Measures Of Economic Performance ✅ Flashcards
Comparison of growth rates, why they must be evaluated
How well off the country is in the first place
How much of the output is self consumed, farmers
Methods of calculation and reliability of data
Relative exchange rate, ppp
Composition of government spending
Use of ppp
When values are expressed in accordance with the amount thay the currency will buy innthe local economy
This allows us to compare standard of living
Basket of goods / big mac index
Exam q
Limitations of using GDP to compare living standards between countries
Hidden economy- farmers consuming output Informal economy- volunteering in charity shop, is output of service Currency values Income distribution Size of the public sector spending Population size Quality of products Quality of life due to high GDP Consumer vs capital spending Happiness - Easterlin paradox
Calculating the rate of inflation
- survey of what people buy, virtual basket, (LCF) each item is weighted due to spending
- survey is then taken of price changes
Limitations of CPI
- only measures for average household, top/bottom 4% are excluded
- sampling problems
- list of items is changed once a year but taste changes quicker
- anomalies, non drivers and vegetarians
- quality of good changes, new phone
Alternative ways of measuring inflation
CPIH - involves house and rental prices
RPI - unique to UK, cannot even used internationally, takes into account changes in mortgage prices and interest rates
Types of inflation
Demand pull - AD goes out increasing the price level
Cost push- cost of production goes up, AS shifts in, price level increases
Increase in money supply, QE
Exam Q what are the effects of inflation
Firms, government, consumers, workers
Firms- technically can reduce wages, halt investment, have to push prices up, reduces competitiveness ( exports and imports), decreased investment from abroad
government- reduces pay for those on benefits, reduces interest rate+cost of borrowing,
consumers- reduces value of savings, increases spending, debt decreases, those on fixed incomes lose out
workers- wage “cuts”
Employment and unemployment
Labour force- number of people who are in work or are actively looking and are ready to work
Working age population- everyone between 16-64
Economically inactive- people with a job that are not looking for one
Measures of unemployment
ILO/labour force survey: questionnaire sent round every moth asking who is unemployed
Claimant count: number people people claiming JSA
Underemployment
When a person is employed but wants to work more hours
Frictional unemployment
People who are unemployed between jobs, or beginning to look for jobs after entering the workforce
Structural unemployment
Measure of the workers who will lose jobs due to declining industries and do not have the skills to move sector
Seasonal unemployment
Unemployed at certain times of the year
Ski instructors , holiday reps
Significance of migration
Net migration= immigration minus emigration
If immigration fills vacancies employment increases
If immigration displaces people from work or do not find work unemployment increases and employment stays the same
Factors effecting the rates of employment , unemployment, inactivity
School leaving age
Number of people entering further education
Number of people working above retirement age
Level of net migration
Availability of jobs
Level of taxes and benefits
Real wage unemployment
Measure of people who are unwilling to work at going rates
Classical view, believes that wages being kept above market clearing rate is the main cause of unemployment
Demand deficient unemployment
Caused by lack of aggregate demand in the economy such as during a recession
Effects of unemployment ( to different people)
Costs to consumers- people have less income, living standards fall
Costs to firms- less profits
Costs to workers- if workers are out of work for a long time they may lose their skills, or skills may become out of date
Costs to government- government have to pay more benefits and will receive less revenue
Costs to society- economy less productive due to unused resources, increased cru,e
Current account
Takes into account
Exports minus imports
Investment income- reward for investment in other countries
Current transfers- payment of money across international boundaries that has no corresponding output e.g wages paid to uk millitary working in another country
Financial account
Records money flow for investment purposes , and hot money which is speculative movement of money between countries as exchange rates and interest rates change
Effects of current account imbalances
Could be a sign living standards are rising
Currency might fall in value
Sign that country might be becoming uncompetitive, which can cause unemployment
Higher taxes to deal with more expensive imports
Functions of the price mechanism
Rationing device - resources are scarce, price mechanism allocates these resources to those who are willing to pay the most, price will rise and fall until Eq is reached
Incentive device- price rising is an indication for firms to produce more, due to rising prices firms can cover the extra cost involved with increasing output
Signalling device- indicates change to producers
benefits of economic growth
Firms - profit due to greater CS
consumers - incomes and wealth/assets rise, people get better jobs, spend more
Governments- more tax revenue, unemployment may be lower so spending on benefits decreases
Government may spend on increasing living standards for all
Actual Economic growth
An increase in real incomes or real gross domestic product
Actual economic growth
Is an increase in real income or real gross domestic product
Potenital economic growth
Increase im the producitve capacity in a country usually caused by an increase in the labour supply, invesment or productivity
Used to show the output gap between potential and acutal economic growth
Differnce between GDP and GNI
Gdp is the total value of all goods and services produced in a country within a given year.
GNI is GDP plus the net income paid into the country e,g intrest and divedends
Limitaions of using GDP to compare living standards between countries
- Hidden economy- farmers consuming their own output
- informal economy - charity shops volunteer is an output of service but is not recorded
- currency values- debate wether to use GDP or PPP
- Income distrubition- average income per head and median income can be very different
- size of public sector - if public sector spending is a large % of GDP welfare may increase ( large defence spending does not increase welfare)
- consumer and capital spending - capital spending may compromise living standards today for greater living standards in the future
- Quality issues - large spend does not equal good quality
Quality of life- rising GDP and incomes could come at cost of pollution or number of hours worked
national happiness
another limitation of using GDP to measure living standards as money does not equal happiness
GNH- aims to measure quality of life
Easterlin paradox- happiness rises with incomes but only up to a certain point, showing government policy should not just be aimed at economic growth
Differnce between current account and balance or payments
Current account - (exports - imports), investment income, current transfers
Balance of payments- current account + capital & finanical accounts
Macroeconomic objectives
Low unemployemnt
Low and stable inflation
Economic growth at a similar rate to other exonomies
Balance of payments equilibrium
High economic growth tends to mean thay the current account balance becomes a deficit so growth should not be too high
Goverement want export led growth
How Interconnectedness of economies is growing
Economies become interdependant
Proportion of output of an indivudal which is traded internationally economy is trowing
Many people/ companies own assets in other countries
Increased migration between countries
More technology being shared
