Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

A-level - Economics Yr13 Mine > 9 - The Measurment of Macroeconomic Performance > Flashcards

9 - The Measurment of Macroeconomic Performance Flashcards

1
Q

What is a policy objective?

A

A target/goal that policy-makers aim to ‘hit’

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What’re the four main macroeconomic objectives that aim to provide macro stability?

A
  • Economic growth
  • Minimisation of unemployment
  • Price stability
  • Stable balance of payments on current account
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Why is ‘economic growth’ a main objective for the government in its aim to provide macro stability?

A
  • The benefits of economic growth include:
    -Higher average incomes
    -Economic growth enables consumers to consume more goods and services and enjoy better standards of living
    -Economic growth during the 20th Century was a major factor in reducing absolute levels of poverty and enabling a rise in life expectancy
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is short-run economic growth?

A

Growth of real output resulting from using idle resources, including labour

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is long-run economic growth?

A

An increase in the economy’s potential level of real output, and an outward movement of the economy’s production possibility frontier (PPF)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is gross domestic product (GDP)?

A

The sum/monetary measure of all goods and services produced in the economy over a period of time e.g. a year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is real GDP?

A

A market value of all the goods and services produced in an economy, adjusted for price changes or inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is nominal GDP?

A

GDP measured at the current market prices, without removing the effects of inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Why is ‘minimising unemployment’ a main objective for the government in its aim to provide macro stability?

A
  • Governments aim to have as near to full employment as possible and they account for frictional unemployment by aiming for an unemployment rate of around 3%
  • Unemployed workers may leave the labour market, which would result in an inward shift of the PPF curve
  • Unemployment has negative externalities e.g. high crime rates and poverty
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Why is ‘price stability’ a main objective for the government in its aim to provide macro stability?

A
  • 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
  • Too high an inflation rate can lead to redistribution of income and loss of international competitiveness, and it also discourages foreign investment
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is a price index?

A

An index number showing the extent to which a price has changed over a month, quarter or year, in comparison with the price(s) in a base year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is a consumer prices index?

A

The official measure used to calculate the rate of consumer price inflation in the UK

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is a retail prices index?

A

A measure formally used to calculate the rate of consumer price in inflation in the UK

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is indexation?

A

The automatic adjustment of items such as pensions and welfare benefits to changes in the price level, through the use of a price index

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is deflation?

A

A continuing tendency for the average price level to fall

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is disinflation?

A

When the rate of inflation is falling, but still positive

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Why is ‘stable balance of payments on current account’ a main objective for the government in its aim to provide macro stability?

A
  • 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.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is a balance of payments?

A

A record of all the currency flows into and out of a country in a particular time period

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is a current account?

A

Measures all the currency flows into and out of a country for exports and imports of goods and services, together with primary and secondary income flows

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is the important part of the balance of payments called?

A

The current account

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What’re the two main sections of the current account of the balance of payments?

A
  • The money value of exports
  • The money value of imports
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What are two additional sections of the current account of the balance of payments which aren’t the main ones?

A

Primary income and secondary income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is balance of trade?

A

The difference between the money value of a country’s imports and its exports

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What is a balance of trade deficit?

A

When the money value of a country’s imports exceeds the money value of its exports

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What is a balance of trade surplus?

A

When the money value of a country’s exports exceeds the money value of its imports

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What’re the Potential trade-offs between the macroeconomic objectives (in the short run)?

A
  • 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
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

How is ‘economic growth vs inflation’ a potential conflict and trade-off between macroeconomic objectives?

A
  • 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
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

How is ‘economic growth vs the current account’ a potential conflict and trade-off between macroeconomic objectives?

A
  • 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.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

How is ‘economic growth vs the government budget deficit’ a potential conflict and trade-off between macroeconomic objectives?

A

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

30
Q

How is ‘economic growth vs the environment’ a potential conflict and trade-off between macroeconomic objectives?

A

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.

31
Q

How is ‘unemployment vs inflation’ a potential conflict and trade-off between macroeconomic objectives?

A
  • In the short run, there is a trade-off between the level of unemployment and the inflation rate which is illustrated with a Phillips curve
  • 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.
32
Q

Draw a Phillips curve

A
33
Q

What does a Phillips curve show?

A

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.

34
Q

What’re trade-off between policy objectives?

A

Although it may be impossible to achieve two desirable objectives at the same time (e.g. zero inflation and full employment), policy-makers may be able to choose an acceptable combination lying between the extremes, e.g. 2% inflation and 4% unemployment

35
Q

What is policy conflict?

A

When two policy objectives cannot both be achieved at the same time: the better the performance in achieving one objective, the worse the performance in achieving the other

36
Q

What are macroeconomic indicators?

A

They provide information from recent economic performance for judging the success or failure of a particular type of government policy or monetary policy

37
Q

What can macroeconomic indicators be divided into?

A

Lead indicators and lag indicators

38
Q

What are lead indicators?

A
  • They provide information about the future state of the economy
  • E.g. Surveys of consumer and business confidence and investment intentions indicate the existence of a feel-good or feel-bad factor and provide information about the likely state of aggregate demand a few months ahead
39
Q

What are lag indicators?

A

They provide information about past and possibly current economic performance and the extent to which policy objectives e.g. economic growth and control of inflation have been achieved
- Data on the level of GDP, and current and recent employment and unemployment figures, provide examples of lag indicators giving information about current and recent economic performance

40
Q

What data can measure the performance of an economy?

A
  • Real GDP
  • Real GDP per capita
  • Consumer Prices Index and Retail Prices Index (CPI/RPI)
  • Measures of unemployment
  • Measures of productivity
  • Balances of payments on current account
41
Q

How does Real GDP measure the performance of an economy?

A
  • 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
42
Q

How does Real GDP per capita measure the performance of an economy?

A
  • 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.
43
Q

How does the Consumer Prices Index (CPI) measure the performance of an economy?

A
  • 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
  • E.g. Petrol has a higher weighting than tea. Each year, the basket is updated to account for changes in spending patterns
44
Q

How does the Retail Prices Index (RPI) measure the performance of an economy?

A
  • 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.
45
Q

How does the measures of unemployment measure the performance of an economy?

A
  • 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 main measures of unemployment in the UK are: The Claimant Count and the International Labour Organisation (ILO) and the UK Labour Force Survey (LFS)
46
Q

What does the Claimant Count do for measuring unemployment?

A
  • 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
47
Q

What does the International Labour Organisation (ILO) and the UK Labour Force Survey (LFS) do for measuring unemployment?

A
  • 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.
48
Q

How does the measures of productivity measure the performance of an economy?

A
  • Productivity is defined as output per worker per period of time and it measures how efficient production is.
  • Productivity increases if more output can be produced with fewer units of input
  • For example, labour productivity is measured in the UK by output per hour. In the first quarter of 2015, it grew by 0.3%.
49
Q

How does the measures of the balance of payments measure the performance of an economy?

A
  • 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.
50
Q

What’re exports?

A

They 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.

51
Q

What’re imports?

A

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

52
Q

What is the balance of payments made up of?

A
  • The current account
  • The capital account
  • The official financing account
53
Q

What are index numbers?

A

A number used in an index (e.g. the consumer prices index) to enable accurate comparisons over time to be made

54
Q

How are index numbers calculated ?

A
  • A base year is used and is then compared to other years.
  • E.g. 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.
55
Q

How do index numbers measure changes in the price level and changes in other economic variables?

A
  • In the calculation of CPI, different items in the basket of goods have difference weights. Food will have a much larger weighting than clothing, since consumers spend more of their income on food.
  • The index number measures the change in price over time
56
Q

What is the calculation used for CPI that measures changes in the price level and changes in other economic variables?

A
  • (Pn/P0) x 100
  • Where P0 is the price level in the base year and Pn is the price in the year being compared
  • Where Q0 is the quantity of the unit being compared and P0 is the original price of the unit. The total amount spent in the base year is P0 x Q0.
  • The amount spent on each unit in a later year is pn/p0 x 100
57
Q

How are the weights of the calculation of CPI assigned?

A

(Image from physics and maths tutor)

58
Q

What is national income?

A

The flow of new output produced by the economy in particular period (e.g. a year), measured by the flow of factor incomes

59
Q

What is a national product (output)?

A

The flow of new output produced by different industries in a particular period e.g. a year

The value of all the final products and services produced in a country.

60
Q

What is national capital stock?

A

The stock of capital goods (e.g. buildings and machinery) in the economy that has accumulated over time and is measured at a point in time

61
Q

What is human capital?

A

The skills, knowledge and experience possessed by the population

62
Q

What is national wealth?

A

The stock of all goods that exist at a point in time that have value in the economy

63
Q

What national income data is used to assess changes in living standards over time?

A
  • Real GDP is the value of GDP adjusted for inflation.E.g. if the economy grew by 4% since last year, but inflation was 2%, real economic growth was 2%
  • Total GDP is the combined monetary value of all goods and services produced within a country’s borders during a specific time period.
  • 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
  • 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.
  • 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)
64
Q

What’re the limitations/problems of national income data to assess changes in living standards over time?

A
  • The non-monetised economy
  • The hidden economy
  • Quality changes
  • Negative externalities
65
Q

Why is the non-monetised economy a possible limitation/problem of national income data to assess changes in living standards over time?

A
  • In the UK, national income statistics fail to fully capture economic activity due to non-monetised activities like housework and DIY home improvements.
  • When measuring national income, a choice must be made regarding whether to include or disregard the value of such production.
  • Criticism is directed at UK accounts for estimating the value of some non-monetised activities while ignoring others.
    Imputed rents are estimated for housing services provided to owner-occupiers, but housekeeping allowances within households are not, implying housework is unproductive.
  • These judgments create anomalies where national income appears to decrease, for example, when a person marries their housekeeper or conducts DIY instead of employing a decorator
66
Q

Why is the hidden economy a possible limitation/problem of national income data to assess changes in living standards over time?

A
  • Economic activity undertaken illegally in the hidden economy may be omitted
  • The hidden economy refers to all the economic transactions conducted in cash which are not recorded in the national income figures because of tax evasion
  • Because of its nature, it is impossible to make a completely accurate estimate of the size of the hidden economy
  • The gap between the GNP total obtained by the income and expenditure methods of measurement can be used to approximate the size of the hidden economy
67
Q

Why is quality changes a possible limitation/problem of national income data to assess changes in living standards over time?

A
  • Over time, the quality of goods changes for better to worse, presenting a particularly difficult problem in the construction and interpretation of national income figures
  • This is true also of services. When services such as public transport and health deteriorate, GNP may rise even though welfare and real living standards decline
68
Q

Why are negative externalities a possible limitation/problem of national income data to assess changes in living standards over time?

A
  • National income statistics over-estimate living standards because of the effects of negative externalities such as pollution and congestion, and activities such as crime
  • What is in effect a welfare loss may be shown as an increase in national output, falsely indicating an apparent welfare gain
  • E.g. the stresses and strains of producing an ever-higher national output leads to loss of leisure time, and people become ill more often. Loss of leisure and poorer health cause welfare to fall
  • But in the national accounts, these show up as extra production and as extra consumption of healthcare, both of which imply a welfare gain
  • Traffic congestion increases the cost of motoring, and hence the value of national income. Motorists would prefer uncontested roads and less spending on petrol and vehicle wear and tear
69
Q

What’re the uses and limitations of national income data to compare differences in living standards between countries

A
  • 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
70
Q

What are purchasing power parity (PPP) exchange rates?

A

The rates of currency conversion that equalise the purchasing power of different currencies by eliminating the differences in price levels between countries

71
Q

What is the importance of using purchasing power parity (PPP) exchange rates when making international comparisons of living standards?

A
  • 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.
    -E.g., 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.
72
Q

How is economic growth vs inflation conflicts between macroeconomic policy objectives?

A

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.

A-level - Economics Yr13 Mine (7 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions