4.2.1 - The Measurement Of Macroeconomic Performance

Question 1

Define macroeconomics

Answer 1

Refers to the economy as a whole

Question 2

Define Economic policy

Answer 2

Is the economic tools and instruments available for a government to use to influence economic performance

Question 3

State the indicators of government macroeconomic policy (7)

Answer 3

Economic growth
Unemployment
Price stability 
Current balance of payments on current account
Environmental measures 
Income distribution
Government budgets

Question 4

Explain Economic growth as an indicator of government macroeconomic policy, why is it considered desirable.

How is it measured

Answer 4

Measures how much the value of output produced in an economy has grown over a period of time, whilst being sustainable. Is considered desirable as individuals prefer to consume more rather than fewer goods or services.

Uses GDP and GNP as a measure

Question 5

Explain Unemployment as an indicator of government macroeconomic policy

How is it measured

Answer 5

Is a problem in society which represents a waste of scarce resources. Fast growing economies are linked to low unemployment as more workers are needed to produce more goods and services.

Measured using the % of labour force in unemployment

Question 6

Explain price stability as a indicator of macroeconomic policy

Explain inflations impact on price stability

How is it measured

Answer 6

Measures how fast the average level of prices of goods and services rises over a period of a year.

Inflation is the sustained increase in average prices in an economy over a period of time, high inflation disrupts the knowledge of prices in the market.

Measures the Consumer Price Index, which covers goods purchased for consumption.

Question 7

Explain the stable balance of payments on current accounts as a indicator of government macroeconomic policy.

Name its measures

Answer 7

Is a measure of financial transactions between the UK and the rest of the world. Economies with a surplus are seen as strong economies

Measured using trade in goods and services, investment incomes (remittances and dividends) and net transfers (international aid)

Question 8

Explain Environmental measures as an indicator of government macroeconomic policy

How is it measured (different arguments)

Answer 8

Are objectives set by the government in relation to the environment. Ranging from reducing water pollution to improving air quality.

No measure, environmentalists believe economic growth harms the planet whilst economists argue economic growth allows economies to clean up the environment.

Question 9

Explain Income distribution as an indicator of government macroeconomic policy

Issues?

Answer 9

Describes government intervention to reduce inequality by setting minimum wages and providing healthcare and education.

Some economists argue economic growth does not fix income inequality.

Question 10

Explain government budgets as an indicator of government macroeconomic growth

Answer 10

Governments aim to have large government budget surpluses which are sustainable and do not require money to be borrowed with interest

Question 11

Define National Income

Answer 11

Is an economic statistic which measures the size of an economy, with a range of measures.

Question 12

Explain the measures of national income (4)

Answer 12

Gross Domestic Product (GDP) - Is the value of goods and services that a country produces over a period of time
Gross Value Added- is GDP minus indirect taxes plus subsidies on goods.
Gross National Income (GNI)- Is the value of goods produced by a country plus overseas interest payments and dividends.
Gross National Product- value of goods produced by a country, overseas and domestically

Question 13

Define Nominal values

Answer 13

Involves measuring data at the prices of the day, not taking into account the effect that inflation might have

Question 14

Define Real value

Answer 14

Involves data being adjusted for inflation over a period of time

Question 15

Define Transfer payments

Explain why it is excluded from national income calculations

Answer 15

Is income where there is no corresponding output, such as unemployment benefits or pension payments.

Excluded from final calculations of national income due to the fact it has no increases on output in the economy

Question 16

Why is national income measured (3)

Answer 16

Economists use them to test hypothesis and build models of the economy, to increase our understanding of how it works.

Governments and firms use the figures to forecast changes in the economy to plan the future, government may change its spending or taxes.

Used to make comparisons over time and between countries

Question 17

What are the limitations of national income data (6)

Answer 17

Statistical inaccuracies- mistakes are made or returns are not accurate or completed.

Does not take into account hidden economy- output from industries which do not pay taxes and therefore cannot be collected

Is not a good measure of welfare- does not take into account environmental, health, education and income distribution factors.

Distribution of income- does not take into account income inequalities, making GDP per capita less reliable

Non-marked output- does not take into account transactions which occur without a monetary payment being made in exchange for a good or service

Negative externalities- increases in GDP are exaggerated as they ignore the negative aspects of pollution and traffic congestion which reduce people’s quality of life.

Question 18

Define Index Numbers

How does it work

Answer 18

Are used to illustrate economic variables when data are presented. Useful when making comparisons over periods of time and highlighting the size of changes in variables.

Will start of with a value of 100, known as the base year value, and a change in the index number will show how far the variable has moved away from it’s starting value.

Question 19

Define the Consumer Price Index

Answer 19

Combines price data for the UK, as a whole basket of goods and services bought by a typical imaginary family. Represents the spending patterns of UK households.

Question 20

Explain weightings as part of the Consumer Price Index

Exemplification

Answer 20

Is a weighted index, weights are attached to items in the CPI according to their relative importance to an average family in their spending patterns.

A doubling in the price of light bulbs will have less impact on the CPI number than a doubling in the price of cars

Question 21

Explain the limitations with the CPI (3)

Answer 21

Based on an imaginary typical family- CPI never really reflects anyone’s exact spending patterns.

The basket has to include many goods and services that not everyone buy’s- not everybody smokes but cigarettes are included in the basket.

No account is taken of the quality of the item’s included- some goods may become more expensive but may also increase in capability.