2.1 Measures of economics performance Flashcards
Define economic growth
In the short run, increase in (real) GDP and in the long run, an improvement in the productive capacity and potential.
Define GDP
The total value of the final g/s in an economy
Difference between real GDP and nominal GDP
Nominal GDP takes the effects of inflation into account, real doesn’t. (To workout Real GDP, you multiply by the base price)
The limitations of using GDP to compare living standards
between countries and over time
doesn’t include unofficial or unpaid work or happiness
National Happiness - UK national wellbeing
National Happiness: The relationship between real incomes and subjective
happiness
Explain GNI - Gross National Income
measures the income earned by citizens operating outside
of the country+the GDP
Explain GNP - Gross National Product
Value of goods and services produced by a country over a period of time over a period of time through labour or property supplied by citizens of a country both domestically and overseas
Purchasing power parities
An exchange rate
Comparing growth
Define inflation
the sustained increase in the general price level
[erodes the purchasing power of money]
Define defaltion
sustained decrease in the general price level
[indicates a slow down in the growth/output in an economy]
Define Disinfaltion
reduction in the rate of inflation
[prices are still rising but not as much]
How do you calculate inflation
- CPI
mathematical (if the level of inflation is 10% how much would £500 be in the following year, 110%x500= £550)
What is CPI - Consumer price index
Measures inflation
Measures the household purchasing power from an expenditure survery. The goods are weighted according to how much income is spent on them.
Survey is used, weighted basket of goods, measures the average price change, changes annually
Limitations of CPI
- Not totally representative: every household buys different amounts and it doesn’t take into account every single good. - Doesn’t include the price of housing which often rises the most
- Some people argue that all inflation measures give an overestimate, because they don’t take the quality of the good into account
What is RPI - Retail price index
RPI is CPI but includes the housing costs. CPI is generally lower than RPI because it takes into account that people switch to a product that has gone up by less. RPI excludes the top 4% of earners because they aren’t ‘average households’
2 causes of inflation
Demand pull and cost push
Explain Demand Pull and a diagram
Explain Cost Push and a diagram
Growth of money supply
Effects of inflation on consumers
Effects of inflation of firms
Effects of firms on the govt
Define consumption
What is disposable income
What is MPC - Marginal propensity to consume
What are the 4 propensities and their formulae
MPS= change in S/change in Y
MPC= change in C/change in Y
APS= total S/total Y
APC= total C/total Y
Influences on consumer spending
What is Aggregate Demand [+ formula]
AD= C+I+G+(X-M)
The total level of demand in an economy at any given price
Difference between movements and shifts
Movements along the curve are caused by a change in the price (caused by de/inflation)
Shift in the curve is caused by a change in any other variable
Interest rate effect
Define unemployed
Someone is unemployed if they are not working but are actively seeking work
they are part of the labour force
the non-labour force is all those not seeking work (stay at home parents, pensioners, children)
Measures of unemployment: Claimant Count
Claimant Count: counts the number if people claiming JSA (job seekers allowance), they have to prove that they are actively looking for work.
- not every unemployed person seeks benefits
- some people claim benefits whilst being employed
Measures of unemployment: ILO
ILO labour force survey: statistical survery sent to 60,000 homes. Asks people if they meet 4 criteria.
i.e. ready to work in the next 2 weeks
Define/Explain underemployed
someone is underemployed when they can work more hours than they currently work or are working in a job that requires lower skills than they have
Underemployment is often a response to cyclical (workers who start in a weak economy are likely to take poor jobs)
Underemployment is also a consequence of structural employment (unless workers retrain and gain new skills, it is harder to gain full employment for them)
How can employment and unemployment rise at the same time
Increased immigration, which causes the working age population to rise
Decreased inactivity rate, as people go from inactive to employed
Significance of changes in rates for stakeholders
5 causes of unemployment
Structural
Seasonal
Frictional
Real Wage
Demand Deficit/Cyclical
(sisters suffer from real white dads)
Structural unemployment
When the structure of an economy changes (workers replaced by technology/capital)
No longer a need for a specific worker
If workers aren’t retrained or have transferable skills, they remain unemployed.
Frictional Unemployment
When workers are between jobs, usually short-term unemployment. Workers have voluntarily left their job to look for another
Seasonal Unemployment
When certain seasons have come to an end and specific labour is not required
ice cream man, tourism
Demand deficit/Cyclical unemployment
Fall in AD in the economy
Happens during recessions and slow downs
Demand for labour is derived from demand for g/s
decreased consumer spending, decreased output, decreased profits, firms lay off workers, rise in U.
Also can be caused by increase in productivity, if one worker has higher output, the firm can make other workers redundant as fewer workers are required to make the same quantity
Real wage unemployment
when wages are inflexible above the free market equilibrium wage, causing unemployment
minimum wage laws, higher wages create an excess of supply in labour, representing RWU
[graph]
The effects of increased unemployment on stakeholders
Govt: less tax revenue (less income tax being paid)
increased spending on benefits (incurring OC)
Increased spending on retraining
Consumers: less disposable income, lower standard of living, increased crime/homelessness/anti-social behaviour
Firms: ^U means they have more supply of labour to choose from, wages fall, reducing costs
~ consumers will have less disposable income, they will stop spending, decreased profit but will spend more on inferior goods, profits rise
individual: psychological consequences of losing a job
What is the budget deficit
UK Government spending> UK Government
revenue (tax receipts).
What is the balance of payments
the record of all financial dealings over a period of time between economic agents of one country and all other countries.
What is the current account
all transactions related to goods/services along with payments related to the transfer of income
Components of the current account
Trade in goods: These are known as visible as we can see physically see them. Difference between the visible exports and
Trade in services: invisible trade, a British family going on holiday to Spain would be an example an example of an invisible
Current account deficits and surpluses
Deficit: imports>exports (-ve balance)
Surplus: exports>imports (+ve balance)
The UK government has a macroeconomic aim to get their Current Account balance as close to equilibrium as possible
Define trade off
Setting policies to target one objective may complicate the possibility of achieving other objectives
The relationship between current account imbalances and other macroeconomic objectives
to correct the CA balance, the govt can raise tariffs, this decreased imports for households. Firms who rely on imported raw materials will have increased COP. These are likely to be passed on to the consumers in the form of higher prices.
Reducing the CA imbalance can come at the expense of increased inflation in the economy
The inter-connectedness of economies through
international trade
one country’s imports are another country’s exports.
Covid and the Ukraine war shows how disruptions in one part of the world cause widespread problems in other parts
producers all over the world are often highly dependent on imported raw materials, showing a high level of interconnectedness. (i.e. a car)
