Measurement of Macroeconomic Performance Flashcards
what is the acronym for macroeconomic objectives ?
TIGER
what does TIGER stand for?
Trade (x=m)
Inflation (stable, 2%)
Growth (sustainable, 2.5%)
Unemployment (stable, 4%)
Redistribution of wealth (equal)
what are the main macroeconomic indicators ? (ways the government track how their meeting their objectives)
GDP (real, nominal, per capita)
inflation rate (CPI, RPI)
claimant count & LFS
current account
what is the measure for economic growth ?
GDP
what is the difference between real and nominal GDP ?
real - adjusted to inflation
nominal - not adjusted to inflation
what is GDP per capita ?
value of GDP per head
(GDP/population)
measures output per person in the economy
what is inflation ?
Inflation is a sustained increase in the general/average price level of an economy
what are the measures of inflation ?
CPI & RPI
what does CPI stand for, and what is it ?
consumer price index
measures household purchasing power,
(basket of goods are taken each year and the prices of each good are compared to the previous years price).
what does RPI stand for, and what is it ?
retail price index
CPI + housing costs
(mortgage interest, council tax)
what are the two measures of unemployment ?
claimant count
&
labour force survey (LFS)
what is the claimant count, how is it measured ?
counts the number of people who are claiming unemployment related benefits (JSA), they have to prove they are actively looking for work.
what is the labour force survey (LFS), how is it measured ?
sample of 100,000 people (chosen randomly) are asked a series of questions to figure out whether they are:
- unemployed
- employed
- part-time employed
- economically active
(willing and able to start working in the next 2 weeks)
what is the measure for productivity ?
output per worker per period of time
(measures the efficiency of workers)
what makes up the balance of payments ?
current account
capital account
financial account
what does the current account consist of ?
trade of goods & services
what do index numbers measure ?
the comparison between years, and to measure the magnitude of change overtime.
what is the index numbers calculation ?
(current year/ base year) x 100
what is the target rate of economic growth ?
and why?
2-3%, growth at this rate is less likely to cause excessive demand-pull inflation
what does strong economic growth look like ?
higher incomes
lower unemployment rates
better government budgets
what is the target rate of inflation ?
2% (CPI)
what is the target rate of unemployment ?
4-5%
why is it impossible to achieve 100% employment ?
there will always be a level of frictional unemployment (the time unemployed between leaving one job to find and pursue another)
when real GDP increases what happens to the unemployment rate ?
it falls
when real GDP decreases what happens to the unemployment rate ?
it rises
what is the current account ?
It represents the flow of trade (exports - imports) in goods and services
what does the government aim for in the current account ?
equilibrium (exports = imports)
what happens if the governments expenditure exceeds its revenue (expenditure > revenue) ?
there is a budget deficit
how does the government get rid of this debt ?
it has to be financed through the public sector (taxation, decrease in government spending)
what happens if government debt becomes too high ?
lenders being to lose confidence in the governments ability to repay the debt
the government will have to raise the interest rate it offers to lenders, which makes borrowing more expensive
what macroeconomic objectives does economic growth conflict with ?
inflation
(prices for remaining resources bid up, and expansions in AD)
current account
(economic growth leads to higher incomes, leading to increased consumption and imports)
environmental sustainability (pollution, negative externality,)
what are macroeconomic indicators ?
metrics that are used to measure economic progression towards a macroeconomic objective
what is the difference between nominal and real GDP ?
real GDP is adjusted to inflation, nominal is not
what is GDP per capita ?
The real GDP is divided by the total population
what is consumer price index (CPI) ?
measures the change in the price of a fixed basket of consumer goods bought by a typical household
what is retail price index (RPI) ?
CPI + house purchasing costs
what is the formulae for CPI ?
(cost of basket in year X / cost of basket in base year) x 100
what is the labor force survey (LFS) ?
An extensive survey is sent to a random sample of households every quarter (60,000 households in the UK)
Respondents self-determine if they are unemployed based on the following ILO criteria:
- Ready to work within the next two weeks
- Have actively looked for work in the past month
what is the claimant count ?
number of people claiming job seekers allowance (JSA) or unemployment related benefits
what does the balance of payments measure ?
the inflows and outflows of money in a country
what causes a budget deficit ?
gov spending > tax revenue
what is an index number, and why do economists use it ?
a tool economists use to track changes in prices, quantities, or economic activities over time.
it makes economic comparisons between countries easier.
what is the basic formula for index numbers ?
(x year/ base year) x 100
Worked example:
An economy’s GDP increased from $500 billion in 2017 to $540 billion in 2019. Using 2016 as the base year, establish the value of the index for GDP in 2018 and comment on its significance
Step 1: Calculate the Index for 2019 using the formula
index for 2019 = (real GDP 2019/ real GDP base year) x 100
index for 2019 = ($540 billion/ $500 billion) x 100
index for 2019 = 108
Step 2: Comment on the value
The value of the GDP has increased by 8 percent in this period
how do you calculate CPI ?
(cost of basket in current year/ cost of basket in base year) x 100
from the CPI how do you calculate the inflation rate ?
(new CPI - previous CPI) / (previous CPI) x 100
what is the definition of national income ?
total value of the new output of an economy over a period of time
what does a fall in national income indicate ?
the economy is going into a recession
what does a rise in national income indicate ?
the economy is experiencing economic growth
what is GNI ?
it represents the total income earned by a country’s residents, domestically and abroad
what is the formula for GNI ?
GDP + (net income from abroad)
what are 3 evaluations can we get from national income data ?
- compares changes in living standards
- evaluates effectiveness of economic policy
- compares data across countries
why can comparing living standards between countries using GDP per capita be inaccurate ?
currency values are different
what is the target rate for economic growth in the UK ?
2.5%
what do governments aim for, in terms of economic growth ?
sustainable economic growth in the long run
why may developing economies aim to increase economic development before economic growth ?
economic development will improve living standards, increase life expectancy and improve literacy rates.
what is the governments target rate for frictional unemployment ?
3%
what do governments aim for, in terms of unemployment ?
to be as near to full employment as possible.
why is the target rate for inflation in the UK 2% ?
provides price stability for firms and consumers, and will help them make sustainable and rational decisions in the long run.
why is a balanced balance of payments on the current account important for the economy ?
means the country can sustainably finance the current account, which is important for long-term growth.
why is a balanced government budget important for the economy ?
ensures the government can keep control of state borrowing to finance a deficit in the budget, so national debt does not escalate.
why is there a conflict between unemployment and inflation ?
in the short run, when economic growth increases unemployment falls due to more jobs being created.
However, this causes wages to increase, which can lead to more consumer spending and a subsequent increase in average price level.
(demonstrated through Phillips Curve)
what is the Balance Of Payments ?
a record of all financial transactions made between consumers, firms and the government from one country with other countries.
states what has been spent on imports.
states the value of exports.
what is GNP ?
(Gross National Product)
measures the total value of goods and services produced by a country’s citizens, regardless of where they are located.
what are some limitations of national income data (GDP) ?
- GDP does not give any indication of the distribution of income. therefore living standards can be difficult to infer from GDP alone.
- large hidden economies such as the black market, which are hidden and not accounted for in GDP.
what is purchasing power parity (PPP) ?
the theory that estimates how much the exchange rate needs adjusting so that an exchange between countries is equivalent.
