Macro 1 - How to Measure the Macroeconomy Flashcards
What are the main objectives of government economic policy?
- Economic growth.
- Price stability.
- Minimising unemployment.
- A stable balance of payments on current account.
What data is commonly used to measure the performance of an economy/
>real GDP, real GDP per capita, CPI, RPI, measures of unemployment, productivity and the balance of payments on current account.
Indicator and objective
- Growth - strong, sustained, sustainable.
- Unemployment - low and full employment.
- Inflation - low and stable, 2% (+/-1%).
- Trade - balanced.
- Distribution of income - ‘fair’ (normative as depends on view).
Economic growth - definition
>An increase in an economy’s productive potential. Usually measured as the rate of change of the GDP, or the GDP per capita.
GDP - definition
>All the goods and services produced by a country (national output).
>Calculate the value (£ billions) of all the goods and services produced in one year.
Nominal GDP - definition
>GDP which hasn’t been adjusted for inflation.
>Misleading as suggests GDP is higher than it is.
Real GDP - definition
>GDP which has been adjusted for inflation.
GNI
>Gross National Income.
>GDP plus net income from abroad.
GNP
>Gross National Product.
>Total output of the citizens of a country.
What can GNI and GNP be used for?
>Comparing standards of living.
GDP limitations
>Hidden economy.
>Public spending is different for different governments.
>Extent of income inequality.
>Working hours and conditions.
>Different spending needs, e.g. heating.
PPP
>More accurate and easier comparison.
Inflation - definitions
- The sustained rise in the average price of goods and services over a period of time.
- Or it can be seen as a fall in the value of money.
Deflation
>Fall in the average price.
Disinflation
>Slowing down of the rate of inflation.
Hyperinflation
>Prices rise extremely quickly and money rapidly loses its value.
How is inflation measured?
>Retail Price Index.
>Consumer Price Index.
Retail Price Index
>Living Costs and Food Survey then it measures the changes in price of around 700 of the most commonly used goods and services.
>Basket of goods reflects what households may spend money on.
Consumer Price Index
>Slightly different to RPI as it excludes, mortgage interests and council tax.
>Slightly different formula.
>Larger sample of the population is used.
>CPI is the official measure of inflation in UK and is used for international comparisons.
CPI vs RPI
>CPI tends to be a little lower except when interest rates are really low.
Uses of RPI and CPI
>Help determine wages and state benefits and measures changes in UK’s international competitiveness.
>If the CPI is higher in UK than others then UK price is less competitive.
Unemployment
>The level of unemployment is the number of people who are looking for a job but cannot find one.
>The rate of unemployment is the number of people out of work (but looking for a job) as a percentage of the labour force.
When is unemployment rate used?
>Different population sizes.
How is unemployment measured
- Labour Force Survey.
- Claimant Account.
Claimant Account
>Number of people claiming JSA.
>Monthly, easy to obtain, can be manipulated, excludes thos not eligible for JSA but that are seeking work.
Labour Force Survey
>More accurate.
>Internationally comparitable.
>Run by ILO (International Labour Organisation).
>Less up to date.
>Expensive.
>May be unrepresentative of whole population as it takes a sample.
Types of unemployment
- Seasonal
- Structural
- Frictional
- Cyclical
Cyclical unemployment
>When economy is in recession.
>Labour is derived from demand, demand falls, less labour is needed.
Seasonal unemployment
>Demand for certain industries isn’t the same all year round.
>Regular.
>Predictable.
Structural unemployment
>Difference in jobs available and the skill levels of the unemployed.
>Decline in industry.
>Negative Multiplier Effect.
Frictional unemployment
>Unemployment experienced by workers between leaving one job and starting another.
>Time lag.
What does full employment do?
>Maximises production.
>Raises standards of living/
>Used to measure health of an economy.
Underemployment
>Has a job, but it doesn’t utilise a person’s skills, experience or availability to best effort.
Balanced trade/ balance of payments
>A record of a country’s international transactions, i.e. flows of money in and out of a country.
Current account
>Current account on the balance of payments = a part of the record of a country’s international flows of money.
>It consists of trade in goods, trade in services, international flows of income (salaries, interest, profit and dividends), and transfers.
What does UK’s balance of payments show?
- Large deficit on balance of visible trade - UK imports more goods than it exports.
- Small surplus on balance of invisible trade - UK exports slightly more services than it imports.
- A surplus on flows of investment income.
- A deficit in transfers - e.g. UK makes foreign aid payments.
>£ - 25, 200 million (2019).
Productivity
>The average output produced per unit of a factor of production, e.g. labour productivity would be the average output per worker or hour-worked.
>The higher the productivity, the higher economic growth.
What is productivity affected by?
The amount and sophistication of capital equipment used by workers.
What does productivity measure?
>How efficiently a company or an economy is producing its output.
Index Numbers calculation
>Value for current period/value for base period x100.
Index Numbers
>Quick and easy data comparisons.
>Base year always has an index value of 100.
>Tell us rate of increase but not able to compare actual figures.
>Compare rate of change with different sets of data - e.g. £ and $,
