measures of economic performance Flashcards
what is meant by current account of balance of payments
measures total value of exports - total value of imports
- trade in goods
- trade in services
- primary income
- secondary income
what is the primary balance (investment income)
earnings of foreign investments (interest, profits and dividends) - payments made to foreigners
what is secondary balance (current transfers)
relates to transfers in the form of money/ goods and services (taxes)
what is a current account surplus
implies that a country’s current account is positive (more money is flowing into the country than out)
what is meant by a current account deficit
implies country’s current account is negative (more money flowing out of country than in)
what are the causes of a current account deficit
- currency is too strong relative to other countries (pound can buy many euros = exports from UK are expensive, imports into UK are cheap)
- high rate if inflation relative to other countries (supply-side)
- high wage costs relative to other countries (demand-side)
-high rate of economic growth in country (higher incomes = buy more imports from abroad)
what causes a current account surplus
- currency is too weak relative to other countries (Yuan is low against other countries = China’s exports will be cheap, imports into China will be expensive)
- low rate of inflation relative to other countries
- low wage costs relative to other countries
- low rate of economic growth (less income = buy less imports from abroad = strong incentive for firms in country to export)
what is the distinction between nominal GDP and real GDP
Nominal GDP is the money value of all goods + services produced by a country in 1 year
real GDP is the nominal GDP adjusted for inflation
what is the GNI
gross national income
- measures income received by country both domestically (GDP) and via net incomes from overseas
what is PPP
purchasing power parities
- used to compare GDP in different countries
- compare different currencies to each other
- using homogenous goods (Big Mac)
- shows living standards and purchasing power of indvs
what are the limitations of using GDP to compare living standards between countries
- diff in population
- diffs in rate of inflation
- how much of output is self-consumed
- methods of calculation and reliability of data may differ
- type of spending by gov
- diffs in income distribution
- diffs in exchange rate
what is the rship between real incomes and subjective happiness
- positive rship between income and happiness up to a certain level of income
- once incomes increase beyond that level, marginal gains in happiness fall (Easterlin paradox)
what is inflation
sustained rise in general price level
what is deflation
sustained fall in general price level
what is disinflation
fall in the rate at which general price level is rising
what is the difference between real and nominal incomes
real incomes are incomes adjusted to inflation
nominal incomes is income which isnt adjusted, the earnings of an idnv
what is the CPI
the measure of inflation used for inflation targeting the UK
- doesnt include housing costs, mortgage interest repayments or rent
- used to make international comparisons of inflation rate
- it is an index number
how is the CPI calculated
- info collected from a sample of nearby 7000 households in UK using self-reported diaries of all purchases
- weights are assigned to each item the average household buys, data collected once a month abt changes in the price of the 700 goods - reflect the proportion of income spent on each item in the average shopping basket
- price changes x weights to give PRICE INDEX
- rate of inflation can be measured by calculating the % change in the price index over consecutive years
what are the limitations of CPI as a measure of inflation rate
- doesn’t include housing costs (significant item of expenditure for most UK households)
- some people don’t have representative spending patterns, so might experience cost of living rises by more/ less than average shown by CPI
- list of 700 representative goods are only changed once a year, sudden changes in spending patterns aren’t reflected
- sampling issues due to households might not provide accurate info on their spending and some might not respond to the survey
what is the RPI
- retail price index
- includes interest payments and mortgages but not as reliable as CPI for international comparison
what are the two causes of inflation
demand-pull inflation
- when AD increases at a faster ate than AS
- increased pressure on factors of production
- pressure placed on scarce resource = increased prices (labour)
cost-push inflation
- when SRAS decreases (left shift)
- total costs of production increases
- producers pass on higher costs to consumers via higher prices
- could be caused by:
- rise in price of raw material
- fall in Xchange rate (imports more expensive)
- rise in business tax
- increase wages
what are the costs of high inflation
- lower purchasing power
- savings lose value(could mean fall in living standards and reach financial goals)
- lower export competitiveness
- risk of hyperinflation (employees bargain for higher wages - increase costs of prod = pass on via prices…continuous)
- unemployment
what are the effects of inflation on firms
fall in exports
- international competitiveness falls (exports are expensive in foreign markets)
high rate might make it difficult for firms to set budgets = fall in investment
lower profits - cost-push inflation = lower investment
high inflation may cause MPC to increase interest rates (tight monetary policy) (cost of borrowing increases)
effect of inflation on government
- fall in the real value of national debt = less burden
- more difficult for gov to reduce income inequality because those on fixed incomes will see a fall in the real value of their incomes
- deterioration of the balance of trade - inflation causes fall in international competitiveness, X fall, M increase
what are the SRAS
- change int eh cost of raw materials (rise = decrease in SRAS)
- change in exchange rates (value increases = decrease in LRAS increases)
- change in the tax rates (reduction in employers’ national insurance contributions then the costs for firms fall = SRAS rise
- tariffs level (increase tariff on imports = costs for domestic firms rise = SRAS decrease)
factors influencing LRAS
- technological advances (reduce costs = increase LRAS)
- relative prod changes (improvement = right shift)
- education and skills (increase in LRAS)
- changes in gov regulations (if reduce productive potential = decrease LRAS)
- demographic changes and migration (supply,, skills and cost of labour, increase then increase LRAS)
