Macroeconomics 9. The measurement of macroeconomic performance Flashcards
What is a policy objective?
A target or goal that policy-makers aim to ‘hit’
What is short-run economic growth?
Growth of real output resulting from using idle resources, including labour, thereby taking up the stack in the economy
What is long-run economic growth?
An increase in the economy’s potential level of real output, and an outward movement of the economy’s production possibility frontier
What is gross domestic product (GDP)?
The sum of all goods and services, or level of output, produced in the economy over a period of time, e.g. 1 year
What is real GDP?
A measure of all the goods and services produced in an economy, adjusted for price changes or inflation. The adjustment transforms changes in nominal GDP, which is measured in money terms, into a measure that reflects changes in the total output of the economy
What is nominal GDP?
GDP measured at the current market prices, without removing the effects of inflation
What is Eurozone (Euro area)?
The name used for the group of EU countries that have replaced their national currencies with the euro. Before 2019, 19 of the then 28 EU countries were in the eurozone, though this may change in future ways
What is a recession?
In the UK and many other countries, a recession is defined as 6 months or more of negative economic growth or declining real national output
What is full employment?
According to Beveridge’s definition, full employment means 3% or less of the labour force unemployed. It is the level of employment occurring at the market-clearing real-wage rate, where the number of workers whom employers wish to hire equals the number of workers wanting to work
What is a claimant count?
The method of measuring unemployment according to those people who are claiming unemployment-related benefits (Jobseeker’s Allowance)
What is a Labour Force Survey (LFS)?
A quarterly sample survey of households in the UK. Its purpose is to provide information on the UK labour market. The survey seeks information on respondents’ personal circumstances and their labour market status during a period of 1-4 weeks
What is inflation?
A persistent or continuing rise in the average price level
What is deflation?
A continuing tendency for the average price level to fall
What is disinflation?
Where the rate of inflation is falling, but still positive
What is price index?
An index number showing the extent to which a price, or a ‘basket’ of prices, has changed over a month, quarter or year, in comparison with the price[s] in a base year
What is consumer prices index?
The official measure used to calculate the rate of consumer price inflation in the UK. It calculates the average price increase of a basket of 700different consumer goods and services
What is retail prices index?
A measure formerly used to calculate the rate of consumer price inflation in the UK
What is indexation?
The automatic adjustment of items such as pensions and welfare benefits to changes in the price level, through the use of a price index
What is a balance of payments?
A record of all the currency flows into and out of a country in a particular time period
What is a current account?
Measures all the currency flows into and out of a country in a particular time period in payment for exports and imports of goods and services, together with primary and secondary income flows (previously known as ‘income flows and transfers)
What are exports?
Domestically produced goods or services sold to residents of other countries
What are imports?
Goods or services produced in other countries and sold to residents of other countries
What is a balance of trade?
The difference between the money value of a country’s imports and its exports. Balance of trade is the largest component of a country’s balance of payments on current account
What is a balance of trade deficit?
When the money value of a country’s imports exceeds the money value of its exports
What is a balance of trade surplus?
When the money value of a country’s exports exceeds the money value of its imports
What is balancing the budget?
When government spending equals government revenue (G = T)
What is balancing the budget?
When government spending equals government revenue (G =T)
What is a budget deficit?
Occurs when government spending exceeds government revenue (G > T). This represents a net injection of demand into the circular flow of income and hence a budget deficit is expansionary
What is trade-off between policy objectives?
Although it may be impossible to achieve two desirable objectives at the same time, e.g. zero inflation and full employment, policy-makers may be able to choose an acceptable combination lying between the extremes, e.g. 2% inflation and 4% unemployment
What is policy conflict?
Occurs when two policy objectives cannot both be achieved at the same time: the better the performance in achieving one objective, the worse the performance in achieving the other
What are the main policy conflicts and their associated policy trade-offs?
- Between internal policy objectives of full employment and growth and the external objective of achieving a satisfactory balance of payments (or possibly supporting a particular exchange rate)
- Between achieving full employment and controlling inflation
- Between increasing the rate of economic growth and achieving a more equal distribution of income and wealth
Between higher living standards now and higher living standards in the future. This is a example of an ‘intertemporal’ conflict between enjoying something now, or in the future
Who are Keynesian economists?
Followers of economist John Maynard Keynes, who generally believe that governments should manage the economy, particularly through the use of fiscal policy
Who are pro-free-market economists?
Opponents of Keynesian economists, who dislike government intervention in the economy and who much prefer the operation of free markets
What is monetary policy?
The use by the government and its agent, the Bank of England, of interest rates and other monetary instruments to try to achieve the government’s policy objectives
What is fiscal policy?
The use by the government of government spending and taxation to try to achieve the government’s policy objectives
What is the balance of payments equilibrium?
A situation in which a deficit or surplus on the current account of the balance of payments is exactly matched by capital inflows or outflows in the other parts of the balance of payments
What is a macroeconomic indicator?
- Commonly used to measure the performance of an economy, such as real GDP
- Provides information from recent economic performance for judging the success or failure of a particular type of government policy, e.g. fiscal policy or monetary policy
- Can be divided into lead and lag indicators
- Always presented in the form of statistical data: for example, unemployment and growth figures in the case of lagged indicators and more
What can an indicator also be used for?
To compare the performance of the UK economy with that of competitor countries
What are lead indicators?
They provide information about the future state of the economy, stemming from the way people are currently forming their expectations
What do surveys of consumer and business confidence and investment intentions provide?
Information about the likely state of aggregate demand a few months ahead
What are lag indicators?
They provide information about past and possibly current economic performance and the extent to which policy objectives such as economic growth and control of inflation have been achieved
E.g. Data on the level of GD, current and recent employment, and unemployment figures
What is the accuracy of information provided by performance indicators highly dependent on?
The accuracy of the statistics available from the government and other sources
What is a index number?
A number used in an index, such as the consumer prices index, to enable accurate comparisons over time to be made
- Changes in real GDP, and in other economic variables are usually expressed through this
What do rising levels of inflation encourage?
Households to bring forward certain purchases
What is the problem with a low-interest rate?
It’s a disincentive to save but it is an incentive to spend
What is national income?
The flow of new output produced by the economy in a particular period e.g. a year, measured, by the flow of factor incomes
What is a national product (national output)?
The flow of new output produced by different industries in a particular period, e.g. a year
What is national capital stock?
The stock of capital goods, e.g. buildings and machinery, in the economy that has accumulated over time and is measured at a point in time
What is human capital?
The skills, knowledge and experience possessed by the population
What is national wealth?
The stock of all goods that exist at a point in time that have value in the economy
What is consumption?
Total planned spending by households on consumer goods and services produced within the economy
What is the hidden economy (the informal/underground/black economy)?
All the economic transactions conducted in cash which are not recorded in the national income figures because of tax evasion
What are some problems that surface when using national income statistics to measure living standards?
- The non-monetised economy
- The hidden economy
- Quality changes
- Negative externalities
What limitations does national income data have when comparing living standards in different countries?
- Relative importance of the non-monetised economy
- Exchange rates
- Traded and non-traded goods
What are purchasing power parity (PPP) exchange rates?
The rates of currency conversion that equalise the purchasing power of different currencies by eliminating the differences in price level between countries
What are the advantages of (PPP)?
What are the drawbacks of (PPP)?
