4.2.1 The measurement of macroeconomic peformance

Question 1

What are the four macroeconomic objectives

Answer 1

• Economic growth
• Minimising unemployment
• Price stability
• Stable balance of payments on current accounts

They aim to provide macro stability

Question 2

Outline economic growth as a macroeconomic objectives

Answer 2

In the UK, the long run trend of economic growth is about 2.5%. Governments aim to have sustainable economic growth for the long run.

In emerging markets and developing economies, governments might aim to increase economic development before economic growth, which will improve living standards, increase life expectancy and improve literacy rates.

Question 3

Outline minimising unemployment as a macroeconomic objectives

Answer 3

Governments aim to have as near to full employment as possible. They account for frictional unemployment by aiming for an unemployment rate of around 3%. The
labour force should also be employed in productive work.

Question 4

Outline price stability as a macroeconomic objectives

Answer 4

In the UK, the government inflation target is 2%, measured with CPI. This aims to provide price stability for firms and consumers, and will help them make decisions
for the long run. If the inflation rate falls 1% outside this target, the Governor of the Bank of England has to write a letter to the Chancellor of the Exchequer to explain
why this happened and what the Bank intends to do about it.

Question 5

Outline Stable balance of payments as a macroeconomic objectives

Answer 5

Governments aim for the current account to be satisfactory, so there is not a large deficit. This is usually near to equilibrium.

A balance of payments equilibrium on the current account means the country can
sustainably finance the current account, which is important for long term growth

Question 6

Outline some extra macroeconomic objectives

Answer 6

Balanced government budget: This ensures the government keeps control of state borrowing, so the national debt does not escalate. This allows governments to borrow cheaply in the future should they need to, and makes repayment easier.

Greater income equality: Income and wealth should be distributed equitably, so the gap between the rich and
poor is not extreme. It is generally associated with a fairer society. The importance of each objective changes over time.

Question 7

Outline the Potential conflicts and trade-offs between the macroeconomic objectives (generally in the short run)

Answer 7

• Economic growth vs inflation
• Economic growth vs the current account
• Economic growth vs the government budget deficit
• Economic growth vs the environment
• Unemployment vs Inflation

Question 8

Outline the trade off between Economic growth vs Inflation

Answer 8

A growing economy is likely to experience inflationary pressures on the average price level.
This is especially true when there is a positive output gap and AD increases faster than AS

Question 9

Outline the trade off between Economic growth vs current account

Answer 9

During periods of economic growth, consumers have high levels of spending. In the UK, consumers have a high marginal propensity to import, so there is likely to be more spending on imports. This leads to a worsening of the current account deficit. However, export-led
growth, such as that of China and Germany, means a country can run a current account surplus and have high levels of economic growth.

Question 10

Outline the trade off between Economic growth vs the government budget deficit

Answer 10

Reducing a budget deficit requires less expenditure and more tax revenue. This would lead to a fall in AD, however, and as a result there will be less economic growth.

Question 11

Outline the trade off between Economic growth vs the environment

Answer 11

High rates of economic growth are likely to result in high levels of negative externalities, such as pollution and the usage of non-renewable resources. This is because of more manufacturing, which is associated with higher levels of carbon dioxide emissions.

Question 12

Outline the trade off between Unemployment vs Inflation

Answer 12

In the short run, there is a trade-off between the level of unemployment and the inflation rate. This is illustrated with a Phillips curve. As economic growth increases, unemployment falls due to more jobs being created.
However, this causes wages to increase, which can lead to more consumer spending and an increase in the average price level.

The extent of this trade off can be limited if supply side policies are used to reduce structural unemployment, which will not increase average wages.

Question 13

Outline how Real GDP can be a measure of the performance of an economy

Answer 13

GDP measures the quantity of goods and services produced in an economy (national output). In other words, a rise in economic growth means there has been an increase in national output. Real GDP is the value of GDP adjusted for inflation.

For example, if the economy grew by 4% since last year, but inflation was 2%, real economic growth was 2%

Question 14

Outline how Real GDP per capita can be a measure of the performance of an economy

Answer 14

Real GDP per capita is the value of real GDP divided by the population of the country.

Capita is another word for ‘head’, so it essentially measures the average output per person in an economy. This is useful for comparing the relative performance of countries

Question 15

Outline how Consumer Prices Index and Retail Prices Index (CPI/RPI) can be a measure of the performance of an economy

Answer 15

CPI and RPI are the measures of inflation in the UK. The Consumer Prices Index (CPI) measures household purchasing power with the Family Expenditure Survey. The survey finds out what consumers spend their income on. From this, a basket of goods is created. The goods are weighted according to how much income is spent on
each item. Petrol has a higher weighting than tea, for example. Each year, the basket is updated to account for changes in spending patterns.

RPI is an alternative measure of inflation. Unlike CPI, RPI includes housing costs, such as payments on mortgage interest and council tax. This is why RPI tends to have a
higher value than CPI.

Question 16

Outline how their are different measures of unemployment

Answer 16

It is usually difficult to accurately measure unemployment. Some of those in employment might claim unemployment related benefits, whilst some of the
unemployed might not reveal this in a survey.

The two main measures of unemployment in the UK are:
The Claimant Count and the The International Labour Organisation (ILO) and the UK Labour Force Survey (LFS)

Question 17

Outline the Claimant Court as a measure of unemployment

Answer 17

This counts the number of people claiming unemployment related benefits, such as Job Seeker’s Allowance (JSA). They have to prove they are actively looking for work.

Question 18

Outline the The International Labour Organisation (ILO) and the UK Labour Force Survey (LFS) as a measure of unemployment

Answer 18

The LFS is taken on by the ILO. It directly asks people if they meet the following criteria:
* Been out of work for 4 weeks
* Able and willing to start working within 2 weeks
* Workers should be available for 1 hour per week. Part time unemployment is included.

Since the part-time unemployed are less likely to claim unemployment benefit, this method gives a higher unemployment figure than the Claimant Count.

Question 19

Briefly describe the balance of payments on the current account

Answer 19

The balance of payments is a record of all financial transactions made between consumers, firms and the government from one country with other countries. It
states how much is spent on imports, and what the value of exports is.

The balance of payments is made up of:
- The current account
- The capital account
- The official financing account

Question 20

Outline exports on the balance of payments

Answer 20

Exports are goods and services sold to foreign countries, and are positive in the balance of payments. This is because they are an inflow of money.

Question 21

Outline imports on the balance of payments

Answer 21

Imports are goods and services bought from foreign countries, and they are negative on the balance of payments. They are an outflow of money.

Question 22

How index numbers are calculate and interpreted

Answer 22

Index numbers are used to make comparisons between years, and to measure the magnitude of change over time. A base year is used and is then compared to other
years. For example, if the year 2015 is the base year, the value given to it is 100. If inflation has risen by 5% between 2015 and 2018, the index number for 2018 will be 105.

Question 23

Define Consumer Price Index

Answer 23

The Consumer Price Index (CPI) measures changes in the average level of prices paid by households for goods and services during a specific time period

Question 24

Define and outline retail price index

Answer 24

The retail price index (RPI) is calculated in exactly the same way as the CPI
Certain goods and services that are excluded from the CPI are included with the RPI
These include council tax, mortgage interest payments, house depreciation, and other house purchasing costs such as estate agents fees

Question 25

Outline economic growth to assess changes in living standards over time

Answer 25

• Economic growth occurs when there is a rise in the value of Gross Domestic Product (GDP).
• GDP measures the quantity of goods and services produced in an economy. In other words, a rise in economic growth means there has been an increase in national output.
• Economic growth leads to higher living standards and more employment opportunities.

Question 26

Define Real GDP

Answer 26

Real GDP is the value of GDP adjusted for inflation. For example, if the economy grew by 4% since last year, but inflation was 2%, real economic growth was 2%.

Question 27

Define nominal GDP

Answer 27

Nominal GDP is the value of GDP without being adjusted for inflation. In the above example, nominal economic growth is 4%. This is misleading, because it can make
GDP appear higher than it really is.

Question 28

Define Total GDP

Answer 28

Total GDP is the combined monetary value of all goods and services produced within a country’s borders during a specific time period.

Question 29

Define GDP per capita

Answer 29

GDP per capita is the value of total GDP divided by the population of the country. Capita is another word for ‘head’, so it essentially measures the average output per
person in an economy. This is useful for comparing the relative performance of countries.

Question 30

Outline Gross National Product (GNP) as a measurement of National Income

Answer 30

Gross National Product (GNP) is the market value of all products produced in an annum by the labour and property supplied by the citizens of one country. It includes GDP plus income earned from overseas assets minus income earned by overseas residents. GDP is within a country’s borders, whilst GNP includes products produced by citizens of a country, whether inside the
border or not.

Question 31

Outline Gross National Income (GNI) as a measurement of National Income

Answer 31

Gross National Income (GNI) is the sum of value added by all producers who reside in a nation, plus product taxes (subtract subsidies) not included in the value of output, plus receipts of primary income from abroad (this is the
compensation of employees and property income)

Question 32

The use and limitations of national income data to compare differences in living standards between countries

Answer 32

• GDP does not give any indication of the distribution of income. Therefore, two countries with similar GDPs per capita may have different distributions which lead to different living standards in the country.
• GDP may need to be recalculated in terms of purchasing power, so that it can account for international price differences. The purchasing power is determined by the cost of living in each country, and the inflation rate.
• There are also large hidden economies, such as the black market, which are not accounted for in GDP. This can make GDP comparisons misleading and difficult to compare.
• GDP gives no indication of welfare. Other measures, such as the happiness index, might be used to compare living standards instead or in conjunction with GDP

Question 33

The importance of using purchasing power parity (PPP) exchange rates when making international comparisons of living standards

Answer 33

This is a theory that estimates how much the exchange rate needs adjusting so that an exchange between countries is equivalent, according to each currency’s
purchasing power. For example, if a car cost £15,000 and the exchange rate between the UK and the US is 1.5 £ per $, then in the US, the car should cost $10,000. This
means both cars cost the same number of US dollars, and the same number of pounds Sterling.

This helps to minimise misleading comparisons between countries.