Government economic policy objectives and indicators of national economic performance Flashcards
What is economic growth?
Short run - increase in real GDP
Long run - increase in productive capacity
When a country’s output increases…
unemployment usually falls
What is the labour force?
…
What is the balance of payments?
f
What is sustainable economic growth?
Growth that can continue over time and does not endanger future generations’ ability to expand productive capacity
What is trend growth?
The expected increase in potential output over time. It is a measure of how fast the economy can grow without generating inflation
What is hyperinflation?
An increase rate above 50%
What is nominal GDP?
Output measured in current prices and so not adjusted for inflation
Hoe is
f
How is economic growth measured?
Usually by the annual percentage change in real GDP. (This is the change in the country’s output)
What are the difficulties in interpreting changes in real GDP?
- A rise in output may be exceeded by a rise in population
(economists can then asses real GDP per head) - Done by dividing real GDP by the population - The informal economy (unrecorded economic activity) This means a country’s output is higher than what the official GDP figures suggest. e.g illegal activities, building, electrical installation and repairs, car repairs, plumbing ( all not including all the money they have earned on tax returns )
What are the consequences of the existence of the informal economy?
- Distorts a range of economic activity
(Tax revenue is lower than would be possible if all economic activity were taxed. - This can have consequences for tax rates and government spending)
Economists measure the number of people who are unemployed and from this find the…..
unemployment rate
What is the unemployment rate?
The percentage of people who are jobless, available to work and are actively seeking employment
How is the unemployment rate measured? (calculation)
the unemployed x 100% / labour force
What is the main measure of unemployment in the UK?
The Labour Force Survey
What is the Labour Force Survey?
A measure of unemployment based on a survey using the ILO (International Labour Organisation) definition of unemployment
How many households does the Labour Force Survey survey?
60,000
How often is the Labour Force Survey published?
Every three months
What else does the International Labour Organisation publish other than the Labour Force survey?
Unemployment figures based on the claimant count
What is the claimant count?
The number of people claiming unemployment-related benefits. One of the measures of unemployment (cf. Labour Force Survey)
What are the difficulties of measuring unemployment?
- People whose partners are working or claiming benefits and young people who are under 18 and are looking for work would not appear in the claimant count but would appear in the Labour Force Survey measure
- Some people claiming benefits may not be actively seeking work - (claiming benefits on false pretences)
- The claimant count is not suitable for international comparisons. This is because the categories of people entitled to benefits caries over time and between countries.
What is the main measure of inflation?
The consumer price index (CPI)
What does CPI form the basis of?
The inflation target that the government requires the Bank of England’s Monetary Policy Committee to achieve.
What is CPI?
This is the preferred meaner of inflation which excludes housing costs but includes all households.
What is CPI?
This is the preferred meaner of inflation which excludes housing costs but includes all households.
What are the stages in constructing a weighted price index?
- Selecting a base year
- Sampling more than 6000 households, which are asked to keep a record of their expenditure
- Statisticians decide what to include in the price index and create a ‘shopping basket’ which is representative of 650 goods and services (weights attached)
- Weights reflect the proportion spent on them
- Expenditure weights are held constant for a year
- Items in shopping basket and weights are then reviewed
- Officials visit a range of outlets in country and gather 120,000 price quotations for their 650 items (repeated each month)
- Weights are multiplied by new price index for each category to find change in the price level
Other than CPI, how is inflation measured?
RPI (retail price index)
What is RPI
Retail Price Index
- Measure of inflation that is used for adjusting pensions and other benefits to take account for changes in inflation and frequently used in wage negotiations
What does the CPI exclude?
- all housing costs including mortgage interest payments and council tax
What does the CPI exclude?
- all housing costs including mortgage interest payments and council tax
What are the difficulties in measuring inflation?
- Goods and services may change price but improve in quality
( If the price changes that reflect improvements in quality were to be removed, the inflation rate would be reduced by 1.1 %) - They measure a fixed basket of products - measures do not take into account people’s ability to alter what they buy during the year (people usually move away from buying products that are becoming more expensive, towards those that are becoming cheaper)
What are the difficulties in measuring inflation?
- Goods and services may change price but improve in quality
( If the price changes that reflect improvements in quality were to be removed, the inflation rate would be reduced by 1.1 %) - They measure a fixed basket of products - measures do not take into account people’s ability to alter what they buy during the year (people usually move away from buying products that are becoming more expensive, towards those that are becoming cheaper)
What are the main elements of the balance of payments?
- The current account
- The capital and financial accounts
- Net errors and ommisiona
What is the balance of payments?
A record of a country’s trade and investment with other countries
What does the current account balance include?
- trade in goods
- trade in services
- income
- current transfers
What are the main causes of an increase in the quality of an economy’s resources?
- Advances in technology
- Improvements in education and training
Name the three types of unemployment
- Structural
- Cyclical
- Frictional
What is cyclical unemployment?
Unemployment resulting from a lack of aggregate demand
What is structural unemployment?
A mismatch in the demand for skills as a result in the changing pattern of industry
What is frictional unemployment?
Unemployment arising when people are between jobs
What two categories can inflation be put in?
- demand pull inflation
- cost-push inflation
What is demand-pull inflation?
Increases in the average price level resulting from excessive increases in aggregate demand
What is cost-push inflation?
Increases in the price level resulting from increases in costs of production
What is the balance of payments?
A record of a country’s trade and investment with other countries
When does a current account deficit occur?
When the country’s expenditure abroad exceeds its revenue from abroad
When does a current account surplus occur?
When the country’s revenue from abroad is greater than its expenditure abroad
What is current account balance?
A record of a country’s trade in goods, trade in services, income and current transfers
Why does a current account deficit occur?
- Because a country’s inhabitants have spent more on goods and services from abroad than overseas residents have spent on the country’s productsAND/OR- because there has been a net outflow of investment income
What are the causes of a current account deficit?
- Changes in income at home and abroad- Changes in the exchange rate
What might cause a current account surplus?
- If products are at a high quality, are produced at a low cost and reflect what households and firms at home and abroad want to buy
What are the consequences of a current account deficit?
If a deficit increases, it will reduce AD in the economy. This will lower the economy’s output, be likely to raise unemployment and may put downwards pressure on the price level
What are the consequences of a current account surplus?
The increase in money supply means banks have more money, which can increase bank lending. A rise in the surplus will mean that net exports are increasing. This will raise AD and be likely to push up the exchange rate.
What is the balance of payments?
A record of a country’s trade and investment with other countries
When does a current account deficit occur?
When the country’s expenditure abroad exceeds its revenue from abroad
When does a current account surplus occur?
When the country’s revenue from abroad is greater than its expenditure abroad
What is current account balance?
A record of a country’s trade in goods, trade in services, income and current transfers
Why does a current account deficit occur?
- Because a country’s inhabitants have spent more on goods and services from abroad than overseas residents have spent on the country’s productsAND/OR- because there has been a net outflow of investment income
What are the causes of a current account deficit?
- Changes in income at home and abroad
- Changes in the exchange rate
What might cause a current account surplus?
- If products are at a high quality, are produced at a low cost and reflect what households and firms at home and abroad want to buy
What are the consequences of a current account deficit?
If a deficit increases, it will reduce AD in the economy. This will lower the economy’s output, be likely to raise unemployment and may put downwards pressure on the price level
What are the consequences of a current account surplus?
The increase in money supply means banks have more money, which can increase bank lending. A rise in the surplus will mean that net exports are increasing. This will raise AD and be likely to push up the exchange rate.
What are the consequences of unemployment?
- Lost output
- Lost tax revenue
- Govt. spending on unemployment benefits
- Pressure on other forms of govt. spending
- Costs to the unemployed
- Hysteresis
What is hysteresis?
Unemployment causing unemployment (the longer people are out of work, the more difficult it can be for them to gain another job)
Why is it that the longer people are out of work, the more difficult it can be for them to gain another job?
- The length of time they have been unemployed may indicate that they are not good workers
- The longer someone is unemployed, the more rusty their skills become and the more out of touch they become with advances in working methods and technology
- The long term unemployed people may tend to seek work less actively over time. They may lose work habit and get used to being at home (they also become discouraged by rejection after rejection)
What is long term unemployment?
Employment lasting for more than a year
What are the benefits of unemployment?
- It may give some people time to search for a more rewarding job
- The existence of unemployment makes it easier for firms, wishing to expand, to recruit workers
- Reduce demand-pull and cost-push inflation
What determines how significant the consequences of unemployment is?
- How much unemployment there is
- How long on average people are unemployed
- The benefits provided to the unemployment
- The type of unemployment
- The distribution of unemployment
When does frictional unemployment occur?
All the time - in any economy
What are the consequences of inflation?
- Menu costs
- Shoe leather costs
- Inflationary noise
- Fiscal drag
- Administrative costs
- Uncertainty
- Inflation causing inflation
What are menu costs?
Costs involved in having to change prices as a result of inflation
What are shoe leather costs?
Costs involved in moving money around during a period of inflation in a bid to maintain its real value
What is inflationary noise?
The distortionary effect inflation can have on price signals
What is fiscal drag?
The reduction in disposable income that occurs if tax bands are not adjusted in line with inflation
How could inflation cause inflation?
- If households expect prices to rise in the future, they may seek to buy more items now, increasing AD
What does the significance of a current account deficit depend on?
- It’s size (small percentage of real GDP = unlikely to be significant)
- Duration
- Cause
What may be the consequences of economic growth?
- if an economy is currently using all of its resources, and thus producing on its PPC, the only way it can increase its output is to switch resources from making consumer goods to making capital goods (->opportunity cost)
( in long run, extra capital goods will enable more consumer goods to be made) - If economic growth is achieved in a way that is not sustainable, e.g expansion of heavy industry without regard to controls on pollution, there will be damage to the environment
- May reduce the quality of lives - some people will need to adopt new skills and change jobs, pace of work may also increase (all stressful)
What are the benefits of economic growth?
- Rise in standard of living due to GDP rising and pop. can enjoy more goods and services
- Poverty in a country may reduce without having to redistribute existing income. (higher output raises tax revenue, without having to raise tax and this can be used to improve public services)
(also, poverty may decrease as employment will increase)
What is the exchange rate?
The price of a currency in terms of another currency or currencies
What is the monetary policy committee?
A committee of the Bank of England with responsibility for setting the interest rate in order to meet the governments inflation target
How are most countries exchange rate determined by?
The market forces of demand and supply
( If demand for the currency rises, this will increase the exchange rate, if supply of the currency increases, the exchange rate will fall )
What factors influence the demand for and supply of a currency (and so its EXCHANGE RATE)
- If UK products are internationally competitive
- Changes in income abroad
- Rising incomes at home
- A rise in UK interest rates, relative to other countries’ interest rates
