2.1 Measuring Economic Performance LS1, 2 , 8+9 Flashcards
Index number formula?
(raw number in period/raw number in base period) x 100
Real vs nominal?
The nominal value is the actual value whereas the real value has been adjusted for inflation
Price index formula?
100 x (nominal/real)
GDP expenditure approach?
(Gross Domestic Product)
C + I + G + (X-M)
Consumer spending
Investment
Government expenditure
Net exports (X-M)
GDP definition
The value of goods and services produced by an economy in a year
GNI?
Gross National Income
GDP + net overseas income (income sent from foreign countries minus income sent to foreign countries)
Takes into account income from overseas and income sent to overseas
(used by World Bank)
Limitations to GDP?
Inequality - doesn’t take into account the distribution of wealth
Hidden economy - doesn’t take into account voluntary/unpaid work
Environment - doesn’t take into account the negative affects a growing economy can have on the environment
Differences in hours worked
Quality of goods/services
GNI per capita?
GNI/population
GDP per capita?
GDP/population
Inflation?
An increase in the overall level of prices in an economy
Deflation vs Disinflation?
Deflation: negative inflation
Disinflation: a fall in the rate of inflation (but still increasing)
Three key economic categories?
Economically inactive
Employed
Unemployed
Economically inactive?
Those of working age but are not in work or looking for work (students, retired, sick, discouraged workers)
Unemployed?
Those who are in the workforce but are without jobs
Measures of unemployment?
Claimant count: the number of people registered as unemployed and claiming unemployment benefit (JSA)
ILO unemployment rate: based on the Labour Force Survey
How does the claimant count measure unemployment rate?
Measures number of people claiming job seekers allowance (JSA) in the UK
Who does the claimant count exclude and what does this mean for claimant count figure of unemployment?
People who are unemployed but have a working partner cant seek JSA
People under 18 cant seek JSA
People with a certain level of savings cant seek JSA
So claimant count figure of unemployment often lower than the labour force survey
Differences between claimant count and ILO?
Claimant count starts at 18, ILO starts at 16-17
Stigmatism around claimant count of relying on financial support
ILO based on quarterly survey of 60,000 households
Claimant count often lower than labour force survey
How does ILO measure unemployment?
Labour force survey given to random sample of 60,000 UK households
To see if they fit their definition of unemployment (ready to work within 2 weeks and have actively looked for work in the last 4 weeks but cannot find a job)
Disadvantages of both ILO and claimant count?
Doesnt include:
* Economically inactive
* Voluntarily unemployed
* Hidden economy workers
* Underemployed (working less hours than they wish or jobs that underutilise their skills)
Hyperinflation?
Very high rates of inflation as a result of significant increases in the supply of money
What can serious hyperinflation result in?
A massive disruption of economic activity
* Businesses stop investing in productive activities and invest instead in assets that maintain their value (gold e.g.)
* Firms withhold goods from sale
* Money loses its value
Also political and social unrest
Balance of payments account?
A record of all financial dealings over a period of time between economic agents of one country and other countries
Split into:
* Current account
* Capital and financial accounts
Current account components?
Trade in goods (or visibles)
Trade in services
Primary income: money that flows in/out of country as a result of employment or previous investment
Secondary income: transfers of money between countries, not for goods/services
Current balance?
The difference between the value of exports and total imports, added with the balance of trade in goods and services, income and current transfers
Current account surplus?
When exports are greater than imports, total money flowing into the country is greater than the money flowing out of the country
Current account deficit?
When imports are greater than exports, total money flowing into the country is less than the money flowing out of the country
What is the inflation rate?
The change in average price levels in an economy over a given period of time
What are the two widely used measures of the price level?
CPI (consumer price index)
RPI (retail price index)
Why does the RPI tend to be higher than CPI?
Diff methods (RPI uses the Carli index to average out different prices)
CPI excludes a number of items relating to housing (i.e. mortage interest rate repayments and council tax)
RPI covers a different sample of the population than the CPI (RPI excludes top 4% of income earners while CPI covers all households and all incomes)
What is the redistribution effect?
When certain groups lose purchasing power and become worse off while other groups gain purchasing power and become better off
What groups lose from inflation?
People who receive fixed income/wages (pensioners, landlords etc)
People with incomes or wages that increase at a rate slower than inflation
Holders of cash
Savers
Lenders
What groups gain from inflation?
Borrowers
Payers of fixed incomes or wages
Payers of incomes or wages that increase at a rate slower than the inflation rate
How can the inability to predict future inflation lead to lower economic growth?
Can lead to uncertainty for firms which can lead to fewer investments which can lead to lower economic growth
What are the consequences of inflation?
- Redistribution effects
- Uncertainty
- Menu costs (incurred by firms when they have to print new menus, catalogues, ads etc due to changes in prices)
- Money illusion (people feel better off than they are due to nominal income increases, can lead consumers to make wrong spending decisions)
- International (export) competitiveness when the price level increases in one country than in another, its exports become more expensive to foreign buyers, while imports become cheaper => exports decrease, imports increase => difficulties for country’s balance of trade
What’s the appropriate rate of inflation?
2-3%
What are the causes of inflation?
Demand-pull inflation
Cost-push inflation
Explain demand-pull inflation
When AD increases with no increase in AS
Caused by excess demand in the economy
Also could be caused by growth of the money supply
What can cause excessive increases in AD in the UK?
- Consumer spending may rise excessively (low interest rates, high consumer confidence, increasing house prices)
- Firms may substantially increase their spending on investment
- Government might be increasing their spending
- World demand for UK exports could be increasing (boom in global economy)
How can growth in the money supply cause inflation?
- Banks influence the amount of borrowing and lending in the economy
- If banks increase their lending to customers
- Money supply will grow
- Customers likely to spend the money they have borrowed
- Will lead to increased AD
- Can cause inflation
Explain cost-push inflation
Changes in the supply-side of the economy can also cause inflation
Cost-push inflation occurs due to rising costs
What can cause rising costs in the economy?
Wages and salaries
Imports
Profits (firms can raise profit by raising prices)
Government taxes or subsidy removals
Firms will try to pass on increases in costs onto consumers
What are the 5 types of unemployment?
Frictional unemployment
Seasonal unemployment
Structural unemployment
Cyclical/demand deficient unemployment
Real wage unemployment
Frictional unemployment?
Short-term unemployment when workers are in between jobs
Seasonal unemployment?
When workers work on a seasonal basis and are unemployed when their work is not in season i.e. tourism industry
Structural unemployment?
When demand for labour is less than its supply in an individual labour market in the economy
i.e. regional unemployment (Northern Ireland) and sectoral unemployment (steel)
Cyclical/demand deficient unemployment?
Economies tend to cycle from boom to recession over time
Cyclical/demand deficient unemployment occurs when economy is not in boom
Have insufficient AD in the economy for all workers (and other factors of production) to be employed
Real wage unemployment?
aka Classical unemployment
Employment that exists when real wages are stuck at a level above than needed to reduce unemployment
Employers cant employ workers because cannot afford due to minimum wage OR workers not taking low paid jobs because they earn more in welfare benefits
Why is cyclical unemployment different to frictional, seasonal, structural and real wage unemployment?
Cyclical unemployment caused by a lack of demand in economy
Rest are caused by supply-side factors
How can migration decrease unemployment in the UK?
Immigrants to UK more likely to be employed than current population (of working age and come to UK to work)
Spending of these workers creates further jobs in UK
How can migration increase unemployment in the UK?
Net inward migration can depress wage rates as supply of labour is increased, reducing equilibrium price of labour, or wages
How has the process of globalisation been taking place?
- Proportion of individual economies’ output that is traded internationally is growing
- Increasing ownership of physical and financial assets
- Individuals are migrating in increasing numbers
- Technology is being shared between countries at a faster rate
What are governments 4 major macroeconomic objectives?
- Low unemployment, achieving full employment
- Low and stable inflation, avoiding deflation
- Economic growth in line with similar economies
- Balance of payments equilibrium, including current account balance
