6.The measurement of macroeconomic performance. Flashcards
Define macroeconomics.
It is the study of the whole economy at the aggregate level.
List 4 main objectives of a macroeconomic government.
- economic growth and stability- raising living standards and reducing economic volatility.
- maintain full employment.
- reduce inflation- price stability (2% inflation target).
- achieve balance of payments.
Define short-run economic growth.
The growth of real output resulting from using idle resources. Occurs when a point inside the PPF curve moves to the PPF frontier. Also known as economic recovery.
Define long-run economic growth.
The rise in the economy’s potential level of real output. Outward shift in the PPF curve.
Define GDP, real GDP, and nominal GDP
GDP- sum of all goods/services produced in the economy over a given period of time. (or level of output).
Real- GDP adjusted for inflation or price changes.
Nominal- GDP at current market levels (includes inflation).
Describe the movement on the PPF curve in the short-run if economic growth is negative.
Movement from a point on the PPF frontier to a point inside the PPF curve.
What would a movement from PPF2 frontier to PPF1 frontier show?
It would show long-run negative growth.
Define inflation.
A persistent or continuing rise in the average price level.
Describe the difference between real GDP and nominal GDP?
Nominal GDP is real GDP multiplied by inflation (average price level).
Define full employment (free market definition).
Full employment is where the number of workers willing to work, is equal to the number of workers firms wish to hire. (occurs in eeconomy’s aggregate labour market at market-clearing real wage rate).
How is unemployment measured?
- claiment count- measures number of people who claim unemployment related benefits (e.g. Jobseeker’s allowance).
- labour force survey- survey of 60,000 people which provides information on the UK labour market.
When does inflation occur?
When most prices are rising some some degree across the whole economy.
Define deflation and disinflation.
Deflation- a persistent or continuing fall in the average price level.
Disinflation- when the rate of inflation is falling, but is still positive.
How is absolute price stability achieved, and how often does it occur?
When there is a zero annual rate of inflation, with the average price level neither rising nor falling from year to year. It is extremely rare.
What is a price index?
A price index shows the extent to which a price has changed over a period of time, e.g. a quarter.
What indices are used to measure the rate of consumer price inflation?
- Consumer price index- official measure used to calculate consumer price inflation. Calculates the average price of a basket of 700 different consumer goods.
- Retail price index.
Define the balance of payments.
It is a record of all the currency flows into and out of a country over a given time period (e.g. a year).
Define the current account of the balance of payments.
It measures all the currency flows into and out of a country over a given time period, in payments for exports and imports, together with income and transfer flows.
What is the balance of trade?
It is the difference between the money value of exports and the money value of imports.
When will a balance of trade deficit/surplus occur?
- A trade deficit will occur when value of imports is greater than the value of exports.
- A trade surplus will occur when the value of imports is less than the value of exports.
Define balanced budget (another macroeconomic objective).
Balanced budget is when government spending is equal to government revenue. (Government revenue is mostly tax revenue).
What is a policy conflict?
Occurs when two policy objectives cannot both be achieved at the same time because achieving one, worsens the performance of the other.
List 2 policy conflicts and trade-offs with full employment and economic growth policy.
- satisfactory balance of payments or exchange rate.
- control of inflation.
What do Keynesian economists believe about how governments should manage the economy?
They believe that the government should manage the economy, particularly through the use of the fiscal policy.
What do free-market economists believe about how governments should run the economy?
They believe that governments should not intervene in the economy and prefer the operations of free markets.
Define the monetary policy.
It is the use of interest rates and other monetary instruments used by government and its other agents (e.g. The Bank of England) to achieve the governments policy objectives.
Define the fiscal policy.
It is the use of government spending and taxation to try to achieve the governments policy objectives.
What is a performance indicator? What two groups are they divided into?
Performance indicators provides information sbout the success or failure of a policy target.
- lead- provides info about the future state of economy.
- lag- provides info on past and current performance in the economy.
Give an example of a lead and lag indicator.
Lead- the likely state of aggregate demand.
Lag- info on the level of GDP.
How do you calculate the percentage change in a given factor? (index numbers)
Percentage change=change in index points/index number of base year.
