4.2.1 The measurement of macroeconomic performance Flashcards
What are the four main objectives of government macroeconomic policy?
- Economic growth (UK - 2.5%)
- Price stability (UK - 2% inflation)
- Minimised unemployment (UK - 3%)
- Stable balance of payments on current account
What can happen, at least in the short run, when attempting to achieve the main objectives of government macroeconomic policy?
Conflicts arising
What is short run growth also known as?
Actual growth
What is short run growth?
Each year’s change in real GDP
What is nominal GDP (Gross Domestic Product)?
The total value of all output in an economy in a year
What is real GDP?
The GDP adjusted for inflation
What is long run growth also known as?
Potential growth
What is long run growth?
Changes in the productive capacity of the economy
What is a recession?
Two consecutive quarters of negative economic growth
What are the 3 methods of measuring GDP?
- Total value of income made by the population
- Total value of production made
- Total value of expenditure by population
What is unemployment?
Consists of the those who are willing and able to work and actively seeking work but are not able to get a job
What does the labour force consist of?
The unemployed and employed
What is the unemployment rate?
The percentage of the labour force that is unemployed
What is inactivity?
Of working age but not in the labour force
What are some examples of reasons for inactivity?
Disability, don’t need to work, in full-time education, stay-at-home parent, carers, imprisoned
What does the Consumer Price Index measure?
The changes in price paid by consumers for a weighted basket of goods and services (700) across all areas in the country based on the ‘typical household’
What do the weights reflect in a weighted price index?
The average spending on each item, the bigger the spend bigger, the higher the weight
What does the Retail Price Index measure?
The changes in price paid by consumers for a weighted basket of goods and services (700), as well as housing costs (mortgages, council tax, gas/electricity) across all areas in the country based on the ‘typical household’
Why is the RPI normally higher than the CPI?
The RPI measures housing costs, which go up more than anything else in general
What is the role of the balance of payments?
To record transactions between the UK and the rest of the world
How are index numbers calculated?
(New price / base year price (100)) x 100
How do you calculate the overall price index for a year?
Sum(price x weights)/sum weights
How do you calculate changes in the price level (rate of inflation) using index numbers?
(New price index - previous price index) / (previous price index) x 100
What are the limitations of using NI data to assess changes in living standards over time?
- GDP per capita has no indication about inequality
- Hidden economy is not accounted for: illegal activity, tax avoidance/evasion
- Ignores quality of products and where output is coming from
What are the differences between GDP and GNI?
- GDP measures the total value of production within the UK over a year
- GNI measures the final value of output/expenditure by UK owned factors of production located in the UK or overseas
- GNI = GDP + NPIA
What is purchasing power parity?
The 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
What is the importance of using PPP exchange rates when making international comparisons of living standards?
It helps to minimise misleading comparisons between countries, as GDP figures in USD tend to underestimate real levels of income/output in developing economies
What is net property income from abroad (NPIA)?
Interest, profits and dividends coming into the UK from UK assets owned overseas minus interest, profits and dividends from foreign owned assets located within the UK heading overseas
What are the benefits of using purchasing power parity to measure GDP?
Using PPP for GDP per capita better reflects standards/cost of living, for example products not exported/imported tend to be cheaper in developing countries, such as services like taxis, or sports tickets
What are the negatives of using purchasing power parity to measure GDP?
It is very difficult to get an accurate measure for purchasing power
