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 of GDP —> shows what certain goods/services are worth
- volume of GDP —> shows the number of goods/services that are produced
ways GDP can be measured:
- output (O) —> final value of all goods/services produced in an economy in a year
- income method (Y) —> adding up all factor incomes earned in the economy in a year (wages, profit, interest and rent)
- expenditure (E) —> C + I + G + (X - M)
- output = income = expenditure
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 - it does not consider the income earned by its citizens outside of the country
- GNI - income earned by citizens operating outside of the country + the GDP
- GNP - GDP + income from abroad - income sent by non-residents to their home countries
growth comparisons between countries:
- changing GDP shows us if a country has grown or shrunk over a period of time
- using real GDP is than nominal GDP as it takes inflation into account
- using real GDP per capita is better as it takes the population into account
PPP (purchasing power parity)?
PPP (purchasing power parity) - an exchange rate of one currency in terms of another which compares how much a typical basket of goods in the country costs compared to one in another country (allows us to see cost of living)
example:
- if a basket of goods cost $150 in vietnam (once the currency has been converted) and the same basket of goods cost $450 in the usa, the purchasing power parity would be 1:3 - cost of living is higher in the usa
what is the big mac index?
- big mac index —> currency is exchanged and compared to price of big mac in the usa
limitations of using GDP
- informal activity —> black and hidden markets where people work without declaring their income to avoid tax or to continue claiming benefits —> GDP is underestimated
- some countries are inefficient at collecting or calculating data —> comparisons can become less effective
- environmental factors aren’t included in GDP —> if they were included then living standards would be lower than what GDP suggests
- other quality of life aspects —> e.g. education and healthcare
relationship between real incomes and subjective happiness
national happiness:
- national happiness is measured by the ONS
- happiness focuses on health, relationships, freedom from corruption, satisfaction at work etc
relationship between incomes and 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
calculating inflation using CPI:
- expenditure survey is carried out by the ONS —> a ‘consumer basket’ of the most popular goods/services is formed
- goods/services in the basket are weighted based on the proportion of household spending
- 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)
limitations of CPI:
- many errors in data collection - respondents gave no incentive to fill in the survey carefully and accurately
- some countries may use CPI to measure inflation whilst others may use RPI - difficult to make comparisons between countries
- only measures changes in consumption on an annual basis - changes in consumption occur more frequently
- the CPI provides a level of inflation for the average basket and the basket of many households is not the average basket
RPI:
- 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 such as council tax, mortgage interest payments
- inflation measured using the RPI is usually higher than the CPI
causes of inflation:
- demand pull —> aggregate demand increases so prices increase (SRAS and AD diagram with AD shifting)
- cost push —> COP increases for firms —> increased prices are passed onto consumers (SRAS and AD diagram with SRAS shifting)
- growth of money supply —> leads to a fall in IR - ROR on savings fall - increased consumption - AD shifts - inflation
- 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
effect of inflation on individuals, workers, businesses and government
firms:
- exports are less internationally competitive
- decreased profits for firms
consumers:
- lower purchasing power - reduces disposable income - consumption falls
- decrease in the real value of savings
government:
- exports are less internationally competitive - current account deficit worsens
- decreased profits for firms - less tax revenue for the government
- trade-offs involved in tackling inflation e.g reducing inflation may increase unemployment/reduce economic growth
- lower purchasing power - fall in living standards e.g. poverty - government has to spend more - could lead to a budget deficit
workers:
- wage price spiral
- fiscal drag - incomes are rising in line with inflation - pay rise may mean that workers get dragged into higher tax bands
unemployment
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 ILO - survey conducted by the ONS to class people as employed, unemployed or economically inactive based on ILO definition of unemployment and employment - the same survey is used globally so it’s useful for making international comparisons
negatives of LFS:
- sampling errors due to small sample
- discouraged workers (hidden unemployed) aren’t included in the unemployment rate as they’re not seeking work anymore
- doesn’t tell us about disparities e.g. race and gender etc - prevents us from addressing inequalities in the labour market
distinction between unemployment and underemployment:
- unemployment - someone of the working age, who is willing + able to work and actively seeking work but cannot find a job
- 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
causes/types of unemployment:
- structural unemployment (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
- cyclical unemployment/demand deficient unemployment - happens due to fall in AD e.g. when the economy goes into recession —> AD falls —> 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)
- real wage unemployment —> wages are forced above equilibrium in a labour market (minimum wages) - creates excess supply of labour
impact of migration on employment:
- immigrants usually fill vacancies that the local citizens cannot (or will not) fill e.g. dangerous jobs
- migration - increased population - increased consumption - AD increases - output increases - labour is a derived demand - employment increases
- migration - supply of labour increases - wages decrease - lower wages incentivise firms to hire more workers - employment increases
impact of migration on unemployment:
- immigrants may displace some domestic workers
- migration - supply of labour increases - wages decrease - lower wages for current employees - people may choose to claim unemployment benefits instead of working - unemployment increases
effects of unemployment:
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
government:
- increased government spending on unemployment benefits - budget deficit
- increased government spending on retraining
- fall in tax revenue
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
society:
- increased crime
- areas of unemployment often see a fall in demand for goods/services - further loss of jobs
balance of payments
- balance of payments - a record of a country’s transactions with the rest of the world
- it’s called the BoP as the current account should balance with the capital/financial account and be equal to zero e.g. if the current account balance is positive, then the capital/financial account balance is negative (and vice versa)
components of the balance of payments:
- current account - record of a country’s transactions with the rest of the world in goods, services, income, and transfers
- capital account - all transactions related to savings, investment and currency stabilisation
- financial account - all transactions related to savings, investment and currency stabilisation
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
- transfers —> e.g. government paying aid to other countries
- visible exports/imports - goods
- invisible exports/imports - services
- balance of trade in goods and services = balance of trade + balance of invisibles
- current balance = balance of trade in goods and services + net income and current transfers
current account deficits/surpluses:
- current account surplus - exports are greater than imports
- current account deficit - imports are greater than exports
index numbers
what are index numbers:
- 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
