour organization and the uk labour force survey.

Answer 29

It is the number of people claiming jobseekers allowance. Jobseekers allowance is paid to people who are willing and able to work but are not currently in employment .

Answer 30

It is a survey of a sample of households asking people between 16 and 65 whether they have been out of work over the last 4 weeks and if they are ready to start within two weeks.

Answer 31

1- Increased GDP 2- increased revenue and profits for firms 3- Increased incomes, leading to an increase in the standards of living. 4- Improved skills (human capital of workers) 5- Higher government taxation revenue as more people pay tax and spend more. (income tax and VAT)

Answer 32

1-Suggests a strong labour market and economic stability. 2-Boosts consumer confidence and aggregate demand. 3-Reduces government welfare costs and increases tax revenue.

Answer 33

1-Signals economic downturn or structural unemployment. 2-Leads to lower incomes, reduced consumer spending, and lower growth. 3-Increases government spending on welfare and may cause social unrest.

Answer 34

1- The productive capacity of the country will fall 2- There may be more claims on state benefits 3- The dependency ratio will increase (the number of inactive people that rely on support from employed and active people)

Answer 35

1- Cyclical unemployment: Arises from a lack of aggregate demand during economic downturns. 2- Structural unemployment: when industries are in a decline and workers skills become obsolete. 3- seasonal unemployment: when people are out of work for certain periods of the year e.g. ski instructors in the summer. 4- Frictional unemployment: when people are between jobs 5- Classical or real wage inflexibility: where there are problems with the supply side e.g. the minimum wage is too high and there is an unwillingness to hire.

Answer 36

The movement of a person or people from one country, locality, place of residence. It refers to immigration and emigration

Answer 37

When people enter a country for longterm stay

Answer 38

When people exit a country for a long term stay in another country.

Answer 39

Migration can impact employment by changing the supply of labour in specific regions. Immigrants may fill labour gaps, but this can also lead to wage pressures.

Answer 40

1- The workforce is more productive, so helping to increase the country's rate of economic growth. 2- Earnings of highly skilled workers are likely to be higher than those of unskilled workers 3- Highly skilled workers are less likely to be unemployed and have more stable and secure employment.

Answer 41

1- Decrease in living standards 2- Loss of confidence leading to lower consumer spending 3- Danger of mental illness if unemployed for too long. 4- May result in lower house prices and a fall in personal wealth.

Answer 42

1- Easier to recruit new employees 2- Less consumer spending so firms face falling sales, revenues and profits 3- Since there is surplus labour in economy, firms might be able to hold wages down and therefore there costs

Answer 43

1- Loss of skills- workers may not have up to date training 2- Loss of income- welfare benefits are rarely as generous as paid employment 3- lower living standards because they have less income so quality of life falls. 4- long term unemployment may make it more difficult to get a job in the future.

Answer 44

1- Increased spending on welfare benefits 2- less revenue from income tax and indirect taxes 3- opportunity cost (the goods that could of been produced by the unemployed workers. 4- Inequality may increase

Answer 45

1- The current account 2- Capital account 3- Financial account

Answer 46

The current account records the transactions related to a country's trade in goods, services, income, and transfers. The trade in goods + The trade in services + The primary balance(investment income) + The secondary balance(current transfers)

Answer 47

Value of goods exported - Value of goods imported.

Answer 48

Value of services exported - Value of services imported

Answer 49

Trade in goods balance - Trade in services balance

Answer 50

The capital account records financial transactions that involve the acquisition or disposal of non-financial assets, such as real estate, patents, and copyrights, between a country and the rest of the world. It also includes capital transfers, which involve the transfer of assets for specific purposes, like debt forgiveness.

Answer 51

Earnings of foreign investments (interest, profits and dividends) - payments made to foreigners.

Answer 52

Transfers in the form of money or of goods and services, e.g. taxes and social security contributions, foreign aid.

Answer 53

The financial account records transactions related to financial assets and liabilities, including foreign direct investment (FDI), portfolio investment, and changes in foreign exchange reserves. It details how a country's residents and entities interact with foreign assets and liabilities.

Answer 54

It implies a country's current account is positive (the net trade balance, the net primary balance and the net secondary balance is positive). Meaning more money is flowing into the country than flowing out.

Answer 55

Implies that a country's current account is negative, i.e. that the combined value of the net trade balance, the net primary balance and the net secondary balance is negative. More money is flowing out of the country than in.

Answer 56

1- The currency is too strong relative to other countries. For example if the pound is stronger than the euro then exports from the UK will be relatively expensive. Meanwhile imports into the UK will be relatively cheap. 2- There is a high rate of inflation relative to other countries. 3- There are high wage costs compared to other countries. 4- There is a high rate of economic growth in a country. People have higher incomes and tend to buy more imports from abroad.

Answer 57

1- The currency is too weak relative to other countries. For example if the pound is low against other currencies then UKs exports will be relatively cheap. In contrast, imports into the UK will be relatively expensive. 2- There is a low rate of inflation relative to other countries. 3- There are low wage costs relative to other countries. 4- There is a low rate of economic growth in a country. People have less income to buy imports from abroad. In turn this creates a strong incentive for firms in the country to export.

Answer 58

1- Economic growth: A surplus can lead to higher savings and investment, potentially boosting economic growth. However, a persistent deficit may lead to unsustainable borrowing. 2- Impact on Employment: A trade surplus may support job creation in export-oriented industries, while a deficit can lead to job losses in import-competing sectors. 3- Impact on Inflation: A depreciating currency (due to a deficit) can lead to imported inflation, affecting the domestic price level. 4- Impact on Exchange Rates: A persistent current account deficit may lead to a depreciation of the country's currency, making exports more competitive and imports more expensive. This can help correct the deficit.

Answer 59

o Full employment o Low, stable inflation (2%) o A sustainable current account on the balance of payments o Sustainable economic growth

Answer 60

International trade refers to the exchange of goods, services, and capital across national borders, linking economies together.

Answer 61

Worldwide networks of companies and their suppliers, manufacturers, warehouses, distribution centres and retailers . The supply chain involves the acquisition of raw materials, which are transformed, manufactured and delivered to customers.