measurement of macroeconomic performance Flashcards
(40 cards)
what are macroeconomic objectives
goals set by government + what government aims to achieve for the whole economy
- govt aims to achieve macroeconomic objectives through the macroeconomic policies
list the main macroeconomic objectives
economic growth
low unemployment
low inflation
balance of payments
macroeconomic objective- economic growth
-‘rate of change of a country’s output’ –> key measure= GDP over 1 year
- govts aim to have sustainable economic growth for the long run
- UK long run trend= 2.5%
benefits of economic growth:
- job creation, rising incomes, improved standards of living, improved consumer + business confidence (to spend + invest), lower govt spending on benefits, tax revenues likely to increase= more money for infrastructure etc
macroeconomic objective- low unemployment
- unemployment= actively seeking for work but unable to find a job
- govt aim to have as near as full employment as possible –> as full employment is impossible due to ppl moving between jobs
benefits: increase consumption, increase standard of living, improved productivity, reduced poverty, social benefits (less crime etc) etc
macroeconomic objective- low inflation
inflation- ‘the rate of change in price in an economy’ measured by CPI and CPIH
- affects value of £s in your pocket, workers wage demands + consumer confidence
- inflation target= 2% in UK govt (Bank of England is responsible)
–> this includes a target for price stability
–> inflation must be in a range of +/- 1% of the target 2%
macroeconomic objective- balance of payments
- measures UK economies activities with other countries
- if exports > imports= surplus
- if imports > exports= deficit
–> deficits have to be funded so surplus or equilibrium is desired
how much does it matter?
- UK runs in a sustained deficit in trade of goods (but more of a surplus in services) BUT overall= sustained deficit
- BUT deficit isn’t just negative + may not be detrimental
–> consumers gain wider choice of goods + services
–> firms benefit from the cheaper/higher quality imports= enhances profits/lowers prices for consumers
other potential macroeconomic objectives
BALANCE OF GOVERNMENT BUDGET
- govt revenue= govt expenditure
budget surplus= revenue greater than expenditure
budget deficit= expenditure greater than revenue
- this controls state borrowing= national debts controlled
PROTECTING THE ENVIRONMENT
- global warming + climate change= govt looks to develop a sustainable future
INCOME EQUALITY
- inequality= unacceptable
- all citizens should access fair wages etc
- income + wealth should be distributed equally= smaller gap between rich + poor
some potential conflicts of macroeconomic objectives
economic growth vs govt budget deficit
- reducing a budget deficit= less expenditure + more tax revenue= fall in AD + economic growth
unemployment vs inflation
- low unemployment as economy grows= wages increase= more spending= increase avg price level
economic growth vs environment
- economic growth= more pollution + manufacturing carbon emissions etc
- these are only some examples
macroeconomic indicators what do they do?
provide a snapshot of economic performance
macroeconomic indicators- short-run + long-run growth
short-run growth- ‘the actual annual percentage change in real national output’ (GDP)
long-run growth- ‘an increase in productive capacity of the economy’
macroeconomic indicators- nominal GDP + real GDP
nominal GDP- the value of goods + services produced in the economy over a period of time
real GDP- the value of goods + services produced in an economy over a period of time taking into account INFLATION
e.g. economy grows by 4% in a year but inflation was 2%= real growth was 2%
calculating GDP:
national expenditure or national income or national output
Real GDP per capita
value of real GDP divided by population of the country e.g. avg output per person in an economy
useful for comparing relative performance of countries as it’s not skewed by population e.g. China have higher GDP than UK
what is GNI how do you calculate it
GNI= GDP + net income from abroad
- total level of income (includes income from abroad unlike GDP)
to compare countries accurately what do you need to make adjustments for?
- INFLATION (real GDP)
- POPULATION (real GDP per capitta)
- cost of living/exchange rates (PPP)
converting from nominal to real GDP
index of comparison year/index of current period x nominal value
diagram for short + long run GDP growth
x-axis= time
y-axis=GDP
- long-run= straight line
- short-run= wiggly line
- want to be at a steady rate of growth
- when there’s growth- GDP is above the trend line)
purchasing power parity (PPP) what is it + how do you calculate it?
- exchange rate is determined by comparing the price of an identical basket of goods between 2 countries
- takes into account cost of living + inflation rates
- actual purchasing power of any currency= the quantity of that currency needed to buy a specific unit of a good/basket of common goods + services in that country
PPP vs GDP + problem of the PPP
GDP per capita= doesn’t compare living standards as accurately due to diff currency values e.g. vietnam may have to pay £1 for something that is £5 in USA= more purchasing power + lower cost of living= better standard of living?
problem of PPP= difficult to truly compare an identical basket of goods in countries due to diff flavours, labour etc
how do you measure inflation?
- consumer price index (CPI)
(now extended to CIPH) - The retail price index (RPI)
CPI
- measures change in price of a fixed basket of consumer goods bought by a typical household
- household purchasing power measured with a family expenditure survey to work out avg spending habits
- basket of goods are weighted according to their importance in familys spending + how often they’re brought
CPIH
- CPI + housing costs (council tax)
RPI
- unlike CPI it includes mortgage interest repayments + council tax
- but now been replaced with CPIH as mortgage payments distort the figure
how do you measure unemployment?
claimant count
labour force survey (ILO)
claimant count
- counts the number of people claiming unemployment related benefits e.g. JSA (Job Seekers Allowance)
–> they have to prove they’re actively looking for work
