2.1 - Measures of economic performance Content Flashcards
2.1 Measures of economic performance
What is economic growth / decline?
2.1.1 - Economic growth
An increase / decrease in the total production or productive potential of an economy.
2.1 Measures of economic performance
How is economic growth measured
2.1.1 - Economic growth
Economic growth is typically measured by calculating the percentage change in real GDP over a specific period, such as a year.
2.1 Measures of economic performance
What is National Income?
The total value of income received by households, from firms (in exchange for CELL) in an economy.
2.1 Measures of economic performance
Causes of inccuracy of national income statistics (4)
- Statistical inaccuracies due to quality of data collecting agencies
- Hidden economy/shadow economy not being counted
- Home produced goods
- Public sector (hard to value output)
2.1 Measures of economic performance
Problems with NI (5)
- Inflated prices - decreases purchasing power so may be less well off for same national income
- Per capita representation needed
- No account of quality
- Externalities, future costs not factored
- Income distribution not accounted for
2.1 Measures of economic performance
How does the development of a country affect National income data?
Developing countries could have poor data collection agencies - meaning the quality of the GDP data could be weak.
2.1 Measures of economic performance
Since National Income data doesn’t account for shadow markets, what do some countries do?
Add an estimate of the value of their shadow market.
2.1 Measures of economic performance
What is the shadow economy?
Illegal activities that create GDP but are not recorded in the formal economy.
2.1 Measures of economic performance
What is PPP used for?
To compare between countries.
2.1 Measures of economic performance
What are the benefits of PPP?
- Easily compared - ppp exchange rates remain fairly constant.
- Exchange rates get closer to the PPP over time.
- Can track and predict exchange rate relationships.
- Examine the relative living conditions of different countries.
2.1 Measures of economic performance
What are the issues with GDP?
Inaccuracy of data, inefficiencies in data collection, over time methods change.
Expenditure does not = quality of life.
Doesn’t include reproductive labour.
Doesn’t take into account home-produced services (e.g. DIY).
2.1 Measures of economic performance
With reference to Figure 2, assess whether an increase in real incomes improves subjective happiness within the UK. (2022)
For
- More money for consumer goods, luxury goods, treats, holidays. –> Improves happiness
- Finacial security, ability to save. Less likely to experience hardship. People on benefits are unlikely to have financial security.
Against
- People who work need to work longer hours, more responsibilities, more stress. They might not be able to enjoy the extra income.
- Depends on age/if there are dependents. Depends on the level of benefits being provided by the state.
2.1 Measures of economic performance
Factors affecting national happiness?
Life satisfaction
Anxiety
Happiness
Worthwhileness
2.1 Measures of economic performance
What are the 3 ways to measure GDP?
Output
Income: GNI
Expenditure
2.1 Measures of economic performance
How is green GDP calculated?
GDP - environmental costs.
2.1 Measures of economic performance
What does ↑ Real GDP mean?
↑ Value of goods and services.
so it should mean, ceteris paribus, that incomes and standards of living are rising
2.1 Measures of economic performance
What is a higher GDP is often correlated with?
Higher incomes and so a higher standard of living.
2.1 Measures of economic performance
What is inflation?
The general increase of price levels in an economy.
(Consumer Price Index).
2.1 Measures of economic performance
What is deflation?
General fall in price levels
2.1 Measures of economic performance
What is disinflation?
A reduction in the rate of inflation.
2.1 Measures of economic performance
What is Demand Pull inflation?
Inflation caused by increased in Aggregate Demand.
2.1 Measures of economic performance
What is Cost Push Inflation?
Inflation caused by increase in the cost of production
(decrease in aggregate supply)
2.1 Measures of economic performance
What makes up the basket of goods in the UK to measure inflation?
180,000 prices are measured across thousands of outlets.
2.1 Measures of economic performance
What are the 3 causes of inflation?
- Demand-pull.
- Cost-push.
- Growth of money supply. (More money than G+S raises prices). [Fisher equation].
2.1 Measures of economic performance
What is Fisher’s equation, which describes the relationship between inflation and real interest rate?
Real interest rates = nominal interest rates - inflation.
2.1 Measures of economic performance
How can inflation be measured?
CPI or RPI
2.1 Measures of economic performance
How does inflation indicate the strength of the economy?
High and unexpected inflation means goods and services are becoming unaffordable - purchasing power of income falls.
2.1 Measures of economic performance
What are the effects of inflation on households?
- Increased spending increase MPC. - as goods are more expensive
- Reduction in the real value of debt
- Wage demands
2.1 Measures of economic performance
What are the effects of inflation on firms?
- Less internationally competitive
- Increased costs (due to wage demands).
- Lower confidence (less animal spirits).
2.1 Measures of economic performance
What are the effects of inflation on government?
- Revenue from indirect taxes will fall (spending dec).
- Revenue from direct taxes will rise (as wages inc).
- Reduction in the value of real govt. debt.
2.1 Measures of economic performance
How is CPI measured? How is a basket of goods created from CPI?
Via a family expenditure survey.
From this, basket of goods = created, weighted due to amount of expenditure on each item.
2.1 Measures of economic performance
What are the limitations of CPI?
- Basket of goods only represents average household.
- Different demographics have different spending patterns.
- Slow to respond to new goods and services.
- Hard to make historical comparisons.
2.1 Measures of economic performance
What does the RPI value tend to be?
Higher than CPI.
(Includes interest rates on mortgage payments, council tax etc).
2.1 Measures of economic performance
What does the RPI exclude?
Top 4% of earners and low income pensioners. (As they are not ‘average households’).
2.1 Measures of economic performance
What does the RPI not take into account?
When prices rise people will switch to product that has gone up by less, unlike the CPI.
2.1 Measures of economic performance
What causes demand-pull inflation?
- Depreciation in the exchange rate. (WIDEC) - AD increases. (Less imports, improved trade balance)
- Lower taxes or more Government spending. ↑ Disposable income.
- Lower interest rates - save less and more borrowing + consumption.
- High growth - export more and AD increase.
(Anything that increases AD).
2.1 Measures of economic performance
Give 4 factors that could cause cost push inflation:
- Increase in price of Land/Labour - (raw mat / cost of labour)
- Expectations of inflation - wage demands = ↑ Cost of Production.
- Increase in indirect taxes, these costs are passed on.
- The presence of monopoly power. Firms have more price control and set higher prices.
2.1 Measures of economic performance
What is the risk when inflation continually rises?
Price rises harm the economy.
Shut down of businesses, AD rapidly declines.
2.1 Measures of economic performance
Causes of long-run economic growth (6)
- Land - Some countreis eg Saudi Arabia have seen extensive growth due to natural resources
- Labour - Increases in the quantity of workers through demographic changes and migration - Or increases in the labour productivity of the existing labour force
- Capital - Stock of capital needs to grow in order to sustain increasing output - Both physical and human
- Technological progress - Can bring new products onto the market to sell -> extra spending - Reduces existing costs due to efficiency increases eg computers and calculators
- Efficiency - Increased efficiency -> rises in output - In a market economy, competition should lead to greater efficiency
- AD - Generally associated with export-led growth eg with China - LRAS can be expanded through the investment of export earnings
2.1 Measures of economic performance
Why does long-run economic growth occur
Productive potential will shift outward if there is a greater number of resources available to produce with or if the process of production becomes more efficient
2.1 Measures of economic performance
The costs of deflation (5)
- Asset values decrease
- Savers watch money grow prompting an increase in MPS
- Low levels of consumer confidence
- Low levels of business confidence
- Growing national debt in nominal terms
2.1 Measures of economic performance
Costs of high inflation (5)
- Growth & Unemployment: Disrupts planning, reduces investment, and dampens consumer spending.
- Competitiveness: Higher inflation than trading partners reduces exports and domestic industry competitiveness.
- Redistribution: Hurts fixed incomes (e.g., pensions), benefits borrowers, and harms lenders due to devalued debt.
- Shoe-Leather & Menu Costs: Causes more shopping effort and higher costs for firms to update prices.
- Loss of Confidence: Creates uncertainty, deterring investment and slowing growth
2.1 Measures of economic performance
Effect of Inflation on workers
While workers may see nominal wage increases, their real wages may decline due to inflation.
Labor unions may negotiate for higher wages to keep pace with rising prices.
2.1 Measures of economic performance
What is Claimaint Count?
The number of people claiming unemployment benefits.
2.1 Measures of economic performance
What is unemployment - UK Labour Force Survey? (International Labour Organisation definition).
Those of working age without work, able and seeking work, available for work in the next 2 weeks.
2.1 Measures of economic performance
What are the possible Employment statuses?
- Employed
- Unemployed
- Underemployed
- Inactive.
2.1 Measures of economic performance
What are the 5 types of Unemployment?
- Frictional - between jobs (short-term)
- Structural - where the industry has shrunk so people with specialist skills are left unemployed
- Seasonal - lifeguards
- Cyclical - busienss cycle
- Real Wage. - real wages level is above equilibrum - excess supply of labour
2.1 Measures of economic performance
What are the costs of unemployment to the workers
- Most likely lose out, loss of income, some may be offset by welfare
- Stigma leads to poor health
- Longer unemployed = harder to get a job
2.1 Measures of economic performance
What are the costs of unemployment to the economy
- Loss of output the unemployed could have produced
- Less able to be consumed for consumers
- Social costs such as increased crime
2.1 Measures of economic performance
What are the costs of unemployment to firms
- Firms suffer because the unemployed represent loss of potential demand
- Full employment is preferable
- Could be lower wage rates however
- Long-term unemployment represents a loss of human capital as workers become de-skilled
2.1 Measures of economic performance
Why does underemployment tend to increase in a recession?
Firms tend to reduce staff hours, as opposed to making them redundant (and paying expensive redundancy packages).
2.1 Measures of economic performance
What is the employment / unemployment rate?
The percentage of economically active people who are employed / unemployed.
2.1 Measures of economic performance
Give examples of underemployed people:
Those in part time or zero hour contracts, in jobs which do not reflect their skill level.
2.1 Measures of economic performance
What is the criteria for claiming unemployment benefits (thus being included in claimant count)?
- over 18
- not in full time education
- available to work
- actively seeking work
- < £16,000 in household savings
(CLAIMANT COUNT DEF OF UNEMPLOYMENT)
2.1 Measures of economic performance
What are the impacts of unemployment on households?
- Loss of income
- Stigma
- Loss of skills
- Lower job security for the employed
2.1 Measures of economic performance
What are the impacts of unemployment for firms?
- Fall in sales / profits.
- Smaller pool of skilled workers.
- Lower wages (as there is increased supply of labour).
2.1 Measures of economic performance
What are the impacts of unemployment for Government?
- Fall in tax revenue
- Increased spending on benefits
- Social deprivation
- Loss of national output
2.1 Measures of economic performance
What are the factors that determine the demand for labour?
- Derived demand: Labour demand depends on demand for the product.
- Marginal revenue product: Revenue added by each worker.
- Productivity: Skilled labour boosts demand through higher output.
- Legislation: Worker rights raise costs, reducing demand.
- Capital costs: Cheaper capital substitutes labour.
- Technology: Advances, e.g., robotics, lower demand (47% jobs at risk by 2040, Oxford study).
- Wage rates: Impact labour affordability.
- Economic confidence
2.1 Measures of economic performance
What are the factors that influence the supply of labour?
- Wages - High wages creates high incentives to work.
- Birth rates and migration - Large population means large supply of labour. Age determines if population can work.
- Non-monetary benefits - Supply of labour will increse if there is high job satisfaction. Healthcare, pension, social factors, location, holidays, flexibility, opportunity for promotion.
- Education/training/qualification - More educated workers means there is a higher supply of workers.
- Trade unions - Restrict the supply of labour by introducing barriers to entry. You need a degree to teach. Must work for TFL for 2 years before you can become a train driver.
- Working conditions and wages for other jobs
- Legislation - Retirement age, school leaving age.
- High government benefits - reduce the incentive to work.
2.1 Measures of economic performance
Ways to improve the skills and quality of the labour force (3)
-
Education
- Education is provided by state to ensure that everyone recieves training
- The legal age in which you can leave education can be increased in order to ensure the level of education is higher
-
Training
- Firms in the free market tend to undertrain leading the gov to intervene in the market
- Gov provides subsidies in order to increase the quantity of the population who has recieved training
-
Immigration
- Importing highly educated people will increase the competency of the existing labour force
2.1 Measures of economic performance
Significance of Migration and Skills for Employment and Unemployment:
- Migration can impact employment by changing the supply of labor in specific regions. Immigrants may fill labor gaps, but this can also lead to wage pressures.
- Skills are crucial for employment. A highly skilled workforce is more adaptable and less prone to unemployment in a changing economy.
2.1 Measures of economic performance
What is Balance of Payments?
Record of all financial dealings over a period of time.
Between economic agents of one country and all other countries.
2.1 Measures of economic performance
What is the Current Account of the Balance of Payments? (TTIT)
- (Balance of) trade in goods
- (Balance of) trade in services
- (Net) income flows from abroad
- (Net international) transfer payments.
2.1 Measures of economic performance
What are the causes of a current account balance of payments deficit?
Not enough exports
* Lack of productivity and competitiveness
* High inflation
* High currency value
* Non price factors like poor quality and design
High imports
* High curency value
* Spending habits
Other factors
* Monetary policy
* Supply side policies
* Fiscal policy
* Trade cycle - Boom times may mean higher imports. (Depends on MPI)
2.1 Measures of economic performance
What are the causes of a balance of payments surplus?
- Competitive economy - High productivity, investment, training, quality
- Low inflation
- Low exchange rate
- Vast natural resource - Kuwait, UAE
- Trade cycle
- Government policies - competitive supply side policies
2.1 Measures of economic performance
What are the problems with having a large balance of payments deficit?
- Signals a long term loss of competitiveness
- May mean higher unemployement - Withdrawl from circular flow, drag on aggregate demand
- May create imported inflation - Leads to a falling exchange rate - higher import costs.
- Fall in GDP - Withdrawl from circular flow
2.1 Measures of economic performance
Why might having a balance of payments deficit not be so bad
- Depends on the size of the deficit and how long it persists - Might be cyclical
- Depends on what the imports are - capital goods and investment will improve future growth prospects.
- Depends on if the exchange rate is fixed or floating, In a floating system, the balance of payments deficit should be self correcting
- Might be financed by a surplus on the financial account
2.1 Measures of economic performance
What are the problems of having a large balance of payments surplus?
- Retaliation - Countries with large deficits might retaliate by putting up barriers to trade to reduce imports - American withdrawl from NAFTA
- Resources are focused on producing to meet export demand rather than export demand, so lower consumer living standards
- Rise in the exchange rate - makes exports more uncompetitive in the long run.
- Inflation - high demand for exports could create inflation.
2.1 Measures of economic performance
How can contractionary fiscal policy be used to correct a balance of payments deficit and what is the problem?
- Fiscal policy - Raise income tax - Consumers have less disposable income. Spend less and import less. Particularly effective for countries with a high MPI.
Evaluation
* Unemployment and lower growth. Less incentives
* Fall in consumption and investment - less aggregate demand means lower business confidence
2.1 Measures of economic performance
If a country has a current account deficit, it must have a surplus on the other elements of the balance of payments. Why is this?
- This is because it has to pay for everything it consumes and funds in some way - to fund a current account deficit, a country must be selling assets to foreign investors.
- It is debatable whether this is sutainable in the long run since, if people invest in a country, at some point they will require a return on their investment, and this will cause a deficit on the financial account
2.1 Measures of economic performance
Balance of payments - balancing item
- The balance of payments must always equate to 0
-> if the government runs a current account deficit, it must run a capital and financial accounts surplus
Measures to reduce current account imbalances (5)
-
Exchange rate changes
-> If an economy is running a persistent deficit, then a currency devaluation is likely to increase exports and decrease imports thus improving the current account
-> A cheaper £ makes imports more expensive for domestic buyers and exports cheaper for foreign buyers
-> This assumes that the combined elasticity of demand for exports and imports is greater than one -> the Marshall-Lerner condition
-> In the short term, there may be a deterioration of the current account due to the J-curve effect, but in the long term it should improve
-> Devaluation is an example of expenditure switching policy
-> Expenditure is swithced from higher priced imports to more competative domestically produced goods
-> It should be remembered that a devaluation is incredibly hard and expensive to do on a free floating currency -
Deflationary policies
-> Policies aimed at reducing AD
-> Eg by increasing interest rates or taxes
-> Households will have less disposable income and therefore will cut back spending on foreign products
-> Equally firms will cut back investment including purchases of imported capital
-> imports decline
-> Exports could increase if firms switch sales from the depressed domestic market to foreign markets
-> Examples of expenditure reducing policies
-> Could alternately use reflationary policies to reduce a surplus -
Supply side policies
->Supply side policies aimed at reducing unit labour costs and increasing investment, increasing human capital in the labour force should lead to increased exports and reduced imports
-> Major problem being that they are long term policies
-> Work by increasing productivity which decreases production costs and thus make exports cheaper, increasing the demand
-> Also make domestically produced goods more competative in relation to foreign imports -
Protectionism
-> Increasing tariffs or quotas will reduce imports and thus improve the current account
-> Only effective if they are not met with retaliation -
Currency controls
-> Government may choose to impose or tighten currency controls
-> These are controls on the purchase of foreign currency by domestic citizens and firms
-> Used today in Russia and Pakistan
-> Limit the amount of imports that can be bought and thus improve the current account
-> Black markets are likely to occur however
