2.1 - Measures of Economic Performance Flashcards
1
Q
What is macroeconomics?
A
Macroeconomics is a part of economics focusing on behavior of collective businesses and consumers, as well as the impact of the government on these collective businesses and consumers.
2
Q
List the four macro-economical objectives.
A
- Inflation
- Economic growth
- Unemployment
- Balance of payments
3
Q
Give some alternative macro economical objectives.
A
- Greater equality (regional/wealth/income)
- Increased access to public services
- Environmental sustainability
- Improved economic well-being (social welfare/mobility)
4
Q
What is economic growth in the short run?
A
In the short run, economic growth is the actual annual percentage change for real national output.
5
Q
How do you measure economic growth in the short run?
A
In the short-run, economic growth is measured by the percentage change in real GDP (gross domestic product) per year.
6
Q
What is economic growth in the long run?
A
In the long run, economic growth is the increase in the potential productive capacity of an economy.
7
Q
How is economic growth in the long run measured?
A
In the long run, economic growth is measured through the shift in the PPF graph (production possibility frontier - illustrates maximum potential output of capital and consumer goods, taking into account scarce resources).
8
Q
Define GDP.
A
Gross Domestic Product, or GDP, is the total market value of all goods and services produced within a country within a year.
9
Q
Give two ways to calculate the GDP.
A
GDP can be calculated either by adding total income (wages, interest, profits) within a year or total expenditure (consumption, investment, net exports) within a year; this means that the national output = national income = national expenditure.
10
Q
What is national expenditure?
A
National expenditure is the total government spending in an economy.
11
Q
What is nominal GDP?
A
Nominal GDP is the GDP expressed in monetary terms, not taking into account the inflation.
12
Q
What is real GDP?
A
Real GDP is GDP which includes market value of production of goods and services as well as inflation.
13
Q
What does nominal GDP measure?
A
Nominal GDP measures national output at current prices but it doesn’t include effects of inflation.
14
Q
What does real GDP measure?
A
Real GDP measures output at constant prices and it also includes the effects of inflation, which is why economists refer to real GDP when discussing economic growth. This is because inflation can decrease a GDP, so the nominal GDP may show the GDP higher than it really is.
15
Q
Give the formula for real GDP.
A
Real GDP = Nominal GDP / Average price level
16
Q
What is a ‘boom’ in an economy?
A
If there are long periods of economic growth, then these are referred to as ‘booms’.
17
Q
What is an economic recession?
A
If, for at least two consecutive quarters (each quarter lasting 3 months), negative economic growth occurs then this is referred to as a recession. Long periods of economic downturn can result in an ‘economic depression’.
18
Q
What is the total real GDP?
A
The total (real) GDP is the value of goods and services produced within a country in a given year. This can be used my economists to deduce the size of the economy and compare with other countries.
19
Q
Define GDP per capita?
A
GDP per capita is the total GDP divided by the population of the country, allowing economists to see standards of life for citizens.
20
Q
Give the two indicators of GDP per capita.
A
- GNI (Gross National Income)
- GNP (Gross National Product)
21
Q
Define GNI.
A
Gross National Income is the GDP per capita + net income abroad. Net income from abroad include income earned from international investments and owned assets abroad, but not from domestic investments by foreigners.
GNI per capita = (Total GNI) / Population of country
22
Q
Define GNP.
A
Gross National Product or GNP, is total output earned from domestic businesses both in the country and abroad.
GNP per capita = (Total GNP) / Population of country
23
Q
Why are GDP per capita, GNI and GNP per capita not so accurate?
A
GDP, GNI and GNP per capita do demonstrate the living standards of a country, but because not every countries uses USD ($), the exchange rate shows that economists aren’t seeing the true living standards.
24
Q
What is the PPP?
A
Purchasing Power Parity or PPP, is a principle used where the purchasing power, or real value of a certain amount of money in a country is used to obtain the real living standards of that nation; e.g. $1 in poor countries will get you a lot of goods, while in developed nations it won’t get much goods.
25
Give a benefit of using PPP.
The Purchasing Power Parity will help adjust GDP to demonstrate purchasing power of goods in that country, allowing for a more accurate representation of living standards.
26
How is the volume of goods different from the value of goods in a country?
The volume of goods shows the quantity of goods and services produced within a country whereas the value indicates the monetary worth of these goods and services.
27
State a limitation of using GDP and GDP per capita to compare living standards.
- GDP and GDP per capita ignore the shadow/hidden economy; the shadow economy is the illegal economy involving the black market and smuggling of illegal goods, cross-border shopping. All this is ignored in the GDP.
28
Describe another limitation of GDP and GDP per capita to compare living standards.
- GDP and GDP per capita ignores negative externalities such as pollution, which can severely affect health of several consumers.
29
Give a third limitation of GDP and GDP per capita to compare living standards.
- Economic growth can cause severe inequalities in income, wealth or region and these inequalities are not taken into account by GDP or GDP per capita.
30
Define happiness economics.
Happiness economics is a branch of economics investigating how happy and content individuals are about their life.
31
What is the Easterlin Paradox?
The Easterlin Paradox is a theory of the relationship between real income and happiness; it proves that although happiness initially rises with the increase in income, it will stop rising beyond a certain economic threshold. As a result, rich societies tend to be less happier than poorer societies.
32
Give a problem of comparing developing and developed countries.
Accuracy of statistics differs very dramatically between developed and developing nations; contrary to popular belief, developing countries do produce many goods but the goods they produce are also consumed by them on the market. So no money is made/there is no monetary value.
33
State another disadvantage of comparing developed and developing countries.
Although developed countries appear successful, what actually happens is that governments increase income at the expense of causing more stress, more congestion and longer working hours.
34
Give a third disadvantage of comparing developed and developing countries.
Developing nations may sometimes aspire to achieve growth at the cost of health and safety regulations.
35
Define inflation.
Inflation is the sustained rise in the average level of prices and fall in the purchasing power of money.
36
What is deflation?
Deflation, or negative inflation, is where there is a decrease in the average price level and slowing down in the rate of prices increasing.
37
Give a cause of deflation.
Consumers may delay purchasing decisions in the fear that prices may fall as a result of the decrease in average price levels.
38
What problems can deflation cause?
Deflation can cause a decrease in demand and consumption of goods and services, causing firms to not be so confident about investing. This will significantly harm the AD (Aggregate Demand) as a result.
39
What is Aggregate Demand (AD)?
Aggregate demand is the total demand of all finished goods and services within an economy.
40
Give the formula for aggregate demand.
AD = C + I + G + (X - M)
| Consumption + Investment + Government spending + (total exports - total imports) = Aggregate demand
41
What is disinflation?
Disinflation is a fall in the inflation rate, so prices are rising at a slower rate. Unlike deflation, where inflation rate can fall below 0%, in disinflation the inflation rate falls but stays positive.
42
Give two methods used by the UK to measure inflation.
- CPI (Consumer Prices Index)
| - RPI (Retail Prices Index)
43
What is the basket of goods and services?
The basket of goods and services is a model used by the Office of National Statistics to influence both the CPI and RPI. It contains about 700 goods and services representing typical consumer purchases in the UK, with prices collected from about 150 different locations in the UK.
44
How are goods typically weighted in the basket of goods and services?
In the basket of goods and services, goods are generally weighted by how significant they are to consumers and how important they are to a consumer's income; petrol is given a high weighting due to there not being many substitute goods, and how petrol forms a major part of a consumer's disposable income.
45
Give a limitation of using CPI to measure inflation rates of households.
CPI is meant to provide a weighted index of goods and services of all households, yet all households are different, with differing rates of inflation as there will be differing baskets of goods.
46
Give another limitation of using CPI to measure inflation rates of households.
During measurement, the consumer prices index excludes mortgage payments and associated interest; mortgage payments include the biggest item of expenditure in a household. So, by excluding payments for the most used item in a household, this is an inaccurate method of measurement.
47
State a third limitation of using CPI to measure inflation rates of households.
CPI doesn't take into account the improvements of quality in goods and services; the prices of several electronic goods and services have fallen despite the stronger quality.
48
Describe a limitation of using RPI compared to CPI.
During measurement, RPI excludes the top 4% income earners as it doesn't believe these are typical households, while CPI includes households of all incomes.
49
What are the three primary causes of inflation?
- Demand-pull inflation
- Cost-push inflation
- Growth of money supply
50
What is demand-pull inflation?
Demand-pull inflation is a cause of inflation as a result of excessive amounts of demand; there is too much money from consumers, chasing too little supplies of goods and services.
51
Give a cause of demand-pull inflation.
Reduced taxation; by reducing taxation, this will contribute to higher disposable consumer incomes, so consumers can afford more goods, causing an increase in demand. This will contribute to demand-pull inflation.
52
Describe another cause of demand-pull inflation.
Another contributor to demand pull inflation is reduced interest rates; with less interest rates, consumers have more spending power on goods and services, increasing demand. This comes as as result of borrowing becoming more popular and saving money becoming less rewarding.
53
Give a third cause of demand-pull inflation.
Increased certainty; with more certainty, this will increase confidence of consumers and firms, thus assisting consumers with their spending decisions and firms with their investment decisions.
54
What is cost-push inflation?
Cost-push inflation is another cause of inflation, where firms respond to increasing production costs by increasing selling prices so the profit margin can be protected. Firms can absorb some of the increasing production costs but it will be too hard to absorb most of these costs, so the costs are passed on to the consumers in the form of higher prices.
55
State a cause of cost-push inflation.
Wage increases; wages are the singular highest costs of production for a firm. If prices are increased, then the workers will ask for higher wages, and if higher wages come in the form of higher prices then the protesting for higher wages will rise. This causes a 'wage-price spiral'.
56
Give another cause of cost-push inflation.
Increased taxation; taxation on firms such as corporation tax, national insurance can largely increase costs of production, firms having to increase selling prices to save profit margins.
57
Describe a third cause of cost-push inflation.
Natural disasters can temporarily or even permanently disrupt sources and routes of raw materials and supply. If supply starts to suffer, then costs can pile up.
58
What is money supply?
Money supply is a measure of the amount or stock of money in an economy.
59
What is narrow money and broad money?
Narrow money (known as M0) is a form of liquid money, mainly comprised of liquid notes and coins, while broad money (known as M4) consists of narrow money and more liquid assets as well; bank deposits.
60
Give one method to increase the money supply.
The money supply can be increased through quantitative easing.
61
State another method to increase money supply.
Reducing holding deposits will allow for more lending of money and hence, more liquidity.
62
Give a general effect of inflation.
If wages and earnings of consumers remain constant and inflation occurs, then this can be very detrimental as consumers will slowly afford less and less goods and services. This comes as a result of a weaker real disposable income.
63
Give an effect of inflation specifically on consumers.
Higher prices will result in consumers immediately spending their money on goods and services, so they can prepare with all the important goods before prices increase.
64
Describe an effect of inflation on businesses/firms.
Due to inflation, the production/supply costs will increase, so to protect profit margins and supply, the business will pass some of the costs onto the consumers in the form of higher selling prices. This is done to help attain profits, so the firm can survive this inflation.
65
Give an effect of inflation on government.
The government will task the Bank of England with maintaining the inflation rate target of 2% (±1%), and also it will adjust interest rates. Interest rates are adjusted primarily to maintain a price level, which will overall help reach the target inflation rate.
66
List an effect of inflation on workers.
To maintain and redistribute their income, workers will begin demanding for higher wages. This will eventually result in a wage-price spiral where firms will continuously attempt to increase wages by just passing on increasing costs to consumers. The solution to this however, is for the Union to negotiate with employers for higher wage rates.
67
Define unemployment.
Unemployment is the number of people in the labour force who are looking for work, may even have the suitable qualifications for work, but are unable to find work at a point in time.
68
What is the level of unemployment?
This is the number of people currently unemployed.
69
What is the labour force?
The labour force is a count of those who are economically active; this means workers who are willing and able to work.
70
Define the rate of unemployment.
The rate of unemployment is the number of unemployed people as a % of the labour force.
71
List two measures of unemployment.
- Claimant count
| - Labour force survey
72
Describe claimant count.
Claimant count is a measure of unemployment, measuring the number of people claiming Job Seekers Allowance (JSA).
73
What is the labour force survey?
The labour force survey (part of the International Labour Organisation), is a measure of unemployment where a survey is conducted on a quarterly of all UK households (approx 40,000 households). This survey is compiled by the Office of National Statistics, used to measure employment in the UK population.
74
What is JSA?
The JSA (Job Seekers Allowance), is benefits paid to unemployed people.
75
State a limitation of claimant count.
People who are under 18 or over 60 don't count in unemployment as they are either children or the elderly, who are retired.
76
Give another limitation of claimant count.
Self-employed workers who are temporarily unemployed tend to not claim JSA.
77
State a third limitation of claimant count.
Some people who claim JSA may already be employed in the black/shadow economy, but still claim benefits.
78
Give an advantage of claimant count.
It is fairly easy to obtain data for claimant count; all you do is measure the number of those claiming JSA (Job Seekers Allowance), and there is no cost involved in collecting this data.
79
Give another advantage of claimant count.
Claimant count is regularly updated on a monthly basis, so it is always up-to-date.
80
Describe an advantage of the labour force survey.
The labour force survey is internationally recognised, making it more trusted for obtaining data.
81
Give another advantage of the labour force survey.
The labour force survey has very accurate data analysis on results.
82
List a third advantage of the labour force survey.
The labour force survey takes into account several trends in sectors.
83
Give a disadvantage of the labour force survey.
The results of the labour force survey are very expensive to compile.
84
Describe another disadvantage of the labour force survey.
Labour force surveys are vulnerable to extrapolation errors (errors in estimation of a certain trend continuing or remaining applicable).
85
What is underemployment?
Underemployment is where workers can't find a job which is suitable for their qualifications or supports the number of hours they are willing to work (this may cause the workers to work long-hours, further adding to stress).
86
How is underemployment occuring in real life?
In the real world, certain graduates struggle to find careers which are of their graduate standard, causing them to instead work in low-skill jobs such as supermarket assistants.
87
How else is underemployment occuring in real life?
Some workers are put on zero-hour contracts; this is where the workers are called in when they are absolutely required, rather than regularly going to work on a permanent contract.
88
Give two factors which help measure the extent of the consequences of unemployment.
- The rate of unemployment, employment, and economic inactivity.
- The duration of unemployment, employment and economic inactivity.
89
Who do the consequences of unemployment massively impact?
- The economy
- Businesses
- The unemployed
90
What is structural unemployment?
Structural unemployment is a type of unemployment where, due to changes in the structure of the economy, the job market is significantly affected. For example, due to low-wage economies in Eastern Europe and Far East, the UK has experienced a shift towards the tertiary sector from primary and secondary sectors. This thus leaves high skilled workers finding it hard to gain employment as certain operations have moved elsewhere. Although workers can gain new skills for employment, they will have to also re-train which can be difficult and expensive.
91
What is frictional unemployment?
Frictional unemployment is a short-term unemployment, where workers who relocate to a different country or change their career, may not have sufficient information about the job opportunities or job market in this new career or region. In every economy, regardless of how well-run it is, there will be some sort of frictional unemployment. This is because not all workers will be aware of the entire job market of their chosen career in a completely different nation.
92
What is seasonal unemployment?
Seasonal unemployment is a type of unemployment, occuring when workers are unemployed at different times of the year. This is common in industries such as the farming industries and travel and leisure industry. This also happens when many workers are employed at busy periods such as Christmas or Black Friday. Seasonal unemployment can cause distortion of unemployment figures, causing these figures to be 'seasonally adjusted', where figures and fluctuations are smoothly adjusted.
93
Explain cyclical unemployment.
Cyclical unemployment is a type of unemployment occuring when there is a negative output gap in the economic cycle. If the economy is in deep recession, the real disposable incomes of consumers will fall, so as a result the demand of goods and services will fall. This will cause firms to remove workers as there isn't much demand for goods, causing cyclical unemployment. If the opposite occured where the economy recovered, then demand would rise and cyclical unemployment would fall.
94
What is (cyclical) demand-side unemployment?
Demand-side unemployment is where aggregate demand decreases by shifting to the left from AD to AD1. The fall in demand could occur because of seasonal or frictional factors. This decrease in demand will result in a fall in real national output, decreasing the rate of economic growth, but also decreases the price level which reduces the inflation rate. However, even though the inflation rate decreases, the government will have to weigh up the pros and cons of the inflation rate decreasing but the rate of unemployment rising and the fall in real national output.
95
Define real wage inflexibility (classical unemployment).
Real wage inflexibility is a cause of unemployment, where real wage rates are set above the equilibrium wage rates. This is related to excess supply of labour which largely surpasses demand for labour. As a result of this excess supply, workers will receive high wage rates which, if too high can be at risk of decreasing supply. To prevent this, the firms decrease demand for labour, causing unemployment.
96
What is supply-side unemployment (structural, frictional and seasonal)?
Supply-side unemployment is a cause of unemployment consisting of a decrease in short-run aggregate supply (shift to the left in SRAS supply curve). As a result of this, this causes a fall in real national output Y-Y1, so the rate of economic growth is less. On top of that, the price level rises which will increase the inflation rate.
97
Give an effect of unemployment.
Lost output is a major effect of unemployment; with unemployment, there is a huge wastage of economic resources, significantly decreasing the rate of economic growth. This causes the economy to be producing within the PPF, where there is inefficiency and unemployment.
98
Give another effect of unemployment.
Lower living standards; as a result of unemployment, consumers won't earn any wages so their real disposable income will be mainly weak. This will contribute to very weak living standards.
99
Give a third effect of unemployment.
Unemployment can also result in social costs involving weaker finances; this is made worse if there is a family as marital stress can arise from the strain in family finances.
100
What is the balance of payments?
The balance of payments is a record of a country's trade/transactions with the rest of the world.
101
Give the names of the three accounts of the balance of payments.
- Current account
- Financial account
- Capital account
102
Give the four components for one of the accounts of the balance of payments.
- Trade in goods
- Trade in services
- Investment income
- Money transfers
103
What is included in the trade in goods?
Trade in goods is one of the components of the current account in the balance of payments; this component includes all finished, manufactured goods, as well as raw materials and capital technology.
104
What is included in the trade in services?
Trade in services is one of the components of the current account in the balance of payments; this includes several services such as tourism, logistics, consultancy, banking, healthcare, education and many more.
105
What is included in investment income?
Net investment income is a component of the current account in the balance of payments; this includes interest, profits, dividends earned from transnational businesses and also includes income earned from owned assets abroad.
106
What is included in money transfers?
Money transfers is a component of the current account in balance of payments. This consists of overseas aid, private transfers and debt relief.
107
What is a surplus, in terms of exports and imports in the balance of payments?
A surplus occurs when the sum of exports of goods, services and investment income exceeds the imports.
108
What is a deficit, in terms of exports and imports in the balance of payments?
A deficit occurs when the sum of exports of goods, services and investment income is less than the imports.
109
Define trade in goods.
Trade in goods is a component of the current account; it measures the net exports (X-M) of visible goods. Traditionally, the UK has a large deficit on this trade in goods component.
110
Why does the UK have a deficit on the trade in goods component of the current account?
The UK traditionally runs a deficit on the trade in goods component due to increased demand for consumer goods.
111
Give another reason why the UK has a large deficit on the trade in goods component of the current account.
The UK runs a trade deficit on the trade in goods component because of its strong currency, which enables it to afford imports but makes its exports less attractive to foreign buyers.
112
Give a third reason why the UK has a trade deficit on the trade in goods component of the current account.
The UK runs a trade deficit on the trade in goods component also because of the decline in the UK manufacturing sector, where outsourcing is currently occurring as the UK is experiencing a shift from the primary and secondary sectors towards the tertiary sectors. This is because of low wage economies in Eastern Europe and Far East.
113
Define trade in services.
Trade in services is another component of the current account; it measures the net exports (X - M) of invisible items such as banking, tourism, insurance... . Traditionally, the UK has a large surplus on this component of the current account.
114
Why does the UK run a large surplus in the trade in services component of the current account?
As a result of the UK shifting towards the tertiary sector from primary and secondary sectors, this has allowed it to specialize in provision of services.
115
Give another reason why the UK runs a large surplus in the trade in services component of the current account?
Because of this specialization in provision of services, the UK is more experienced and successful in this sector, allowing it to provide high quality services at low costs. This is why London is a internationally renowned prime financial centre, with a high provision of services and major source of wealth and income.
116
What is investment income (primary income)?
Investment income is a component of the current account, and it consists of profits, interest, or dividends earned from owned UK assets abroad. The profits, interest, or dividends from these assets are sent back to the UK, as a credit of investment income, contained within the current account. What is not investment income, are debit items from foreign investments done in the UK, as these are sent back to their foreign countries. On the current account there is a deficit on investment income.
117
What are money transfers (secondary income)?
Money transfers are a component of the current account, and they consist of payments made or received by a government, to a country or from a country. Typically, money transfers come in the form of overseas/foreign aid to help out other countries or another notable example of money transfers, is payments for membership of the European Union (EU).
For the UK, taking into account its status with the EU and global economy, the UK currently runs a deficit for the money transfers section of the current account.
118
Give a cause of a current account deficit.
Poor price and non-price competitiveness - Rising inflation than trade partners, low investment in capital or research and products which are weak in design, performance and branding, can weaken competitiveness of a country and contribute to a current account deficit.
119
Give another cause of a current account deficit.
Strong exchange rate - a strong exchange rate can make imports cheaper but exports more expensive.
120
Describe another cause of a current account deficit.
Recession in one or more trade partner countries - A recession occuring in one or more trade partner countries can be very bad as export prices are cut, and it will now be harder for the UK to sell to emerging markets due to this barrier.
121
Give a fourth cause of a current account deficit.
Volatile global prices e.g. commodities - Commodities are raw materials and primary agricultural products which may be bought and sold. Exporters of primary commodities can be hit hard by falling global prices as they won't be able to make much money from exporting, and importing countries are also hit hard as a result of increasing oil and gas prices.
122
Why is there a persistant deficit on the current account?
Increased consumer demand for imported goods - As consumer spending rises, so will consumer demand for imported goods. Typically in the UK, we have a high propensity (tendancy) to consume imported goods, so improvements in economic growth combined with a rise consumer spending and demand, will overall lead to an increased and persistant current account deficit.
123
Give another reason why there is persistant deficit on the current account.
Due to low wage economies, the UK manufacturing industry is in decline as primary and secondary industries have shifted to these low wage economies (in Middle East and Far East). As a result of this and increasing globalisation, the UK will find it hard to compete against these low-wage economies in manufacturing goods.
124
State a third reason why there is a persistent deficit on the current account.
If the exchange rate gets too strong, then although imports become more affordable, the exports won't be so appealing to foreign buyers so exports won't be so competitive.
125
What is an economical problem from a persistant trade deficit?
As a result of a persistant trade deficit, aggregate demand (AD) will decrease, causing the AD curve to shift to the left from AD to AD1. The fall in AD will decrease the rate of economic growth and GDP growth due to real national output decreasing. As GDP growth has fallen, this will cause a fall in living standards.
126
Describe another economical problem from a persistant trade deficit.
A persistant trade deficit can also cause a decline in jobs from home-based industries, contributing to regional decline and structural unemployment.
127
Give a factor of redressing the balance (regulating imports and exports).
One way to redress the balance is to invest in the supply-side of the economy. This can increase productivity, which will cause a rise in real national output and therefore the rate of economic/GDP growth will also increase. If productivity is further enhanced, then exports can also increase as a result of greater output.
128
Give another factor of redressing the balance (regulating imports and exports).
Another method to redress the balance is to improve macro-economical variables, because this can encourage investment and domestic/economic growth. Also with this economic growth, the reliance on imports will fall.
129
How are economies all interconnected through international trade?
Economies are all interconnected because economic activity in certain countries can affect the state of open economies.
130
How else are economies all interconnected through international trade?
One way economies are all interconnected through international trade is through inflation. Inflation is where there is a weakening in the purchasing power of money, so as a result exports will become less appealing.
