economic measures explanations Flashcards
happiness
rise in GDP - people working more to pay for luxuries
government objective and why
economic growth needs to be stable and sustainable . stable growth allows consumers/businesses to plan ahead
sustainable growth means growth occurs without causing environmental damage
government target
economic growth needs to be comparable to other economies at a similar stage of development
GDP measure on previous quarter increases
economy is growing
population increase
economy in contraction
solved - GDP per capita where GDP figure is divided by population
living standards
‘regrettables’ cause increase GDP. increase in police officers, cuz rise in crime, peoples standard of living have fallen
comparing national incomes can be difficult because :
income distributions different =. high levels inequality
populations different- figures adjusted per capita
exchange rates vary
some countries more expensive to live in than others
problems with GDP comparing living standards over time/betwen countries
GDP doesn’t take into account improving quality of technological goods
GDP doesn’t include unofficial/unpaid work
increases in real GDP may not be shared equally among economies population
may be increase in other problems eg pollution
National happiness
In 2007 the OECD World Forum issued a declaration calling for fact-based information that could be used by a society to formulate a shared, comparable, valuation of national well-being. In the UK, the ONS launched its Measuring National Well-being Programme in 2010, to bring together a range of indicators across ten dimensions of the quality of life that would allow the monitoring of well-being through time.
Comparing national income between countries can be difficult
Income distributions may be different= high levels of inequality
Populations different meaning figures adjusted per capita
Exchange rates may vary betw countries
Some countries are more expensive to live in than others
How to alleviate issues of national incomes between countries
Though PPP
Compares cost of living in one country allowing for comparisons to be made in living standards
If real GDP is growing,
this means the value of goods and services being produced is rising. So it should mean, ceteris paribus (everything else equal), that incomes and standards of living are rising.
Benefits of PPP
The PPP exchange rate remains fairly constant year round, so it can be easily compared.
Exchange rates will often get closer to the PPP as time passes.
Knowing the PPP will allow you to track and predict exchange rate relationships.
PPP can help you to examine the relative living conditions of different countries.
Limitations of national income data
Two countries could have the same level of GDP (national income), but the country with a larger population will have a lower ‘average’ GDP per person. So we can improve national income data by looking at GDP per capita (GDP divided by population).
gov objective-inflation
inflation needs to be low and stable
low - prices still rising, incentivising firms to increase supply
stable price levels allow consumers and businesses to plan ahead
Economic indicators-inflation
One reason inflation is an indicator of the strength of the economy is because high and unexpected inflation would mean goods and services are becoming unaffordable as the purchasing power of income falls.
gov target- inflation
inflation needs to be at 2% symmetrical target
leads to confidence in market, leading to increased spending by business and consumers ,c rating economic growth
calculating inflation - basket of goods
720 of most common goods and services nought by average household
updated yearly
calculating inflation - diff retail outlets
180,000 diff prices collected every month from 140 diff locations
calculating inflation - weightings
goods and services placed into categories such as ‘food’
weighed to reflect amount of income spent on them by consumers
inflation - not true reflection of price changes
products increase in price = more technologically advanced
overstates inflation
if products in basket of goods increase in price consumers will stop buying it - so rates not accurate
inflation figures are only averages
basket contains petrol/cigarettes but not everyone in uk drives/smokes
single person wont buy same as family
Causes of cost-push inflation
National minimum wage increases.
Trade union wage increases.
Increase in world commodity prices, e.g. oil price rises globally.
External supply-side shocks, e.g. bad harvest abroad causing the price of wheat to rise.
Rise in indirect taxes, e.g. VAT (if it is passed on to consumers).
Rise in corporation tax (if it is passed on to consumers).
Falling productivity (which causes unit costs to then in that each good costs more to produce)
A growth of the money supply can also cause inflation.
This is because more money is pushed into the economy and therefore the purchasing power of the currency decreases. This leads to price rises.
Government causes of demand-pull inflation
Excessively ‘loose’ fiscal policy: income taxes could be cut too much or government spending be increased too quickly.
Excessively ‘loose’ monetary policy: interest rates could be cut too much or too quickly and Quantitative Easing could be too high.
Causes of demand-pull inflation
Exchange rate depreciation – causes the price of exports to be cheaper in foreign currency terms and thus demand for exports rises. This causes the value of exports to increase, so X-M increases.
Rising animal spirits (confidence) e.g. due to positive wealth effect from rising house prices.
Excessive borrowing.
Global economy experiencing faster growth in incomes and buying a lot of goods from the UK, causing UK exports and AD to rise quickly, causing demand-pull inflationary pressure.
inflation consequences for firms
Business uncertainty – volatile prices means firms may reduce investment because it is riskier.
Falling international competitiveness – a high inflation rate vs main trading partners will mean a country’s exports will be less internationally competitive.
The role of expectations
If inflation expectations rise, this can cause people to spend now to avoid the future higher prices.
This could lead to demand rising, causing prices to rise even further.
Expectations of higher inflation could cause higher inflation: a self-fulfilling prophecy!
two measures of unemployment
are the Labour Force Survey and the Claimant Count.
How Automatic Stabilisers Work
Unemployment benefits would increase government spending when unemployment is high. The government would also receive less income tax and so would not have as much revenue to invest in public services to address the problems caused.
The following could cause a deficit:
Low productivity, meaning the final price of the goods are likely to be higher.
Inflation being higher domestically than abroad, reducing the international competitiveness of domestic goods.
A strong exchange rate, reducing the price of imports and increasing the price of exports.
Non-price factors, such as poor quality of goods and services.
Supply-side constraints, which could cause a lot of goods being imported from abroad.
If a deficit is because of capital goods imports, then ……
If a deficit is because of the purchase of current goods then …
it is likely to be good for future productivity and future growth.
it will be good for the short-term standard of living.
If the USA is running a current account deficit.
To fund this deficit, it has to have a capital account surplus. It does this by selling US government debt (called treasuries) to foreign governments and international private investors.
Effects of a deficit
A current account deficit needs to be financed by a financial account surplus - so it will become a problem if foreign investors stop wanting to purchase assets in that country.
If a country has a free floating currency, the currency will depreciate. This may partially offset the uncompetitiveness of exports.
This will also cause the price of imports to rise though, leading to higher prices for consumers and potentially cost-push inflation.
inflation benefits
-low and stable, demand-pull inflation, may encourage firms to increase output
-if pay rates rise, even by same level as inflation, workers feel valued, more productive
- demand falling - firms avoid redundancy by not increasing wages by inflation rate
inflation effect -UK international competitiveness
UK products more expensive= whole economy less competitive as products become more affordable in other countries
inflation effect- uncertainty in business planning
- prices fluctuate = economy unstable
difficult for businesses to assess future demand = investment reduction
inflation effect- purhcase power of fixed incomes
price level rise - reduce purchasing power people on fixed incomes eg benefits,pensions
increased prices= cant buy as much for their money
inflation effect- unemployment
increase Econ growth = decrease unemployment
leads to price increase
inflation effect-wage-price spiral
cause and effect relationship between rising wages and rising prices/inflation
rising wage = increase disposable;e income , raises demand for goods , price rise
gov objective of unemployment
full employment - situation where those wanting and able to work can find employment ar the going wage rate
any level of unemployment is a waste of resources, means economic growth is lower than it could be and gov have to waste resources by providing welfare payments and job centres
gov target of unemployment
-economists believe naturally occurring rate of unemployment of between 3% and 5%
-due to occupational immobility and geographical immobility deemed almost impossible to achieve full employment
advantages of LFS
true reflection of no people actually employed an unemployed
internationally accepted collection method, allows for comparison
consistent so used by goc to measure performance against target
disadvantages of lFS
subject to sampling errors - doesn’t give accurate data
involves contacting 60000 households= time consuming and costly
advantages of JSA
allows gov to plan their spending, accurate budgets
figure easy to calculate=cheap method of collection
disadvantages of JSA
figure can be manipulated by gov - set criteria for JSA
doesn’t include people who are unemployed but not eligible for benefits
figure is not internationally comparable
increase in employment
more workers
increase in tax revenue (income tax and vat)
increases aggregate demand = economic growth
increase in unemployment
gov loses tax revenue, while having to increase spending on welfare
aggregate demand falls, leading to fall in economic growth rate
iincrease in inactivity …
worse for the country
reduces amount of resources available(labour) and reduces ability to produce goods and services
leads to inward shift of aggregate supply = fall of economic growth rate
costs of unemployment
-lost output
- lost tax revenue
- gov spending on benefits-pressure on finances - opportunity cost
- pressure on other areas, eg sickness, crime,housing
- poor health,poverty
-hysteresis
benefits of unemployment
-encourage look for more rewarding job
-opportunity to return to education and up-skill
-easier for firms to fill vacancies with suitable applicants
-price levels fall, reduce of inflationary pressure
- dissuade workers from seeking wage rises and taking industrial action
causes of deficit on current account
- occurs when countrys people spend more on goods and services from abroad than overseas residents have spent on countrys products
-becuase there has been net outflow of investment income - if incomes falling abroad, demand for countrys exports will fall, rise in incomes at home will contribute to deficit as people will increase spending on imports
-rise in exchange rate also may result in a deficit, as will raise export prices and lower import prices - outflow of investment income occurs if investments that foreign residents have made in country earn more than investment the countrys people have made in other countries
cause of surplus on current account
- occurs when countrys revenue from abroad is greater than its expenditure
-can happen when revenue from exports exceeds expenditure on imports OR because country=net earner of investment income - surplus likely to occur if countrys products = high quality , produced at low cost, reflect what households /firms abroad + at home want to buy
- fall in exchange rate can give rise to surplus as a reduction in value of currency lowers exports prices and raises import prices
- recession also can give rise to surplus as a countrys peoples may cut back on buying products including imports - forcing firms on competing in export markets
consequences of a deficit
- country is consuming more than its producing
- extra income is going abroad
- aggregate demand will fall
-unemployment will increase - price levels will fall
- may lead to fall in exchange rate
- counters debt will increase
consequences of a surplus
- country is consuming less than producing
- leads to net inflow of income
- banks have more money and increase lending
-rise in surplus means net exports increase - aggregate demand will increase
- exchange rate will appreciate
