2.1 Measures of Economic Performance Flashcards
Government Macro Objectives
( T I G E R S )
Trade - Balanced Trade
Inflation - Low & Stable
Growth - Strong & Sustained Growth
Employment - Low Employment
Redistribution - Of Income
Stability
Non-Core Objectives: Sound Gov. Finance, Environmental Stability, Productivity Growth
The Circular Flow of Income
The Circular Flow of Income illustrates how money moves between different sectors of an economy.
House Holds 🠮 Expenditure 🠮 Firms 🠮 Income
Expenditure: All Injections GIX
Government Spending ( G )
Investment ( I )
Exports ( X )
Income: All Leakages SMT
Savings ( S )
Imports ( M )
Taxations ( T )
GDP
Gross Domestic Product: The standard measure of output that allows us to compare countries. It is the total value of goods and services produced in a country within a year
Total GDP
GDP Per Capita
Total GDP represents the overall GDP for the country.
GDP Per Capita is the total GDP divided by the number of people in a country.
Real GDP
Nominal GDP
Real GDP strips out the effects of inflation whilst nominal GDP does not.
Real GDP – GDP adjusted for inflation, using constant prices to reflect true economic growth.
Nominal GDP – GDP measured at current market prices, without adjusting for inflation.
Index Numbers
Equation & Use
To make ugly numbers less ugly & To allow for quick and easy data comparisons.
Base year always has an index value of 100
Index Number = Raw Number / Base Year Raw × 100
Costs and Benefits of Unemployment
Cost:
- Lost Outputs
- Deterioration of government finance
- Social Costs
- Costs to other countries
- Lost Income
- Hysteresis
Benefits:
- Greater pool of workers for firms
- Low Inflation
- Improved current account positions
- Time for workers to find suitable job
Evaluation 🠮 Rate, Duration, Type, Distribution
Natural Rate Of Unemployment
& Freemarket / Interventionist Determinants
- Unemployment when labour market is in equilibrium
- Consists of Structural, Frictional & Seasonal Unemployment
- Can never achieve 0% unemployment. Full employment is the NRU (Natural Rate Of Unemployment)
Free Market Determinants:
🠮 Generous Benefit Systems
🠮 Excessive Labour Market Regulations
Interventionist Determinants:
🠮 Lack of transport / Housing Infrastructure
🠮 Lack of in-work Training
Disequilibrium Unemployment
Demand Deficient Unemployment (Cyclical)
⮕ Unemployment in a recession due to lack of AD.
Real Wage Unemployment (Classical)
⮕ When wages are forced above equilibrium in a labour market creating excess supply of labour.
Equilibrium Unemployment
(Natural Rate Of Unemployment)
Types of Equilibrium Unemployment:
🠮 Structural Unemployment {Immobility of labour}
🠮 Frictional Unemployment {Inbetween Jobs}
🠮 Seasonal Unemployment {Temporary fall in demand}
Unemployment & how it’s measured?
Meaning & Equation
The unemployed consist of those of working age who are willing and able to work actively seeking work but who do not have a job.
(LFS) Labour Force Survey
- Employed
- Unemployed
- Economically Inactive
Economically Active (Employed + Unemployed)
Unemployment Rate = Unemployed/Economically Active ×100
Claimant Count: BUT
- Difficult to compare between countries
- not everyone will claim
- not everyone can claim
- could be subject to fraud
Inflation
Inflation is persistent increase of prices in an economy in a year.
3% 🠮 4% = Rising Inflation
4% 🠮 1% = Disinflation
1% 🠮 −2% = Deflation
CPI
Method & Limitation
Consumer Price Index
- Expenditure survey carried out.
- A ‘Consumer Basket’ of most popular Goods/Services is formed with average prices attached
- Price of these Goods/Services are weighted based on % of the income (0-1)
- Weighted prices are added to give total weighted price of the basket
Limitation / BUT:
- Average Family 🠮Personal inflation rates differ
- Price fluctuations of certain goods (food, energy) 🠮 Core CPI & PPI
- Housing Costs? 🠮 CPIH
- Basket Updates Too Slow (Once Per Year)
Causes of inflation.
Demand Pull Inflation (AD shifts to the right)
AD = C+I+G+(X-M)
- ↓ interest rates = C,I,(X-M)
- ↓ Income / Corporation Tax = C,I
- ↑ consumer / Business confidence = C,I
- ↑ government spending = G
- Weak Exchange Rates = (X-M)
Cost Push Inflation (SRAS shifts to the left)
- ↑ Raw material prices
- ↑ Wages
- ↑ Business taxes e.g. VAT
- ↑ Price of imported raw materials due to weaker exchange rates
Costs and Benefits of Inflation
Cost:
- Lower purchasing power (value of money decreases)
- Erosion of savings
- Lower exports competitiveness
- Wage / Consumer price spirals (rising wages lead to higher production costs, causing businesses to increase prices and further wage demands and more inflation.) 🠮 Menu Costs
- Fiscal Drag (where people end up paying more taxes because tax brackets aren’t adjusted for inflation)
- Inflationary Noise (hard to make decisions)
Benifits;
- Workers with higher wages
- Consumption is natural
- Firms encouraged to increase output
- Can keep unemployment low in a recession
- Reduces real value of debt
- Improvement of government finance
EVAL:
1. Rate 2. Cause 3. Duration 4. Anticipated vs unanticipated
5. Stability
Deflation
Demand & Supply Side Deflation
Deflation is the decrease in the general price level of goods and services in an economy over a period of time, which is the opposite of inflation.
Demand Side Deflation (Bad / Malignant Deflation)
- Comes with lower economic growth
- Long term and anticipated
Anticipated Deflation Dangerous (Deflation Spiral)
🠮 Delayed Spending
🠮 Positive real interest rates
🠮 Increases value of debt
Supply Side Deflation (Good / Benign Deflation)
- Comes with higher growth
- Short term and anticipated
Short Term Deflation Beneficial
🠮 Falling prices for consumers
🠮 Falling input prices for firms
