measures of economic performance Flashcards
economic growth, inflation, unemployment, balance of payments
measures of economic performance (4)
- economic growth
- unemployment
- inflation
- balance of payments
3 major sources of increased costs affecting cost push inflation
- wages and salaries
- imports
- raising indirect taxes and reducing subsidies
costs of high inflation (3)
-high inflation is typically sudden so hard for economic agents to plan for future
-can weaken bop and result in loss of jobs and lower growth
- shoe leather costs
how can inflation weaken bop 3
- price competitiveness of exports decreases
- increasing demand for imports as local goods could be too expensive
- FDI will decrease as other countries will think its too risky
indexation and taxation
for long-term capital gains on investments, it adjusts the purchase price for inflation to reflect a more realistic profit and potentially lower taxes.
costs of deflation (4)
- Consumers might delay purchases, hoping for even lower prices
- Debt Burden Increases
- Business Profits Decline as prices fall
- If prices fall but wages don’t, unemployment can rise.
balance of payment effect on competitiveness of export and import
When inflation rises faster in one country but the exchange rate stays the same, exports from that country become less competitive in foreign markets, while imports from countries with lower inflation become more attractive
key measure of national income
GDP (gross domestic product)
use of GDP (2)
- measure of growth
- measure of living standards
how does economic growth effect living standards
higher economic growth > higher gdp > higher average income > more disposable income > more spending > better living standards
how does economic growth effect unemployment
more demand > more supply for firms > firms need workers > firms hire > unemployment lowers
limitations of gdp (7)
- does not measure non market activities
- does not account for black markets
- excludes negative externalities
- does not concern on standard of
living - there is risk of double counting
- errors of calculating such data
- does not consider income inequality
what is double counting in terms of gdp
the risk of including counting the products of primary sector, but then including it again when a good has been manufactured in the secondary sector using it.
how to overcome the double counting issues?
calculating only the final good value
advantage of gdp
- simple and general indicators that
every countries use to compare - useful for policy makers and
analysts to easily guide economic policy
limitations of gdp / capita (2)
- does not include remittance
- effected by fdi, but usually does not actually effect people of the country
what measure gets around the disadvantages of gdp, why?
gni, as it includes all domestic worker income and subtracts fdi influen
disadvantages of green gdp (2)
- putting monetary value of environmental costs is very normative and varies
- reduces gdp by too much to be feasible for a countries politics
types of measures of economic growth (5)
- gdp
- gdp / capita
- gni
- green gdp
- gva
nominal versus real gdp
- sum total of all production of final goods in the economy
- real gdp is the sum total of all production, but adjusted for inflation and thus, valued at a pre-determined base market price
what does gdp / capita describe and what problem does it try to face
describes benefits of economy on its citizens, helps economy understand the true average standard of living
what is gdp growth an indicator of
gdp growth, or the rate of change of gdp indicates economic growth and living standards
GDP growth measured by the change in total value can be misleading because
Inflation:
Rising prices can make GDP appear higher even if the actual production of goods and services stays the same.
why use real gdp growth?
Focuses on production:
Real GDP growth reflects the actual increase (or decrease) in the physical output of the economy.
disadvantage of gni (3)
- converting foreign currency is difficult as rate changes
- does not focus on well being or social factors
- does not focus on environment
gross value added
gdp minus indirect tax plus subsidies
use of gva
Measure of Production by Industry/Sector
why is national income measured (4)
- to build our understanding of economics
- to forecast changes in economy so all agents can be prepared
- to make comparisons between time and countries
- used to make welfare judgements based on living standards
consumption versus investment in terms of gdp (draw ppc, movement vs shift)
- Higher consumption directly increases GDP because it represents the final demand
- Investment contributes to future GDP growth by expanding the economy’s productive capacity
limitations of using gdp/gni to compare living standards between countries (5)
- quality of national income data varies
- size of unrecorded economy
- quality of goods and services differs
- countries spend different proportions of investments
- exchange rates dont reflect purchasing power
impact of ppp in international comparisons (advantages) (3)
- Compares Living Standards by comparing the relative purchasing power of currencies across countries
- can help us see what goods are cheaper elsewhere
- Focuses on Volume, Not Just Value
impact of ppp in international comparisons (disadvantages) (5)
- PPP is a simplified model and doesn’t capture all aspects of international comparisons
- Consumption patterns vary across countries
- non-tradable goods (like haircuts) can be cheaper in some places
-What’s essential in one country might be a luxury in another - may not be as relevant for short-term financial market fluctuations heavily influenced by investor sentiment and speculation
what does an increase in real gdp suggest
means output in the economy has risen
what do changes in real gdp represent
changes in the volume of national income
distinction between positive economic growth rate and negative
positive economic growth rate suggests a percentage increase in the countries output compared to the last period, whilst negative shows a decrease
Comparing GDP/GNI Growth Rates: Countries (2)
- Compare real GDP growth rates (adjusted for inflation) to get a clearer picture of actual economic expansion.
- Consider GNI for a Broader View
Comparing GDP/GNI Growth Rates: over time (2)
- see how a country’s GDP/GNI growth rate has changed over several years. This gives context to recent performance.
- Consider External Factors
types of transfer payments (3)
- welfare payments
- allowance money for children
- selling second hand goods, no production is involved
effect of transfer payments positive (4)
- can help with income inequality
- Governments can design transfer programs to target specific vulnerable groups, such as the elderly, unemployed, or disabled.
- provide a basic level of financial security
- Transfer programs like educational grants can contribute to a more skilled workforce
negative effects of transfer payments (2)
- certain transfer programs might discourage work because recipients have a guaranteed income
- represent a significant expense for governments.
transfer payments effect on gdp
there is no effect, since nothing new is produced the transaction is not counted
effect of the stock market on gdp
no effect, since no new goods or services are produced, transaction is not counted
the relationship btwn real income and subjective happiness
- there is positive correlation upto a point,
where there is basic needs med and choices available - eventually, people need more like social relationships and health
The Easterlin Paradox
suggesting that after a certain point, increases in real income have a diminishing effect on happiness within a country over time
easterlin relative income and happiness
happiness might be more influenced by relative income (how you compare to your peers) than absolute income (your actual income level).
Benefits of using the HDI (3)
Focus on People
comparison on countries
can truly measure standard of living in terms of non financial factors
disadvantages of HDI (4)
-Averages Don’t Tell the Whole Story
- data collection will be very normative since no objective measurement of happiness
- excludes pollution metrics
- negative externalities are not considered
difference between deflation and disinflation
deflation :
(negative inflation rate). Disinflation: (inflation still positive, but decreasing).
aim of CPI
to measure how much more money a typical household needs to make to buy the same amount of goods at the same time the previous year
dilemma of stagflation
since actions intended to lower inflation may increase unemployment
relationship between CPI and inflation
any extra value over 100 represents inflation %. 120 CPI = 20% inflation
limitations of CPI (4)
- Fixed Basket: Doesn’t reflect changing consumption habits (e.g., substitution effect).
- cant indicate changes in quality of goods
- cant include new goods that dont have a previous base year value
- doesn’t include costs like housing mortage and thus cant accurately depict extra money spent
aim of cpi
attempts to measure how much more money a typical household needs to buy the same basket of goods at the same time currently, compared to the previous year
difference between PPI and CPI (2)
- prices measured by the CPI include sales and excise taxes, while prices measured by the PPI exclude those taxes
- CPI measures the changes of price for consumers, PPI focuses on wholesale prices
the producer price index and indicator of future trends in the rate of inflation (2)
- Because it measures price changes before they reach consumers, can be seen as an earlier predictor (time lag effect )
- if retailers have to pay more for products, they will try to pass on costs to consumers
PPI and its limitation
- only considers domestic goods
causes of inflation (3)-
- demand pull (due to too much demand)
- cost push (due to too much cost)
- excessive growth of money
why excessive growth of money supply cause inflation and vice versa
With more money chasing a limited supply, businesses can raise prices because consumers have more money to spend. This is inflation.
causes of deflation (3)
- falling aggregate demand
- increase in aggregate supply
- fall in money supply
difference between normal supply and demand vs aggregate
- normal looks at singular markets or firms
- agg looks at the whole economy. what producers have producers or consumers have demanded at a certain price level.
how fall in aggregate demand causes deflation
When aggregate demand weakens, it means consumers, businesses, and the government are spending less overall
so less price to reflect that
effect of inflation on investment ( 2 bad ) (1 good)
- less real investment returns so less investment in long run
- Increased Investment Risk as inflation creates uncertainty
- Hedge Against Deflation as it can cause value of asset to fall
effect of inflation on current account of balance of payments (impact on imports) (1)
Inflation pushes up domestic prices, making imported goods and services more expensive. This can discourage imports
effect of inflation on current account of balance of payments (impact on exports) (1)
- ## If a country’s inflation rate is higher than its trading partners, its exports become relatively more expensive
effect of inflation of the government
higher tax revenues
less debt burden
increasing government spending
effect of inflation on firms
lower demand, lower sales
higher cost of production
deters economic growth
effect of inflation on workers
lower real income
lower purchasing power
lower standard of living
why do countries sometimes devalue their own currency (3)
- A weaker currency makes a country’s exports cheaper on the global market
- By making imports more expensive and exports cheaper, less trade deficit
- less debt burden
unemployment is measured using…according to international labour organization
labor force survey statistics
labour force survey statistics
sample survey of households that asks about individuals personal circumstances and activity in labour market to classify
population of working age =?
economically active population + economically inactive population
labor force = ?
those in employment + ILO unemployed
causes of unemployment (5)
- frictional
- seasonal
- structural
-demand deficiency or cyclical
-real wage inflexibility
effect of real wage inflexibility
Nominal wages might adjust somewhat due to raises but not enough to account for inflation, results in stagnant real wages and purchasing power weakens over time
what causes cyclical unemployment
when actual level of output/income is below the long run trend line, or when economy is in recession
demand side causes of unemployment
cyclical unemployment
what is the effect of low demand of labor
leading to a reduction in production and a corresponding reduction in employment.
supply side causes of unemployment (3)
frictional
seasonal
and structural unemployment
Underemployment is often a response to… (2)
- cyclical unemployment as Workers who have lost their jobs in a weak economy are willing to take part-time jobs or accept roles outside of their main skill base
- structural unemployment, unless they learn new skills it will be hard to get new jobs
effect of migration on the economy tht is gaining the workers
to recruit foreign workers means supply of labor has increased, reducing equilibrium price or wage rate
how does migration effect home country workers
they are faced with more competition and lower wage rates
impact of migration of skilled workers (2)
they wld transfer knowledge that promotes innovation
would transfer knowledge to home country people, thus making more skilled workers
impact of migration for the country migrated from (2)
- remittance payments are significant income source as its taxed
- source of foreign exchange
costs of unemployment to society (3)
- cld lead to increased crime as people need sources of income
- deterioration of neighborhood as people cant afford to take care of it
- shops close down so very little choices for consumers
costs of unemployment to govt(4)
- increased walfare payments
- less income tax so less govt rev
- low gdp
- transfer payments like education
costs of unemployment to resource utilization (use ppc curve here) (1)
- the loss of output that those unemployed workers couldve produced
- ppc inside the curve
costs of unemployment to firms (2)
- represents loss of demand
- long term unemployment reduces pool of skilled workers and people either couldnt afford to be educated or have outdated education so firm cant hire
costs of unemployment to consumers (2)
- less disposable income
- less choice
impact of unemployment on resource utilisation
- taxpayers paying money to unemployment benefits is not a loss for the economy, its a transfer payment and helps in the redistribution of income.`
significance of employment rate changes (like if employment rate is high / low ) (analysis)
high employment rate indicates a strong economy with businesses expanding and creating jobs.
This leads to increased consumer spending, economic growth, and tax revenue for the government
significance of high unemployment rates
indicates a weak labor market with more people looking for work than available jobs.
This can lead to lower wages, decreased spending, and social unrest.
significance of economic inactivity rate
indicates if a significant portion of the working-age population actively seeking work
what accounts is balance of payments comprised of (3) / current account balance
current acc + capital acc + financial acc
what does current acc measure (3) WE ARE MEASURING VALUE NOT QUANTITY
- trade balance of an economy (trade in goods and trade in services)
- income
- transfer payments
balance of trade surplus or deficit
export > import - surplus
import > export - deficit
balance of trade calculation
balance of trade in goods + balance of trade in services
trade surplus widening positives 3
- economic growth
- Stronger Currency
- Improved Current Account Balance
trade surplus widening negatives 2
- lower domestic demand as stronger currency cld make imported goods cheaper
- might not be sustainable in the long run
economic growth and trade surplus 2
- increased jobs
- increased export
exchange rate and balance of payments
- current account deficit (imports exceeding exports) can lead to a weaker domestic currency. This happens as there’s a higher demand for foreign currency to pay for imports.
foreign investment and bop
- needed when current account deficit
- might attract foreign capital to finance the gap. This inflow of investment can boost economic growth
foreign investment negative
- but also increases external debt.
evaluation of bop effects (3)
- size of imbalance
- composition of trade. -> surplus in high-tech exports is more beneficial than a surplus in raw materials
- Sustainability -> deficits can be financed for a while so its ok sometimes, surplus might be unsustainable
