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Macroeconomics Summer Exam > 2.1 Measures of Economic Performance > Flashcards

2.1 Measures of Economic Performance Flashcards

1
Q

What is GDP?

A

Gross Domestic Product: the value of production

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2
Q

What is production?

A

This is the value of goods and services in a given period of time.

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3
Q

How can we measure economic growth?

A

Using the rate of change of real GDP

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4
Q

What is the difference between real and nominal GDP?

A

Real values are values that have been adjusted to remove the effects of inflation, using an index number.

Nominal values are measured in money terms, they are unadjusted and current.

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5
Q

What is the difference between total GDP and GDP per capita?

A

GDP per capita is GDP/population size, to measure growth compared to population growth.

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6
Q

What is the difference between ‘value’ and ‘volume’ measures?

A

Value takes into account the overall price of goods and services, instead of just the amount.

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7
Q

What is GNI?

A

Gross National Income - GDP plus net income paid into the country by other countries.

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8
Q

What must be considered when evaluating GDP growth figures? [5]

A
  • the original level of GDP
  • how much is self-consumed
  • methods of calculation and reliability
  • exhange rates and currency values
  • composition of government spending
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9
Q

What are purchasing power parities?

A
  • These are values that express GDP in accordance with how much the currency will buy in the local economy.
  • This allows for more accurate international comparisons.
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10
Q

What are the limitations of using GDP to compare living standards between countries over time?

A
  • The hidden economy - undeclared incomes, black markets etc
  • The informal economy - volunteer work, consuming own production etc.
  • Currency values
  • Income distribution
  • Size of the public sector - how much of GDP is government
  • Consumer and capital spending - possible future growth
  • Quality of goods and services
  • Quality of life - e.g. pollution/stress
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11
Q

What is inflation?

A

A general and sustained increase in the price level

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12
Q

What is deflation?

A

A fall in the general price level - negative inflation

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13
Q

What is disinflation?

A

A fall in the rate of inflation - prices still rising but at a slower rate.

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14
Q

How is inflation calculated?

A

Consumer Prices Index (CPI):

  • Measued by ONS
  • Surveys two things:
  1. Determines the most popular items a household buys, and the proportion of each. This determines the weights that are attatched to goods to reflect the importance of each one.
  2. The monthly changes in price of each item.
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15
Q

What are the limitations of using CPI to account for inflation? [5]

A
  • It does not include housing costs like mortgages or rent, not accurate cost of living changes therefore
  • Only for average households, top and bottom 4% excluded, as well as pensioners.
  • Sampling problems, less than 50% responded in 2017
  • List of items changes yearly - seasonal trends?
  • Quality changes not accounted for
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16
Q

What is the difference between CPI and CPIH?

A

CPIH includes cost of renting and council tax, it is now the ONS preffered measure.

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17
Q

What is another way of measuring inflation, and what does it measure?

A

The Retail Prices Index (RPI):​

  • Includes the cost of housing, mortgage interest repayments
  • Can be unreliable as RPI will rise when interest rate rises, making it seem as if raising interest rates increases inflation.
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18
Q

What are the two forms of inflation? Define them both.

A
  • Demand-pull: An increase in the general level of inflation caused by increased consumption, government spending or net exports
  • Cost-push: An increase in the general level prices caused by increased production costs such as a rise in wages or a fall in the exchange rate.
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19
Q

What is the money supply?

A

This is the amount of spending power in an economy. It includes cash and bank deposits. An increase in the money supply has a direct link to inflation.

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20
Q

What are three impacts of inflation on consumers?

A
  1. The real value of savings will fall as prices rise - if inflation > interest rates, then savings real value will decrease.
  2. The purchasing power of those on fixed incomes will fall as prices rise - for example, pensioners.
  3. People with high levels of debt benefit, as the real value of debt falls.
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21
Q

What are five impacts of inflation on firms?

A
  1. Loss of international competitiveness
  2. Increased uncertainty
  3. Decreased investment from abroad as money decreases in value
  4. Can encourage business investment as there is proft incentive to make more
  5. Small inflation means wages can rise a small amount
22
Q

What are three impacts of inflation on the goverment?

A
  1. Redistribution of income is necessary
  2. Cost of borrowing falls as real interest rate decreases
  3. Provides a cushion against deflation (which leads to a spiral of underinvestment and reduced spending)
23
Q

What are two impacts of inflation on workers?

A
  1. Workers expect an increase in wages, but often this is not offered by firms - especially if they cannot pass on higher costs
  2. Trade off between wage inflation and unemployment - high wage inflation means it is easier for people to find jobs, as firms are rising wages to attract more workers. This is called the short-run phillips curve.
24
Q

What is the labour force?

A

This the number of people at working age who are willing and able to work

25
Q

Who are the economically inactive?

A

People without a job who are not seeking one, e.g. students, stay at home parents, early retirees. They are unable and/or unwilling to work.

26
Q

What is unemployment?

A

A situtation in which someone is willing and able to work, but not actively employed

27
Q

What are the two ways the UK measures unemployment?

A
  1. The Labour Force Survey by the ILO
  2. The Claimaint Count
28
Q

How is the Labour Force Survey calculated?

A
  • The ILO asks a representative sample of the population
  • They ask two questions:
    • Are you out of work in the last four weeks?
    • Are you ready to start in the next two weeks?
29
Q

What is the Claimant Count?

How has it changed since 2018?

A

This is the number of people who are claiming Jobseeker’s Allowance (JSA) - unemployment benefits

Under Universal Credit, a broader span of claimants are required to look for work than under Jobseeker’s Allowance. This has the effect of increasing the Claimant Count and Office for National Statistics (ONS) have stated that the figures are no longer a reliable economic indicator.

30
Q

What are the advantages and disadvantages of using the Labour Force survey?

A
  • ILO is the official survey, it accounts for everyone
  • Statistical errors, dishonesty, too vague questions?
31
Q

What are the advantages and disadvantages of using the alternative claimant count?

A
  • The data is easy to collect and give a measure of hardship

BUT

  • There is stigma for getting JSA, it is hard to get, not everyone needs it/is on it (rich stay-at-home parents etc.), many are not eligible
  • When comparing it to pre-2016, it is less accurate as it uses statistical modelling
32
Q

What is the difference between underemployment and unemployment?

A

Underemployment is where a worker is still employed but wants to work more hours than they are currently able to

33
Q

What are six factors that change employment, unemployment and inactivity?

A
  1. The school/compulsory training leaving age (rose to 18 in 2015)
  2. Number of leavers entering higher or further education
  3. Number of people who work beyond the state retirement age of 65 (1.3% of workforce) as state pension is low
  4. Level of net migration (34% here to work)
  5. Availability of jobs
  6. Level of taxes and benefits - incentives to work.
34
Q

What is the classical view of unemployment as opposed to the Keynsian view?

A
  • The classical view is that there can only be real wage unemployment, which is where there is unemplomyent only because people are unwilling to work at the current wage rate.
  • The Keynsian view is that there is demand-deficient (or cyclical) unemployment, which is caused by a lack of aggregate demand in an economy, as people are not spending enough to create jobs.
35
Q

What are the three other causes of unemployment?

A
  • Structural unemployment - workers who lose jobs as they are in a declining industry and do not have the skills to get another job
  • Frictional unemployment - this will always exist as it refers to people who are between jobs or beginning the search for one as they just entered the workforce
  • Seasonal unemployment - this is people who are unemployed at certain times of the year, like ski instructors or vegetable pickers
36
Q

How does migration affect unemployment?

A
  • Migration can improve employment, as they fill vacancies that are not filled by domestic workers.
  • It can also make it worse, as if they don’t find a job they add to surplus labour (labour force that is out of a job).
37
Q

How does the skill level of the labour force affect unemployment?

A
  • The higher the skills of the workforce, the more flexible workers will be if there is change in industry or requirements
  • Higher training and skills therefore decreases unemployment as people can easily adjust and find new jobs.
38
Q

What is the effect of unemployment on consumers?

A
  • People have lower incomes and living standards. They become demoralised and their skill sets become outdated.
39
Q

What is the effect of unemployment on firms?

A
  • Firms notice that people are willing to spend less, so they make less profit
  • It may mean that their employees work harder as they are more incentivised to keep their job
40
Q

What is the effect of unemployment on workers?

A
  • Worker’s skill sets become obsolete and out of date, making it even harder to find work
41
Q

What is the effect of unemployment on the government?

A
  • The government has to pay more in welfare, and recieves less in income tax and VAT
42
Q

What is the effect of unemployment on society as a whole?

A
  • Unemployed resources represent an oppurtunity cost - the econonmy is not operating at full potential and there is less output
  • Crime may increase, general standards of living decrease
43
Q

What is the balance of payments?

A

A record of payments between one country and the rest of the world, comprising of the current, financial and capital accounts.

44
Q

What is the current account?

A

The current account records trade in goods, trade in services, investment income and current transfers

45
Q

What is the balance of trade?

A

This is the difference between the value of goods and/or services exported and the value of goods and/or services imported

46
Q

Define investment income

A

The reward for investment in other countries: interest; profit; and dividends

47
Q

Define current transfers

A

The payment of money accross international boundaries that has no corresponding output, e.g. taxes paid to the EU or economic migrants sending income back home

48
Q

What is a current account deficit?

A

Outflows on the current account of the BoP are greater than inflows

49
Q

What is a current account surplus?

A

Inflows on the current account of the BoP are greater than outflows

50
Q

What is the financial account?

A

This records money flows for investment purposes: foreign direct investment and foreign portfolio investment

51
Q

What is the difference between foreign direct investment and foreign portfolio investment?

A

FDI is buying assets and ownership of companies abroad, whereas FPI is the speculative movement of money between countries as exchange rates and interest rates change

52
Q

What is the capital account?

A

Puts the financial and current account in balance by recording the changes in net assets

Macroeconomics Summer Exam (7 decks)

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