Measurement of macroeconomic performance

Question 1

The main objectives of Govt. Macro policy

Answer 1

Trade Balance, trading should be well balanced between imports and exports and their values. Inbalance can create a surplus or deficit.

Inflation, should be low and stable in order to maintain satisfaction amongst society, uk aim is 2% (+/-1%).

Economic Growth, Sustained increases in the output/ GDP of an economy.

Employment, should be high, however full employment can cause issues as it prevents the movement between jobs.

Redistribution of Wealth, Govt. aim to create ‘fairness’ and prevent the rich-poor divide from becoming too significant.

Question 2

Measuring Economic Growth

Answer 2

The change in national output over a set period of time measured either by; 1. Volume 2. Value, of goods and services.

Change in GDP / Original GDP x 100 = Rate of Economic growth.

Question 3

GDP Calculations

Answer 3

1. GDP = C + I + G + (X-M)
2. Value (£billions) of all G/S produced in a year
3. National output = National Income = National Expenditure

Question 4

Nominal GDP

Answer 4

A GDP figure given without any regard for inflation, ie. in its pure numerical form.

Question 5

Real GDP (rGDP)

Answer 5

A GDP figure which has been adjusted for the rate of inflation in an economy

Question 6

GDP per Capita

Answer 6

Total GDP / Population Size = GDP per Capita
This can be used to assess living standards - sometimes

Question 7

Purchasing Power Parity (PPP)

Answer 7

A measure to compare living standards internationally, accounting for varying exchange rates + costs of living.
PPP is the real value of a set amount of money, ie. how much you can buy with it.

Question 8

Limitations of GDP

Answer 8

Not all economic activity is reflected, ie. illegal trade
The extent of public spending, ie. public healthcare
Income inequality
Working conditions
Environmental costs

Question 9

Index Numbers

Answer 9

Value for current period/ Value for base period X 100

Indexed data is based off of an original (Base) year that is represented as 100, used to compare change over years.

Question 10

Inflation Definition

Answer 10

The general and progressive rise in prices over a period of time.

Question 11

Disinflation

Answer 11

The rate of inflation is slowing down. Ie. 4 % to 3%

Question 12

Deflation

Answer 12

Average prices are falling. Ie. -1%

Question 13

Retail Price Index (RPI)

Answer 13

1. 6,000 households - Living costs and food survey
   - Used to identify what people spend their money on
2. A survey measures the change in prices of a basket of around 700 goods of the most commonly used goods.

The price changes in the second survey are multiplied by the weightings identified in the first survey and converted into index numbers to be compared with previous data.

Question 14

Consumer Price Index (CPI)

Answer 14

Calculated similarly to RPI
Excludes - Mortgage interest payments + Council tax
A larger sample is used to identify the CPI
CPI is the primary measure of inflation in the UK

Question 15

Limitations of measures of Inflation

Answer 15

RPI excludes top 4% of all incomes
CPI excludes mortage interest payments + council tax
The Living costs and food survey can be inaccurate.
The basket of goods only changes annually

Question 16

Uses of CPI + RPI

Answer 16

Employers + Trade Unions can used them to determine wages
Govt. can use them to decide on state pension / welfare payments.
High CPI can suggest low international competitiveness.
Determine actual growth (real not nominal)

Question 17

Unemployment Rate

Answer 17

The number of people out of work as a percentage of the labour force.

Question 18

Unemployment Level

Answer 18

The number of people who are looking for a job but cannot find one.

Question 19

Claimant Count (+ pros/cons)

Answer 19

The number of people claiming unemployment-related benefits from the Govt. (eg. JSA + Universal Credit)

Pros - Data is easily obtained, No cost to obtain data

Cons - Can be manipulated by the Government (eg. raising school age), Excludes people who are not eligable for benefits.

Question 20

Labour Force Survey (+ pros/cons)

Answer 20

The International Labour Organisation (ILO) uses a sample of the population and asks people who are not working if they are looking for work. The total number of people who say yes produces the ILO Unemployment Count.

Pros - More accurate than the claimant count, Internationally agreed upon, making comparison easier

Cons - It is expensive to conduct, The sample may be unrepresentative

Question 21

Reasons to measure unemployment

Answer 21

A high rate of unemployment suggests that the economy is doing badly.
Unemployment leads to lower levels of income and spending.
Signals that there is spare capacity
The Government have extra costs, ie. Welfare payments

Question 22

Balance of Payments

Answer 22

The international flows of money, measured as the value of exports and imports.

Question 23

Disequilibrium in the Balance of Payments

Answer 23

If money flowing in exceeds money flowing out, this is called a surplus
If money flowing out exceeds the money flowing in, this is called a deficit

In recent years, the UK has had a deficit on its balance of payments.

This may signal a country is not internationally competitive.

Question 24

Economic Development Definition

Answer 24

The level of social and human welfare in an economy, ie. the quality of life.

Question 25

Human Development Index (HDI)

Answer 25

The HDI was developed by the UN to rank countries levels of social and economic development. It combines three equally weighted sections;

1. Health - Measured via life expectancy
2. Education - Average / Expected years in School
3. Standard of Living - GNI per Capita / PPP

Question 26

Uses of the HDI

Answer 26

Measure changes in the level of development over time in a country
Compare levels of development in a country

HDI Results;

0.8 < - High levels of development
0.5 to 0.8 - Medium level of development
0.5 > - Low levels of development

Question 27

Critique of HDI

Answer 27

A long life expectancy is not the same as high quality of life, eg. long working hours, limited civil liberty

Time in school does not consider quality of education

Issues with GDP - Inequality, Hidden Economy