Macroeconomics: Measurement of macroeconomics performance

Question 1

What are the 4 main objectives of government macroeconomic policy?

Answer 1

Economic growth
Minimising unemployment
Price stability
Stable balance of payments on current account

Question 2

What is meant by economic growth?

Answer 2

Rise in the level of GDP

Question 3

What is meant by recession?

Answer 3

2 or more quarters (6 months or more) of negative economic growth mean that demands fall, leading to increased unemployment rate.

Question 4

Why is economic growth a policy?

Answer 4

In the UK, long run term of economic growth is around 2.5% so the Government aims to have sustainable economic growth for the long run.

Question 5

Why may some governments aim to increase economic development before growth?

Answer 5

In emerging markets and developing countries the quality of life is poorer than in advanced countries so Governments focus on improving living standards, increasing life expectancy, and improving literacy rates because that is more important.

Question 6

What % of unemployment are governments aiming for?

Answer 6

Around 3% to minimise unemployment

Question 7

Why is price stability a policy?

Answer 7

In the UK, the Government’s inflation target is 2% and so aims to provide price stability for firms and consumers to help them make decisions.

Question 8

Why is a stable balance of payments on the current account a policy?

Answer 8

Governments aim for the current account to be satisfactory so there is not a large deficit. A balance of payments equilibrium means the country can sustainably finance the current account which is important for long term growth.

Question 9

As well as policies what else may governments have?

Answer 9

Macroeconomic objectives which changes over time

Question 10

Why is a balanced government budget an objective?

Answer 10

Ensures the Government keeps control of state borrowing so that national debt does not escalate. It also allows the Government to cheaply borrow in the future making repayment easier.

Question 11

Why is greater income equality an objective?

Answer 11

Income and wealth should be distributed equitably so the gap between the rich and poor is not too extreme.

Question 12

What can potential conflicts and trade-offs between objectives lead to in the short-run?

Answer 12

A growing economy is likely to experience inflationary pressures on the average price level.

During periods of economic growth, consumers have high levels of spending therefore in the UK consumers have a higher rate of spending money on imports which leads to a worsening of the current account deficit.

Reducing budget deficit requires less spending and more tax revenue which leads to a fall in aggregate demand (AD) leading to less economic growth.

High rates of economic growth results in high levels of pollution and usage of non-renewable resources due to high levels of manufacturing.

Question 13

What does export-led growth mean?

Answer 13

A country can run a current account surplus and have high levels of economic growth.

Question 14

What does the Phillips curve show?

Answer 14

The rate of inflation is on the y-axis and the rate of unemployment is on the x-axis.
As economic growth increases, unemployment falls as there are more jobs created
HOWEVER, this causes wages to increase because there is more spending and there is an increase in the average price level.

Question 15

What are the macroeconomic indicators?

Answer 15

Data that is commonly used to measure performance
of an economy, such as real GDP, real GDP per capita,
Consumer Prices and Retail price indices (CPI/RPI),
measures of unemployment, productivity, and the balance of
payments on the current account.

Question 16

What is real GDP?

Answer 16

GDP measures the quantity of goods and services produced in an economy so a rise in economic growth means there is an increase in national output.
Real GDP is value of GDP adjusted for inflation.

Question 17

What is real GDP per capita and what does it measure?

Answer 17

Value of real GDP/ population of the country
It measures the average output per person in an economy which is useful for comparing relative performance of countries.

Question 18

What are CPI and RPI and what do they measure?

Answer 18

Measures of inflation in the UK
CPI measures household purchasing power with the family expenditure survey which is what consumers spend their income on and so a basket of goods is created. This means that goods are weighed according to how much income is spent and is updated each year for changes in spending patterns.
RPI includes housing costs e.g. payments on mortgage interest and council tax and so has a higher value than CPI.

Question 19

What are the 2 main types measures of unemployment in the UK?

Answer 19

THE CLAIMANT COUNT: counts the number of people claiming unemployment-related benefits but they must prove that they are actively looking for work.
THE INTERNATIONAL LABOUR ORGANISATION (ILO) & UK LABOUR FORCE SURVEY (LFS): Directly ask people if- been out of work for 4 weeks,
are able and willing to start working within 2 weeks, workers should be available for 1 hour per week. (part time unemployment is included)
Since part-time unemployment are less likely to claim unemployment benefits, there is a higher unemployment figure than the claimant count.

Question 20

What is productivity and what does it measure?

Answer 20

Productivity is the output per worker per period of time.
It measures how efficient production is.
It increases if more output can be produced with fewer units of input.

Question 21

What is the balance of payments on the current account?

Answer 21

The record of all financial transactions made between consumers, firms, and the government from one country with other countries.
It states how much is spent on imports and what the value of exports is.

Question 22

What are exports?

Answer 22

Goods and services sold to foreign countries, so is positive in the balance of payments because of the inflow of money.

Question 23

What are imports?

Answer 23

Goods and services bought from foreign countries, so is negative in the balance of payments because of the outflow of money.

Question 24

What is the balance of payments made up of?

Answer 24

Current account- balance of trade in goods and services.
Capital account
Official financing account

Question 25

What are index numbers used for and what do they measure?

Answer 25

Used to make comparisons between years
Measure the magnitude of change over time

Question 26

How are index numbers calculated?

Answer 26

The base year is used which is compared to other years.
e.g. 2015 is the base year, value given=100, inflation rose by 5% between 2015-2018 and so the index number for 2018-105.

Question 27

What are the government policy instruments to achieve these objectives?

Answer 27

Monetary policy- interest rates, quantitative easing
Demand-side policies- fiscal policy (tax, government spending)
Supply-side policies- influence a business or household’s confidence in the economy e.g. education and training, flexibility of markets (limit power of trade unions)

Question 28

What are the primary objectives?

Answer 28

Economic growth- high and sustainable
Unemployment- low
Inflation- low and sustainable

Question 29

What are the secondary objectives?

Answer 29

Budget sustainability
Trade balance- a balance of payments
Environmental sustainability

Question 30

What is the problem with GDP?

Answer 30

Doesn’t take into account the cost of producing that output. A country could have a high GDP but it could be using up all of it’s raw materials, minerals doing so. So it is unsustainable.