MACRO - LS2 - Measures of Economic Preformance (Part 2)

Question 1

Inflation definition

Answer 1

An increase in the average price level in an economy for goods and services within an economy resulting in a decrease in the purchasing power of money

Also seen as a fall in the value of money

Question 2

Disinflation

Answer 2

A fall in the rate of inflation

Still occurs but at a slower rate

Question 3

Deflation

Answer 3

Negative inflation - a fall in the average price level in an economy for goods/services resulting in an increase in the purchasing power of money

Question 4

Deflation effect

Answer 4

People expect prices to drop, wait to buy things, fall in demand in the economy, perpetuates recession

Question 5

Deflation example

Answer 5

Japan

Question 6

Hyperinflation definition

Answer 6

When prices rise extremely quickly and money rapidly looses its value

Question 7

Hyperinflation example

Answer 7

Zimbabwe in 2000, dictator needed money for bribes, printed more money but lead to more money competing for the same goods, prices increased, purchasing power decreased

Question 8

What is CPI & what does it stand for

Answer 8

Consumer price index is the main measure of inflation in the UK & EU - calculated by ONS

Question 9

How is the CPI calculated

Answer 9

• survey is carried out and creates ‘consumer basket’ of 700 most popular goods/services with average prices
• prices are then weighted based on percentage income spent on goods to give weighted price of the basket
• then converted into index no. and inflation rate worked out

Question 10

What is CPIH

Answer 10

CPI but takes into account housing costs like council tax, mortgage interest payments

Question 11

What’s RPI

Answer 11

Retail price index is another measure of inflation

Not used as much as CPI

Question 12

Differences between CPI and RPI

Answer 12

• uses different formula
• RPI uses smaller population sample
• generally CPI is lower and more accurate
• RPI takes into account housing costs - generally higher

Question 13

What is used - CPI or RPI

Answer 13

CPI - matches other countries internationally

Question 14

Limitations of CPI and RPI

Answer 14

• not accurate for a non-typical household - different for low vs high income household
• different household spend differently e.g. difference between single people and households w/ kids
• price may increase due to an increase of quality of good/service
• only changes every year - slow to respond to new products/trends and misses short term changes
• people who respond to the survey may not give accurate responses
• RPI excludes pensioners and highest income households

Question 15

Employment definition

Answer 15

The state of being payed to work for a company/organisation

Question 16

Unemployment

Answer 16

Those who are of working age and are willing to work, and are actively seeking working but don’t have a job

Question 17

Economically inactive definition

Answer 17

Those who are of working age but neither in work or actively seeking it

Question 18

Underemployment definition

Answer 18

When people are working fewer hours then they wish e.g. working 30 hours when wanting 40 a week

Workers who accept jobs that don’t utilise their skills e.g. graduate working at McDonald’s

Question 19

What does LFS stand for

Answer 19

Labour Force Survey

Question 20

What’s the LFS and how does it work

Answer 20

• official measure of unemployment by ONS
• samples population - asks 60,000 households if they are unemployed/employed/economically inactive
• worldwide measurement - easy to compare

Question 21

What does the LFS define unemployment as

Answer 21

• without and wanting a job, actively sought work in the last 4 weeks & available to start in the next two weeks
• out of work, found a job and wanting to start in two weeks

Question 22

Unemployment rate formula

Answer 22

Unemployment rate = (unemployed/economically active) x 100

Economically active = unemployed + employed

Question 23

LFS Advantages

Answer 23

• same methodology as other countries - can compare
• more accurate then claimant count
• criteria is different to claimant count - allows good quality time-series comparisons
• rich data set on many aspects of labour market - includes regional labour market activity

Question 24

LFS Disadvantages

Answer 24

• survey of 60,000 households - causes sampling errors - not everyone unemployed is counted
• always 3% margin of error
• expensive and time consuming
• conducted quarterly - may not pick up on quick changes in labour market

Question 25

What is the Claimant count and how does it work

Answer 25

The unemployed who are registered as able, available and willing to work at the going rate for any suitable job but can’t find employment
They claim benefits:
— Jobseeker’s Allowance (JSA)
— Universal credit (UC)

Question 26

Advantages of claimant count

Answer 26

• produced monthly - timely indicator of economic activity
• easy to classify whether someone is actively seeking work
• cheap - has no cost
• accurate in the sense that an exact no of people who can claims benefits can be calculated/found

Question 27

Disadvantages of claimant count

Answer 27

• there are unemployed people who don’t meet the criteria (U18’s, people with savings, a partner working)
• some people don’t claim it as they are scared to due to the stigma of asking for help with money
• it often underreports unemployment - especially comparent to LFS
• Difference between countries - can’t compare them

Question 28

Groups not included in LFS or Claimant count

Answer 28

• economically inactive (elderly/kids)
• voluntarily unemployed
• migrants/homeless people
• those working in the hidden economy

Question 29

GNP Difference with GDP

Answer 29

GNP is by factors of production in the country
value of goods/services produced in the country