3.2.1 The measurement of macroeconomic performance

Question 1

What are the main objectives of government macroeconomic policy?

Answer 1

(1) economic growth
(2) Inflation
(3) unemployment
(4) balance of payments

Question 2

What are the 2 main measurements used for inflation?

Answer 2

Consumer Price Index (CPI): measure of inflation in the UK. Some items are excluded from CPI such as mortgage interest payments and council tax and a larger sample of the population is used

Retail Price Index (RPI): 2 surveys used to carry out:
Living costs and food survey - what proportion of income people spend their money on and what and then each item has a weighting
Basket of goods: Measures the change in price of around 700 of the most commonly used goods / services - average household spending
Price changes x weightlifting converted into an index number

Question 3

What are some limitations of CPI and RPI?

Answer 3

(1) RPI excludes households in the top 4% of income.

(2) RPI living costs and food survey information given can be inaccurate

(3) RPI Basket of goods only changes once every year so ST changes in spending aren’t accounted

(4) CPI covers a larger range of the population but doesn’t include mortgage interest payments or council tax

Question 4

How are CPI and RPI used in government policy?

Answer 4

They help determine wages, state benefits and measure changes in the UK’s international competitiveness

Question 5

Define inflation

Answer 5

Increase in the average price of goods and services over a period of time and the fall in the purchasing power of money

Question 6

Define positive, negative / de , hyper and dis inflation

Answer 6

Positive: average price of goods / services are rising

Negative / de: average price of goods / services are falling

Hyper: Prices rise extremely quickly of money rapidly loses its value

Dis: Rate of inflation is slowing down

Question 7

Define purchasing power parity (PPP)

Answer 7

The real value of an amount of money in terms of what you can actually buy with it
You can use it to compare living standards with other countries that use different currencies due to exchange rate

Question 8

What are some limitations of using GDP for comparison?

Answer 8

(1)extent of the hidden economy - economic activity that isn’t in official figures

(2) Public spending - some countries may offer more which improves the standard of living e.g. benefits or free health care

(3) Income inequality - redistribution of income

(4) different standard of living such as spending needs in hot and cold countries - heating or number of hours a person has to work per week

Question 9

How are index numbers calculated and interpretated

Answer 9

Useful to make comparisons over a period of time such as price level

Base year - first year (index number =100)
Changes are expressed as numbers below / above 100

Question 10

Define unemployment

Answer 10

Number of people who are willing and able to work and are actively seeking a job but cannot find one as a percentage of the labor force

Question 11

What are the 2 measures of unemployment?

Answer 11

The claimant count: Number of people claiming unemployment related benefits - job seekers allowance

The labor force survey: International labor organization uses a sample of the population to ask who aren’t working if they’re actively seeking for work - those who say yes are added up to produce the ILO unemployment count

Question 12

What are the advantages and disadvantages of the claimant count?

Answer 12

adv: data is easy to obtain - no cost and updated monthly so it’s always current

disadv: can be manipulated to make it seem smaller e.g. changing school leaving age and excludes those who aren’t eligible for the JSA

Question 13

What are the advantages and disadvantages of the labor force survey?

Answer 13

adv: more accurate and internationally agreed measure of unemployment so easy to make comparisons

disadv: less up to date, expensive to collect data and sample may be unrepresentative of the population as a whole making the data inaccurate

Question 14

What are the costs of unemployment?

Answer 14

(1) high unemployment rates suggests a bad economy

(2) unemployment leads to lower incomes and spending - companies sell less goods and cut prices leading to less profit

(3) Unused labor in the economy - fewer goods / services produced

(4) Gov have extra costs such as welfare benefits and less revenue as less tax is paid

Question 15

What does the balance of payments record?

Answer 15

The flow of money by value into and out of the country - imports and exports

Question 16

What is the balance of payments on current account?

Answer 16

Records the international exchange of goods / services

trade in goods (visible trade)
trade in services (invisible trade)
International flows of income e.g. interest of accounts held in foreign countries
Transfers of money from one person or gov to another - family abroad

Question 17

Explain what a surplus and a deficit are on the current account of the balance of payments

Answer 17

Surplus: money flowing in exceeds money flowing out

Deficit: money flowing out exceeds money flowing in

Question 18

What is the human development index?

Answer 18

measures and ranks country levels of social and economic development to see the quality of life
looks at health, education and standard of living - standard and easy to collect

Question 19

What are some limitations of the HDI?

Answer 19

(1) high life expectancy doesn’t mean high quality of life - work conditions

(2) average school years doesn’t measure quality of teaching

(3) GNI per capita can make inaccurate comparisons due to the hidden economy

(4) doesn’t show inequality in a country

Question 20

Define GDP

Answer 20

Measurement of economic growth
Can be measured by the change in national output over time
National output is all the goods and services produced by a country