macro 2.1 - measures of economic performance ✅ Flashcards
GDP?
GDP- total value of goods and services produced within in a year
total GDP- overall GDP for the country
GDP per capita- total GDP/population
real GDP- GDP adjusted for inflation e.g. if nominal GDP is £100bn and inflation is 10% then real GDP is £90bn
nominal GDP- GDP not adjusted for inflation
value —> shows what certain goods/services are worth
volume —> shows the number of goods/services that are produced
GNI and GNP
- GDP may not be the best to measure a country’s output/wealth —> GDP is value of all goods produced inside the country, whether they were produced by citizens of the country or not but it doesn’t consider the income earned by its citizens outside of the country
- GNI - total income earned by a country’s residents, both from domestic and foreign sources
- GNI = GDP + net factor income (income earned by domestic workers/firms abroad - income earned by foreign workers/firms at home)
- GNP - value of goods and services produced by a country’s residents, regardless of whether that production occurs inside or outside the country
PPP (purchasing power parity)?
PPP (purchasing power parity) - an exchange rate of one currency for another which compares how much a typical basket of goods in the country costs compared to one in another country
- comparing basket of goods between 2 diff countries (exactly same goods/services in each basket) —> e.g. UK basket of goods has value of £1000, US basket of goods has value of $1700
- nominal exchange rate: £1 = $1.60
- £ is undervalued against the $
- US will buy UK goods/services —> supply of the $ increases —> demand for £ increases —> leads to appreciation of £ —> reach real exchange rate of £1 = $1.70
what is the big mac index?
- big mac index —> currency is exchanged and compared to price of big mac in the US
- look at price of big mac is USA —> e.g. big mac costs $5 in US and £6 in the UK —> convert £6 into dollars and compare it —> is it cheaper in the UK or the US —> shows us purchasing power of a currency (undervalued or overvalued against ___)
limitations of using GDP to compare living standards
- double counting (including the value of output in the primary sector and then including it again when primary commodity has been manufactured into something) —> inflates GDP figure
- informal activity —> black and hidden markets where people work without declaring their income to avoid tax or to continue claiming benefits// home-produced services e.g. DIY or the service of house-wives/husbands are not recorded —> GDP is underestimated
- some countries are inefficient at collecting or calculating data —> comparisons can become less effective
- negative externalities aren’t included in GDP —> e.g. cost of deforestation and air pollution etc —> if they were included then living standards would be lower than what GDP suggests
- other quality of life aspects —> e.g. education and healthcare
- doesn’t take into account income inequality (e.g. GDP may seem high but most of it could come from very rich ppl whilst there’s lots of people living in poverty)
relationship between real incomes and subjective happiness
6 key factors of UN happiness report?
- real GDP per capita
- health
- life expectancy
- having someone to count on
- perceived freedom to make life choices
- freedom from corruption
Relationship between real incomes and subjective happiness?
- Easterlin paradox - Happiness and income are positively related at low incomes e.g. if you are poor and your income increases, you will be happier, however if you are rich and your income increases, you won’t necessarily feel happier
inflation
inflation- sustained rise in general price levels
deflation- sustained decrease in general price levels (inflation rate falls below 0)
disinflation- prices rising but at a slower rate
causes of inflation?
- demand pull —> aggregate demand increases so prices increase
- cost push —> COP increases for firms —> increased prices are passed onto consumers
- growth of money supply —> if the money supply increases but economic output does not then this can lead to excess demand for goods and services —> result in inflation
what are index numbers and how do we calculate them?
- converts figures into the same form so figures can be compared —> choosing one year for the base year and adjusting all other figures into equivalent figures
- (new figure/base figure) x 100
why does inflation occur?
- consumer price spiral —> consumers anticipate high inflation in the future —> rational consumers will bring forward consumption —> if all consumers act rationally, consumption increases so AD increases —> demand pull inflation occurs
- wage price spiral —> workers bargain for higher wages —> COP increases —> pass this onto consumers via higher prices —> inflation increases —> workers bargain for even higher wages
how to calculate inflation using CPI?
how to calculate inflation using CPI?
- expenditure survey is carried out by the ONS —> a ‘consumer basket’ of the most popular goods/services is formed with the average prices of goods attached
- prices of goods/services are weighted based on % of income spent —> price x weighting determines the final value of the good/service in the basket —> weighted prices are added to give total weighted price of the basket
- base year selected with index value 100
- weighted prices converted into index numbers
- % change calculations to work out inflation rates (difference/original x 100)
- basket is updated yearly —> items that consumers aren’t buying as much will leave the basket and items that are now popular will enter the basket
limitations of CPI?
- Sample size too small
- Some countries may use CPI to measure inflation whilst others may use RPI —> comparisons between countries are less meaningful
- Product quality changes over time so prices change over time and so the comparison with different time periods is less useful
- Inaccuracy when collecting data —> The respondents have no incentive to fill in the survey carefully and accurately
differences between CPI and RPI?
RPI (retail price index) —> calculated in exactly the same way as the CPI but certain goods/services that are excluded from the CPI are included with the RPI e.g. housing costs
difference between CPI and RPI?
* RPI includes housing costs such as mortgage and interest payments and council tax, whereas CPI does not
* RPI excludes the top 4% of income earners and low income pensioners as they are not the average households
effect of inflation on individuals, workers, businesses and government
individuals/workers:
- lower purchasing power —> if incomes don’t rise in line with inflation —> fall in living standards
- erosion of savings —> interest rates aren’t rising in line with inflation e.g. cost of goods increases but savings stay the same —> less incentive to save
- fiscal drag —> incomes are rising in line with inflation —> pay rise may mean that workers get dragged into higher tax bands —> living standards decrease
businesses:
- inflation increases —> COP increases due to materials being more expensive —> exports are less internationally competitive —> demand for exports decreases—> revenue from exports decreases —> current account worsens
- inflation —> COP increases due to materials being more expensive —> firms will pass these costs onto consumers via higher prices —> demand decreases —> profits for businesses decrease (e.g. menu costs changing —> updating menus)
government:
- inflation —> COP increases due to materials being more expensive —> firms will pass these costs onto consumers via higher prices —> demand decreases —> profits for businesses decrease —> less tax revenue
- inflation increases —> COP increases due to materials being more expensive —> exports are less internationally competitive —> demand for exports decreases—> revenue from exports decreases —> current account worsens —> goes against one of the key macro economic objectives
- lower purchasing power if incomes don’t rise in line with inflation —> fall in living standards e.g. poverty —> government has to spend more
unemployment?
unemployment —> someone of the working age, who is willing + able to work and actively seeking work but cannot find a job
types of unemployment?
- cyclical unemployment/keynesian demand deficient unemployment —> happens due to fall in AD e.g. when the economy goes into recession —> demand decreases —> labour is a derived demand —> labour decreases
- frictional unemployment —> occurs when workers are transitioning between jobs (evaluation - not serious problem as it is only short term)
- seasonal unemployment —> when people are unemployed due to time of year e.g. summer and xmas jobs (evaluation - short term so it isn’t serious)
- structural unemployment —> structural unemployment - immobility of labour due to long term change in the structure of an industry (evaluation - more serious form of unemployment due to it being long-term)
2 types:
occupational immobility of labour - skills mismatch
geographical immobility labour - workers not willing/able to move - real wage unemployment —> wages are forced above equilibrium in a labour market (minimum wages) —> creates excess supply of labour
measures of unemployment?
Claimant Count: The number of people in UK claiming unemployment benefits (job seekers allowance)
Negatives of claimant count:
- Difficult to make comparisons between countries —> some countries may not even have unemployment benefits but even if they do, the conditions to claim benefits are very different
- Claimant count tends to be lower than LFS —> not everyone who is unemployed will claim benefits (embarrassment) and not everyone can claim it (if spouse earns a certain amount of income then they won’t be eligible to claim benefits)
- People can fraudulently claim benefits (e.g. providing false information when they’re not entitled to claim it or continue claiming benefits after they have found work) —> inaccurate unemployment figures
Labour Force Survey and International labour organisation: survey conducted by the ONS to class people as employed, unemployed or economically inactive —> the same survey is used globally so it’s useful for making international comparisons —> the LFS use the ILO definition of unemployment and employment
Negatives of LFS:
- Sampling errors due to small sample
- Expensive
- Discouraged workers (hidden unemployed) aren’t included in the unemployment rate as they’re not seeking work anymore
- Inactive groups e.g. early retired, ppl relying on partners income —> not counted in unemployment rates as they’re not willing to work —> don’t meet the definition of unemployment —> however they should be classed as unemployed since they’re not working
- Underemployed are counted as fully employed —> not included in unemployment stats —> in the UK, you only have to work 1 hour a week to be counted as fully employed
- Doesn’t tell us about disparities (differences in unemployment rates) —> e.g. race and gender etc —> prevents us from addressing inequalities in the labour market
underemployment?
underemployment- a situation where an individual is working but their job does not fully utilise their skills or abilities, and/or does not provide sufficient hours or pay to meet their needs
- tends to increase during recessions —> firms reduce staff hours instead of making them redundant so they don’t have to pay expensive redundancies packages —> underemployed have lower incomes —> MPC decreases —> AD decreases
significance of migration on employment and unemployment
Significance of migration on employment
* Immigrants usually fill vacancies that the local citizens cannot (or will not) fill. These tend to be manual labour, dangerous, and low skilled jobs
* The increased supply of labour may push down wages in the economy, especially for low skilled jobs. Lower average wages are an incentive for employers to hire more workers. Employment may increase as a result
* Immigration results in an increased population which increases consumption in the economy. Greater output requires more labour so it creates more jobs
Significance of migration on unemployment
* Immigrants may displace some local workers increasing the level of unemployment
* Migration increases labour supply which can result in lower wages for current employees —> people may choose to claim unemployment benefits instead of working —> unemployment increases
impacts of unemployment on firms, consumers, workers, government and society?
firms:
- long term unemployed lose skills —> smaller pool of skilled people to employ
- decrease in demand for normal goods (positive YED) as people can’t afford things but it may positively impact firms selling inferior goods (negative YED) ✅
- can offer lower wages as people will take the job anyways (and might be more productive as they don’t want to lose their jobs) ✅
- firms benefit from a greater choice —> bigger pool of workers to choose from ✅
consumers/workers
- less disposable income —> lower consumer spending —> AD decreases
- long term unemployed lose skills —> weaker human capital—> people feel discouraged as they can’t find a job —> mental health issues
- if people are unemployed —> loss of income —> living standards decrease —> mental health issues —> government has to spend more on healthcare
government:
- deterioration of government finances —> higher level of government spending on unemployment benefits and spending in areas which suffer from high unemployment e.g. higher depression rates/crime levels —> opportunity costs
society:
- areas of high unemployment often see a fall in demand for goods and services —> this will lead to a fall in income for those working —> disposable income is lower —> consumer spending decreases —> eventually this leads to even more job losses
- social costs —> depression and crime can increase
balance of payments?
balance of payments - a record of a country’s transactions with the rest of the world —> record the amount of money entering and leaving a country —> it’s called the BoP as the current account should balance with the capital/financial account and be equal to zero
components of the balance of payments:
- current account - a component of the balance of payments that records a country’s imports and exports of goods and services, as well as income received and paid out to other countries
- capital account
- financial account
current account split into 4 parts:
- trade in goods —>(negative in the uk as we import more)
- trade in services —> (positive in the uk as we export more)
- income —> income entering and leaving the country e.g. remittances (positive in the uk as more money is entering than leaving)
- transfers —> e.g. government paying aid to other countries (negative as more money is leaving than entering via transfers)
- balance of trade in goods and services = balance of trade + balance of invisibles
- balance of trade - difference between visible exports and visible imports (goods)
- balance of invisibles - different between invisible imports and invisible exports (services) e.g. holidays
- current balance = balance of trade in goods and services + net income and current transfers
- current account surplus —> exports are greater than imports
- current account deficit —> imports are greater than exports
equation for current balance
balance of trade in goods and services = balance of trade + balance of invisibles
balance of trade- difference between visible exports and visible imports
balance of invisibles- different between invisible imports and invisible exports e.g. holidays
current balance= balance of trade in goods and services + net income and current transfers
