Measurement of Macroeconomic Performance Flashcards
what are the 4 main macroeconomic objectives
Economic growth (2% +/- 1%) -> government aim to have sustainable economic growth in the Long run
Minimising unemployment -> the aim is to have near full employment -> the government account for fictional unemployment (people who are unemployed because they are in between jobs) of around 3%
price stability -> measured at 2% by CPI -> aims to provide price stability for firms and consumers -> help make decisions for the long run
balance of payments on current account -> no large current account deficit -> a balance of payments equilibrium is important as it can sustainably finance the current account (important for long term growth)
why might governments aim to increase economic development before economic growth
In emerging markets and developing economies, governments might aim to increase
economic development before economic growth, which will improve living
standards, increase life expectancy and improve literacy rates.
what are other macroeconomic objectives the government might have
balanced government budget -> e.g. not spending more than earning in tax revenue -> allows the government to borrow cheaply in future as they are seen as reliable as they have control of their finances -> makes repayments easier
greater income equality -> income and wealth distributed equally -> more equitable society
what are the conflicts and trade off between macroeconomic objectives (generally in SR) (can be used as eval)
economic growth vs inflation -> growing economy faces inflationary pressures (e.g. demand-pull inflation)
economic growth vs current account -> during periods of economic growth consumers have high marginal propensity to import -> more likely to be spending on imports -> leads to a worsening of the current account deficit
however, export lead growth e.g. from china and Germany -> means a country can run a current account surplus and have high levels of economic growth
economic growth vs environment -> economic growth causes firms to expand their output and create large amounts of negative externalities e.g. pollution
unemployment vs inflation ->
in SR -> trade off between unemployment and inflation -> illustrated with the Phillips curve
As economic growth increases -> unemployment falls due to the increased derived demand for labour -> this also leads to increased wages -> leads to more consumer spending and increase the average price level
the extent of this trade off can be limited if supply side policies are used to reduce structural unemployment (the skills needed to enter an occupation) -> which will not increase average wages
draw the Phillips curve
As economic growth increases -> unemployment falls due to the increased derived demand for labour -> this also leads to increased wages -> leads to more consumer spending and increase the average price level
diagram:
https://www.google.com/url?sa=i&url=https%3A%2F%2Fwww.economicshelp.org%2Fblog%2F1364%2Feconomics%2Fphillips-curve-explained%2F&psig=AOvVaw2xeBaBA2n7C8itk6J3txl1&ust=1684590847267000&source=images&cd=vfe&ved=0CBAQjRxqFwoTCJik2InEgf8CFQAAAAAdAAAAABAO
what does Real GDP measure
GDP measures the quantity of goods and services produced in an economy (national output) e.g. a rise in economic growth means there has been an increase in GDP
Real GDP is the value of GDP adjusted for inflation -> e.g. if the economy grew by 4% since last year, but inflation was 2%, real economic growth was 2%
what is real GDP per capita
real GDP per capita is the value of real GDP divided by the population of the country
capita - “per head”
essentially means the average output per head in the economy
useful for comparing the relative performance of countries
what is the CPI and what does it measure
the consumer price index (CPI)
measures household purchasing power with a survey
the survey finds out what consumers spend their income on
from this, a basket of goods are created
the goods are weighted according to how much income is spent on each item e.g. petrol has a higher weighting than tea
yearly, the basket is updated to account for changes in spending patterns
what is RPI and what does it measure
RPI is an alternative measure of inflation
unlike CPI, RPI includes housing costs e.g. payments of mortgage interest and council tax
this is why RPI tends to have a higher value than CPI
What are the measures of unemployment
usually difficult to measure employment, some of those in employment might claim unemployment related benefits, while some of the unemployed might not reveal in a survey
two main measures of unemployment in the UK are
-the claimant count
-the ILO (international labour organisation) and the UK labour force survey (LFS)
what is the claimant count
counts the number of people claiming unemployment related benefits, such as the job seekers allowance (JSA)
people claiming have to prove that they are actively looking for work
what is the international labour organisation (ILO) and the UK labour force survey (LFS)
the LFS is taken on by the ILO, directly asking people if they meet the following criteria
since part time unemployed are less likely to claim unemployment benefit, this methods gives a higher unemployment figure the claimant count
what is the definition of productivity
output per worker per period of time, measuring how efficient production is.
Productivity increases if more output can be produced with fewer units of input
e.g. labour productivity is measured in the UK by output per hour. In the first quarter of 2015, it grew by 0.3%
balance of payment on current account records all..
records all financial transactions made between consumers, firms and the government from one country with others
what are exports
goods and services sold to foreign countries, and are positive in the balance of payments (they are an inflow of money into the country as they are goods sold to foreign people)
what are imports
goods and services bought from foreign countries, they are negative on the balance of payments (outflow of money)
what is the balance of payments made up of
the current account
the capital account
the financial account
-the current account on the balance of payments is the balance of trade in goods and services
how are index numbers calculated and interpreted
used to make comparisons between years, and to measure the magnitude of change over time
(raw number / base number) * 100
to get the index number
when does economic growth occur and what does it lead to
when there is a rise in value of GDP (GDP measures the monetary value of goods and services produced in an economy)
Economic growth leads to higher living standards and more employment
opportunities
define nominal GDP
the value of GDP without being adjusted for inflation.
might make economic growth misleading, actual growth may be less due to the inflation
define total GDP
the combined monetary value of all goods and services produced within
a country’s borders during a specific time period.
what does GNP (gross national product) measure
gross national product (GNP) - the market value of all products produced in an annum by the labour and property supplied by the citizens of one country.
It includes GDP + (income earned from overseas assets -incomes earned by overseas residents)
GDP is within a countries borders, whereas GNP includes products produced by citizens of a country, whether inside the border or not
what does GNI (gross national income) measure
value of all producers who reside in a nation
limitations of GDP
does not give any indication of the distribution of income. Therefore, two
countries with similar GDPs per capita may have different distributions which lead to
different living standards in the country
There are also large hidden economies, such as the black market, which are not
accounted for in GDP. This can make GDP comparisons misleading and difficult to
compare
GDP gives no indication of welfare. Other measures, such as the happiness index,
might be used to compare living standards instead or in conjunction with GDP.
