Measure of economic performance Flashcards
How might you measure economic growth?
By the rate of change of real GDP (data adjusted for inflation)
How might you measure national income?
GNI (the value of goods produced by a country over a period of time and the net overseas interest payment and dividends)
Why is it difficult to compare rates of growth between countries and over time?
- unrecorded economy size differs
- quality of goods differ
- different income distributions
- market exchange rates dont reflect purchasing power.
What is purchasing power parities (PPP)?
An exchange rate of one currency for another which compares how much a typical basket of goods in one country costs compared to that of another country.
How might you measure the quality of life?
GNH which measures the quality of life, it uses national income as a proxy measure for happiness
What is the easterlin paradox?
That happinesses increases as incomes rise but only to a point, beyond it happiness decreases
What is inflation?
A sustained rise in the general price level
What is deflation?
A fall in general prices
What is disinflation?
when prices rise slower than in past years
How do you calculate the rate of inflation?
Using the consumer price index or retail price index
What is the consumer price index?
A measure that examines the weighted average of prices of a basket of consumer goods.
How do you calculate the consumer price index?
By taking the price changes for each item in the basket of goods and averaging it
What are the limits of CPI?
- Doesn’t include housing costs
- Measures only the cost of living for an average household
- list of items change once a year and fashion changes faster than that
- unrepresentative for people wit atypical spending patterns
What is RPI and what is it used for?
The retail price index is an index used to measure inflation that includes housing costs
What are the disadvantages to using RPI?
Its not reliable for internal comparisons and makes inflation look worse than it is.
What are the causes of inflation?
- Demand pull (increased level of prices caused by increased consumption)
- Cost push (increase in price level due to production costs increasing)
- Money supply (spending power increases resulting in high money supply in the economy)
What are the effects of inflation on:
- consumers
- firms
- the government
- workers
Consumers; - real value of savings fall - purchasing power of fixed incomes fall - value of debt falls Firms ; - loss of international competitiveness - increased uncertainty - decreased investment from abroad Gov ; - redistribution of income - inflation lowers interest rate, cost of borrowing falls - provides cushion against perils of deflation Workers; - difficulties to find work - trade off with inflation and unemployment
How would you measure unemployment?
- The claimant count (the number of claimants of Jobseekers Allowance or other benefits)
- International Labour Organisation (those out of work in the last 4 weeks)
What are the disadvantages of the claimant count?
- Doesn’t fully present the picture of unemployment
- however quick and cheap to obtain data
What are the disadvantages of using the ILO?
Survey data is 6 weeks out of date
What is unemployment?
A situation where someone is willing and able to work but isn’t employed
What is underemployment?
A situation where a worker is employed but wants to work more hours
What factors affect employment?
- School
- net migration levels
- availability of jobs
- level of taxes and benefits
What are the causes of unemployment?
- Structural (declining industry, no transferable skills)
- Frictional (between jobs)
- Seasonal (certain times of the year)
- Cyclical (lack of AD in an economy)
What is the significance of migration and skills for employment and unemployment?
- immigration leads to an increase in employment
- however if immigrants don’t find work or displace other people = employment is unchanged but unemployment increases.
- increased level of skills in labour force = more flexible workers
What are the effects of unemployment to;
- consumers
- firms
- workers
- governments
- communities
- consumers ; less income, lower living standards, lower moral
- firms ; less spending, lower prices, lower profit
- workers ; obsolete and out of date skills
- government ; increased jobseeker benefits, less tax revenue
- community ; lower standards of living, higher crime, civil unrest and social issues
What are the components of the balance of payments?
- current account
- financial account
- capital account
What is the current account in the balance of payments?
Records the trade in goods, services, investment incomes (reward for investment in other countries) and current transfers (payment of money across international boundaries that has no corresponding output)
What does the financial account do?
Records money flows for investment purposes such as FDI and portfolio investments (speculative money between countries)
What is the capital account?
Records changes in net assets in each country, as well as errors and omissions
What is a current account surplus?
Where inflows on the current account of the balance of payments are greater than outflows
When is a balance of payment deficit a problem?
when reserves of foreign currencies begin to run low. thus the country is not paying its way. Its a sign of currency falling in value which is inflationary. Its also a sign the country is becoming uncompetitive.
How do you solve a balance of payments deficit?
Increase taxes and decrease government spending, however it may cause a slowdown in economic growth.
OR
increase interest rate which will increase exchange rate thus lowering competitive exports and increasing imports
