Measures Of Economic Performance Flashcards
What does GDP stand for
Gross domestic product
What is gross domestic product (GDP)
GDP is the total market value of the goods and services produced in a country in a year. It is given as a value of production, in the local currency. On its own it is almost meaningless: we need to know how many people there are, what currency is worth in terms of its spending power in the local economy and what the changes have been to the previous measure.
What are the things we need to know about GDP as well as just the value for it to be useful
GDP on its own its almost meaningless, we need to know how many people there are, what the currency is worth in terms of its spending power in the local economy and what the changes have been since the previous measure.
Define production
Production is the value of goods and services produced in a given period of time
What are the two meanings of economic growth
Economic growth can mean actual economic growth and potential economic growth
What is actual economic growth
Actual economic growth is an increase in real incomes or real gross domestic product (GDP)
What is potential economic growth
Potential economic growth is an increase in the productive capacity in a country. This could be caused by an increase in the labour supply, an increase in investment or an increase in productivity.
Although it is a useful measure, potential economic growth is hard to record accurately.
What can potential economic growth be used to show
It can be used to show how an economy is performing relative to its output capacity. Differences between the two are known as the output gap.
What’s the output gap simply
The difference between how an economy is performing relative to its output capacity.
Define productivity
This is usually measured as the output per worker per hour worked
What is GDP the sum of
GDP is the sum of all goods and services produced in a country in a year
It is also the sum of all incomes earned in a country in a year
also it is the sum of all expenditure in a year.
GDP does not include earnings by its residents while outside the country. Consider it as a circular flow of income where for everything that is earned, something must be produced and something must be spent. The government measures all three flows - output, income and expenditure - which should in theory amount to the SAME figure !
However in practice, errors and omissions mean that there are some discrepancies between these three measures of GDP
Increases in GDP signals ….
Increases in GDP are a sign that a country is experiencing increasing incomes, output and spending. On the face of it, this is a good thing because people can have more goods and services, implying that they have a higher standard of living.
However there are many reasons why this may not be the case. If someone earns more, it may be that they work longer hours and have more work pressures, or that they have a higher cost of living such as increased mortgage payments. Pollution is likely to increase as they travel greater distances and there a whole range of external costs that may be incurred
What is actual economic growth
The rate of GDP increase in real terms is known as actual economic growth. It means more spending, higher incomes and higher output in the economy.
if economic growth is measured using GDP, What is GDP useful for when it’s a nominal value
MEANINGLESS
🤭😫😫😫😫
The value is meaningless unless the figures are given in real values, rather than nominal values.
What are real values
Real values have been adjusted to remove the effects of inflation
What are nominal values
Nominal values are the current incomes that are unadjusted for changes in average prices.
Define real values
Values that have been adjusted to remove the effects of inflation. The effects are removed using an index number that represents the changes in prices and the results are called ‘constant values’
Define nominal values
Values that are measured in money terms. Nominal figures are unadjusted ‘current values’
What do we also call real values
Constant values
What do we also call nominal values
Current values
For GDP to have any significance in terms of standards of living, figures must be calculated….
Per capita (per head)
Eg if a country’s income increases 10% but the population increases 20%, people would, on average, be worse off per head.
Tell me distinction between ‘total’ and ‘per capita’ measures
Total is the total GDP or a total value for something in a country/economy
Per capita is per head or per person
Tell me the distinction between ‘value’ and ‘volume’ measures
Another important distinction required when measuring economic growth is to look at values rather than volumes. Firms might achieve higher sales figures because they sell more in volume or number of products, but if those sales are worth less per unit then they are not seeing an increase in the value of their output.
As an example, consider Germany and China. Germany is the biggest exporter in the world by value, whereas China exports much more in terms of volume of goods.
If inflation is 2% and your nominal wages have risen by 2% have your real wages increased
No 📉 they stayed the same
GDP is best measured in real terms…
…. per capita
Is economic growth the only factor that affect standards of living
Standards of living include factors besides economic growth, although economic growth has a part to play in increasing living standards if the increased incomes are spread out across the economy.
What is GDP to do with goods and services and what does it not include
Gross domestic product (GDP) is the total market value of all goods and services produced in the country in a given year. GDP does not include earnings by its residents while outside of the country.
What does GNI stand for
Gross national income
What is GNI
Gross national income is an augmented version of GDP.
GNI is GDP plus net income paid into the country by other countries, for example interest and dividends.
The ‘net income’ is calculated by subtracting profits and Income that goes abroad from foreign owned companies from profits and income earned overseas from locally owned firms.
Tell me about examples of comparison of rates of growth between countries over time
An increase in GDP of 10% in one country does not mean that the country is doing better than a country with an increase of 5%. Similarly, changes over time have a different meaning: for example, increases in GDP in Japan in the 1960s were 10% a year compared to only 4% a year in the 1980’s, but the 1980s figure was based on a much larger economy.
What does an evaluation of growth figures depend on (to do with GDP)
How well off the country is in the first place, ie. it’s level of GDP
How much of the output is self-consumed, so does not appear as GDP
Methods of calculation and reliability of data
Relative exchange rates - do they represent the purchasing power of the local currency
Composition of government spending - is money spent on warfare or on areas that directly affect the quality of life such as education and health?
What do PPPs stand for
Purchasing power parities
What are purchasing power parties
(PPPs) are when values are expressed in accordance with the amount that the currency will buy in the local economy.
What’s ‘GDP at PPP’
Means that the exchange rate used is the one where the same basket of goods in the country, say the UK, could be bought in the USA at this rate of currency exchange.
This makes international comparisons much more helpful because where the cost of living is high it would be expected that the PPP value of GDP would be lower.
In 2018 real economic growth was 8.5% in Ethiopia, 7.1% in India and 1.4% In the uk, are these fully representative figures?
No, these figures may mask several differences not accounted for in GDP statistics
List the limitations of using GDP to compare living standards between countries and over time
Subsistence, barter and the hidden economy
The informal economy
Currency values
Income distribution
Size of the public sector
Consumer and capital spending
Quality issues
Quality of life issues
Tell me how subsistence, barter and the hidden economy is a limitation of using GDP to compare living standards between countries and over time.
If farmers consume their own output, if goods are traded without the price system (eg. by barter) or of goods are paid for without being declared for tax purposes, national income will not reflect the true standard of living. The estimates of the size of the hidden economy is 7% in the UK, 46% in India and 50% in Russia ! 🕵🏼♂️👀
Tell me how the informal economy is a limitation of using GDP to compare living standards between countries and over time
Some output is not recorded because it is not bought or sold, but it is still output.
For example, if a volunteer runs a charity shop this is output of a service, but here is no corresponding income. If someone grows their own potatoes this is output just as if they had bought them, but the home grown ones are not recorded.
Tell me how currency values is a limitation of using GDP to compare living standards between countries and over time
When trying to compare countries, there is difficult in knowing whether to use the official value of a currency (the exchange rate) or the purchasing power of that currency.
Tell me how income distribution is a limitation of using GDP to compare living standards between countries and over time
When comparing countries income per head, some sense of the income distribution should also be taken into account. In some cases, a large proportion of income is earned by a very few, which makes the mean income much higher than the income enjoyed by the ordinary person. In this way, the general standard of living in a country can appear higher than it really is for most people.
Tell me how the size of the public sector is a limitation of using GDP to compare living standards between countries and over time
If much of the spending in the economy is by government, it might or might not improve welfare for the population. The public sector is the part of the economy controlled by the government.
Tell me how consumer and capital spending is a limitation of using GDP to compare living standards between countries and over time
Spending on investment goods might mean standard of living increases in the future, but at the expense of living standards today. It is better to take account of future growth patterns rather than simply considering today’s income, and stark economic growth figures should be broken down to look at the investment element.
Tell me how quality issues is a limitation of using GDP to compare living standards between countries and over time
Spending on schools might be high, for example, but how can we measure quality? Are improving results enough to prove that living standards are rising?
Tell me how quality of life issues is a limitation of using GDP to compare living standards between countries and over time
Rising real incomes may be associated with factors which might reduce living standards, such as differences in the number of hours worked, different levels of air and noise pollution (eg resulting from differences in manufacturing processes) or different levels of stress.
If we just base comparisons of living standards on GDP will they be accurate
No, however, real income growth per head is a good guide to actual growth if these other factors are taken into account.
Instead of using GDP to compare living standards what can we use
We can take into account other measures of living standards apart from material goods and try to measure the quality of life.
How can we measure quality of life
Measure national happiness, rather than just focusing on monetary variables such as GDP
How can we measure national happiness
The Gross National Happiness (GNH) index has been designed in an attempt to define an indicator and concept that measures quality of life in more holistic and psychological terms than only using GDP.
However, the index has only officially been used in Bhutan. In the uk, the ONS measures national well being and reports progress against a set of headline indicators covering areas of our lives including our health, natural environment, personal finances and crime.
What is the Easterlin paradox
Within the area of happiness economics, some people refer to the Easterlin paradox, which is the idea that happiness rises with average incomes, but only up to a point. Beyond this, the marginal, gains in happiness fall, perhaps because people care about relative as well as absolute incomes. One conclusion we may draw from this is that government policy should not be aimed only at economic growth. There are other aims, such as reducing income inequality or external costs, which might have far greater impact on standards of living than having more money.
What is inflation
Inflation is a sustained rise in the general price level. The general price level is measured using an index such as the consumer prices index (CPI)
How do you measure general price level
Using an index such as the consumer prices index (CPI). The reason for using an index is that percentage changes can be shown easily, making effective comparisons possible.
Define inflation
A general and sustained increase in prices, measured by a change in a weighted index of prices such as the CPI
What’s deflation
Deflation is a fall in the general price level. It is a problem for people with debts, because the real payments (having adjusted for lower prices) will become larger. Deflation is a problem because it stops any firm wanting to invest in a country from abroad as the value of output is likely to fall relative to the initial costs and deflation is likely to cause aggregate demand to fall. Why buy an expensive consumer item when you know prices are going to come down?
Define deflation
A fall in the general level of prices, i.e negative inflation
What is disinflation
Occurs when prices rise more slowly than they have done in the past. For example, the rate of inflation might fall from 3% to 2%, meaning that prices are rising but less quickly than they were previously. Disinflation can be a sign that inflation is coming under control, but on the worrying side it can mean that investment and confidence are low in the economy.
Define disinflation
A fall in the rates of inflation, eg prices are rising at a slower rate
What is the first survey to do with expenditure in order to calculate inflation, CPI
The first survey on expenditure involves the collection of information about what people buy, currently known as the Office of National Statistics (ONS) Living Costs and Food Survey (LCF).
This is an annual survey that is used to determine the contents of a virtual ‘basket’ of goods and services that households spend their money on,and the proportion spent on each.
This survey is carried out by the ONS and involves collecting information from a sample of around 7,000 households in the UK using self-reported diaries of all purchases including food eaten out.
Households spend more on some items than others so, for example, a 10% increase in the price of electricity and gas would have a much bigger impact than a similar increase in the price of salt. For this reason weights are attached to the items in price indices. These weights reflect the relative importance of various items in the average shopping basket.
What is the second survey to do with prices about - to calculate the CPI
The second survey is of prices. The price survey is undertaken by civil servants who collect data once a month about changes in the price of the 650 most commonly used goods and services in a variety of retail outlets. Because similar items can be bought in high and low cost shops, a selection of prices is gathered for each item, with 120,000 prices gathered in all. The price changes are multiplied by the weights(from the first survey) to give a price index. You can measure inflation from this by calculating the percentage change in this index over consecutive years.
Why are ‘weights’ needed on items price indices for the CPI (the first survey finds these weights)
Households spend more on some items than others so, for example a 10% increase in the price of electricity and gas would have a much bigger impact than a similar increase in the price of salt. For this reason, weights are attached to the items in price indices. These weights reflect the relative importance of the various items in the average shopping basket.
Define weights
These are attached to the goods and services in the CPI to reflect the relative importance of the various items in the average shopping basket.
Why are there two surveys for the CPI
The first is known as the Office of National Statistics (ONS) Living Costs and Food Survey (LCF), it determined how much households (7000 self reported diaries used) spend on goods and workout weights for the price indices.
The second surveys monitor the change in price of goods of the 650 most commonly used goods at a range of outlets so 120,000 prices are gathered.
The price changes multiplied by the weights give the price index. You can measure inflation from this by calculating the percentage change in this index over consecutive years.
What does CPI stand for
Consumer price index
What’s the UK governments target for CPI inflation
2%
There is a tolerance of one percentage point either way so could be 1% or 3% and be deemed acceptable.
What does the governments target for CPI inflation mean
It is 2% +or - 1%
This means that small price rises are acceptable to the UK government. If prices rises by more than 3% they become a concern, but if they begin to rise by less than 1%, or even fall, then risks of deflation and even a recession might arise.
What’s different about the UKs target for CPI inflation to others
In many other countries and areas such as the eurozone there is a ceiling-only inflation objective. The current UK objective recognises that there are dangers attached to prices being too low (below 1%) as well as too high (above 3%)
What is an issue with the CPI to do with housing costs
The CPI measure does not include housing costs such as mortgage interest repayments or rent. Monthly mortgage payments often form a large part of a households spending and are certainly a cost of living for almost 10 million households in the UK, with average mortgage payments costing 15-20% of income. Therefore, if the CPI rises by only 2% and inflation seems to be under control, a rise in interest rates means that many households will never the less be experiencing the effect of higher mortgage payments, ie the cost of living rises. In this case, a wage rise linked to CPI excludes significant change in living costs.
Tell me an issue of the CPI to do with choosing households to measure
The CPI measures the cost of living only for an average household. The top and bottom 4% brackets are not included, and nor are pensioners.
Tell me an issue of the CPI to do with sampling
There are sampling problems; in 2017, less than 50% of households responded to the survey. In addition, households might not give accurate information about recent spending of various members within the household.
Tell me an issue of the CPI to do with the 650 items chosen to measure prices for
The list of 650 items is changed only once a year, but tastes and fashions change more quickly than this. In addition, the list does not reflect the fact that changes in retail outlets such as ‘buy one get one free’ temporarily change peoples spending habits.
Tell me an issue of the CPI to do with people with atypical spending patterns
For people with atypical spending patterns, such as vegetarians and non-drivers, the CPI is unrepresentative. For example, those who often buy rail tickets may experience a personal inflation well above 2% with recent rises in train fares.
Tell me an issue of the CPI to do with quality of goods
When the quality of goods changes, the measure breaks down because it is not comparing like with like. For example, if someone bought a more expensive mobile phone this year than last year, the price change might not be the result of inflation but because the phone is made to a higher specification.
Despite the limitations, the CPI is a measure that is used to make…
…international comparisons of the rate of inflation
What is the CPIH in essence
A new measure of inflation in the uk
What does CPIH stand for
Consumer price inflation including owner-occupiers housing costs.
Tell me about the CPIH measure for inflation
This measure of the rate of inflation has been the ONS preferred measure of consumer price inflation since March 2017. The main difference between the CPIH and the CPI is that CPIH includes changes in residential rents across the UK. It does not, therefore take into account the changes in the value of UK homes, but more specifically it estimates the amount it would cost all UK homeowners to rent their houses. Unlike CPI, CPIH also includes council tax on its calculations.
Why is the RPI measure of inflation needed
For many people, wage increases are linked to the rate of inflation and, if the CPI measure is used, wage increases will fail to take into account a large part of household expenditure in the form of housing costs. A more appropriate measure for wage increases is the retail price index. (RPI)
Tell me about the RPI as a measure of inflation
This is a more inclusive method than the CPI in that it includes housing costs, but it is not reliable for international comparisons and the statistical method of basing the data is also unique to the UK. Moreover, because the RPI includes the cost of mortgage interest repayments and these will rise when interest rates are raised, any interest rate rise implemented to tackle inflation will have a one off effect of making inflation appear worse, which makes the policy makers look incompetent.
Define retail price index (RPI)
An index used to measure inflation that includes housing costs such as mortgage interest repayments.
Tell me the 3 current uses of the CPI
Used for:
Public sector pension increases
Bank of England inflation target
Some increases in social security benefits
Tell me the 2 current uses of the RPI
Pension scheme increases where rules explicitly refer to the RPI
Regulated to rail fares
Tell me an exam tip to do with not confusing price levels with rates of inflation
Don’t confuse price levels (eg CPI) with rates of inflation. Increases in CPI are inflation, the rate of inflation may fall even when price levels are still rising. If inflation is above zero, but falling, the price level is rising as a slower rate.
What do we need to know about inflation to understand monetary policy
In order to understand how monetary policy works, it is important to consider the causes of inflation. In terms of aggregate demand/ aggregate supply (AD/AS) analysis, inflation can be shown as a shift to the right in AD or a shift to the left in AS.
What is demand-pull inflation
Demand pull inflation is associated with a rightward shift in the AD curve. It may be caused by an increase in any of the components of AD, for example, consumption, government expenditure or net exports.
What is cost-push inflation
A shift to the left in AS is known as cost push inflation and occurs whenever costs of production increase in an economy. These might be for short-term reasons, such as a fall in the exchange rate making imports more expensive, or for longer term reasons, such as higher corporation (profit) taxes.
Define demand pull inflation
An increase in the general level of prices caused by increased consumption, investment, government spending or net exports.
Define cost push inflation
An increase in the general level of prices caused by increased production costs such as a rise in wages or a fall In the exchange rate (imports more expensive)
What did Milton Friedman believe about about inflation
According to monetarists such as Milton Friedman, inflation is ‘always and everywhere a monetary phenomenon’. That is, monetarists believe that inflation is caused by increases in the money supply above the rate of the increase in the real output in the economy. Inflation can be controlled by controlling the money supply, either directly or through the rate of interest.
Define the money supply
The amount of spending power in an economy. It includes cash and bank deposits. Monetarists believe that an increase in the money supply has a direct relationship with inflation.
Who is affected by the costs of inflation
Problems for consumers, firms, the government and workers, but there are also some benefits!
For consumers, tell me all the effects of inflation
The real value of savings falls as prices rise
The purchasing power of those on fixed incomes falls as prices rise.
Those with high levels of personal debt benefit from inflation, as the real value of the debt falls.
For consumers, tell me how the real value of savings falls as prices rise
If the rate of inflation is higher then the rate of interest that people are receiving on their savings, then the real value of their savings will be falling. Also, people of working age are already significantly under-saving in the UK and inflation makes saving even less attractive.
For consumers, tell me how the purchasing power of those on fixed incomes falls as prices rise
For example, pensioners relying on annuities(fixed amounts of money given yearly) for their main living expenditures will find their standards of living decline with inflation.
For consumers, tell me how those with high levels of person debt benefit from inflation, as the real value of the debt falls
The value of a mortgage loan relative to income is likely to fall when the general level of prices rises.
For firms, list the effects of inflation
Loss of international competitiveness
Increased uncertainty
Investment from abroad might decrease
Increased prices might be a sign that firms can make more profits
A little inflation means that real wage differentials can be changed without actually cutting wages in nominal terms
For firms, tell me the affect of inflation to do with loss of international competitiveness
Exports become relatively expensive and imports relatively cheap. The balance of trade is likely to worsen.
For firms, tell me the affect of inflation to do with increased uncertainty
If firms think that costs are rising and fear increases in interest rates, they might curb investment.
For firms, tell me the affect of inflation to do with investment from abroad might decrease
Inflation erodes the value of money, so why buy into a currency that is falling in value?
For firms, tell me the affect of inflation to do with increased prices might be a sign that firms can make more profits
In contrast to the point about investment from abroad decreasing, it might mean that investment is encouraged.
For firms, tell me the affect of inflation to do with ‘a little inflation means that real wage differentials can be changed without actually cutting wages in nominal terms’
The argument is that people will accept wage rises below the rate of inflation but will never accept wage cuts.
For the government, list the effects of inflation
Redistribution of income
Inflation reduces the real interest rate, so the cost of borrowing falls
A little inflation provides a cushion against the perils of deflation
For the government, tell me about the effect of inflation: redistribution of income
Those on fixed incomes will find that they incomes fall in real terms. Those with index linked incomes will not lose out unless they are linked to a fairly unrepresentative measure such as the CPI
For the government, tell me about the effect of inflation: inflation reduces the real interest rate, so the cost of borrowing falls
In February 2019, the Uk government had public sector net debt approaching £1.8 trillion, but the real value of debt falls when there is inflation.
For the government, tell me about the effect of inflation: a little inflation provides a cushion against the perils of deflation
When prices are falling, the economy can run into a vicious circle of underinvestment and reduced spending.
For workers, tell me the effects of inflation
Inflation might mean that some workers expect an increase in their wages but firms do not feel confident about paying higher costs
According to some economists, there is a trade off between wage inflation and unemployment (the short run Philips curve)
For workers, tell me how inflation might mean that some workers expect an increase in their wages but firms do not feel confident about paying higher costs
This is particularly true if firms cannot pass on the higher costs in terms of higher prices.
For workers, tell me how according to some economists, there is a trade off between wage inflation and unemployment ( the short run Philips curve)
This means that if there is high wage inflation, it is easier for people to find work because firms are raising wages only because they cannot choose other workers at lower wages.
What is the level of employment
The level of the employment is the number of people in work
What is the employment rate
The employment rate is the number of people who have a job as a percentage of the working age population
Why will the working age population be larger than the labour force
Because the labour force only includes those people who are working or those of working age who are will and able to work, I.e the employed and unemployed.
What is the working age population in the Uk currently defined as
Those aged 16-64
Define labour force
A measure of people of working age who are willing and able to work.
What are the 2 categories of people within the working age population
The ‘labour force’, or ‘currently active population’. This comprises all persons who are employed and the unemployed
The 2nd type of person in the working age population is the ‘economically inactive’. Economic inactivity measures people without a job but who are not classed as unemployed because they have not been actively seeking work within the last 4 weeks, and/or they are unable to start work within the next 2 weeks. It includes students in full time education, parents looking after a family at home, those who have retired early and those who are too sick to work.
What people are included in the ‘economically inactive’ proportion of the working age population
Students in full time education, parents looking after a family at home, those who have retired early and those who are too sick to work
What is the unemployed
The unemployed are people who are willing and available for work, but are not currently employed.
What is the level of unemployment
The level of unemployment is the number of people out of work, and the rate of unemployment gives this figure as a proportion of the workforce.
Define unemployment
A situation in which someone is willing and available for work, but it currently not employed.
Tell me the 2 main ways of measuring unemployment
The UK labour force survey and the claimant count
Tell me about the International Labour Organisation (ILO) and the Labour Force Survey
The international labour organisation uses the labour force survey, which is now the official measure used in the UK. It is a legal requirement for every EU country to conduct this survey and each country must use the same methods. The sample is made up of approximately 40,000 responding UK households and 100,000 individuals per quarter. The questions include whether anyone in the household has been out of work for 4 weeks and is ready to start in the next 2 weeks. The questions relate to anyone over the age of 16, and it is therefore a more inclusive survey than the claimant count. However, the survey data are 6 weeks out of data by the time they are published, which happens (by sampling) every month.
Define labour force survey
A measure of unemployment calculated using surveys of those out of work in the last 4 weeks and ready to start in the next 2 weeks.
Tell me about the claimant count as a method of measuring unemployment
The claimant count is a measure of unemployment that records the number of people who are claiming Jobseekers Allowance (JSA) or other benefits, such as universal credit, principally for the reason of being unemployed. The claimant count has undergone a number of changes since the introduction of universal credit (UC) in 2013. This has led to some inconsistency in coverage and so this measure has been downgraded to experimental official statistics. There is some stigma attached to claiming benefits, so not everyone who is eligible to claim does so, and many are not eligible because the criteria for the eligibility are tight. For example, if you have resigned from your previous job within the last 6 months or refused three jobs that you have been offered, you cannot claim.
Tell me the 3 different types of Jobseeker’s Allowance (JSA)
‘New style’ JSA
Contribution based JSA
Income based JSA
Which type you can get depends on your circumstances and how many children you have.
Tell me the criteria for receiving JSA (or universal credit)
The criteria is complex and subject to frequent changes. Currently the following criteria are used:
You are at least 18 years old
You are under the state pension age
You are not studying in full time education
You are available and capable of performing work, and you are actively trying to get a job
Tell me a pro and a con of the claimant count
The claimant count does not present the full picture of unemployment. Indeed, the ONS states that the claimant count is not an alternative measure of unemployment.
Nevertheless, it is quick and cheap to obtain these data (they are a by product of the process of administering benefits) and they give a useful measure of hardship - after all, you are not likely to claim JSA If you don’t need the money between jobs.
Define the claimant count
A measure of unemployment using the number of claimants of JSA
Explain to me the concept of underemployment
Many people have some work but not enough hours to give them the pay they would like, or are in jobs that do not pay as much as they expect given their qualifications. For example, a classically trained musician might get some work playing in concerts at the weekends but not every day of the week, and he might have to fill the time working as cleaned to make up his income.
The idea of underemployment became particularly important in the wake of the 2008 global financial crisis and with the growth of zero hour contracts.
Tell me about figures of unemployment in 2018 and trends since 2008.
The number of underemployed workers has been increasing and was estimated to be about 10% of the workforce in 2018.
This means that the figures for employment may be misleading. Following the financial crash of 2008, employment has increased steadily since 2011 and reached over 75% in 2018. But if underemployment is taken into account, then this may be a misleading representation of the state of the labour market.
Define underemployment
A situation in which a worker is employed but wants to work more hours.
List the factors that affect employment
The school or compulsory training leaving age
Number of school leavers entering higher or further education
Number of people who continue to work beyond the state requirement age
Level of net migration
Availability of jobs
Level of taxes and benefits
Tell me how the school or compulsory training leaving age affects employment
In the uk, this rose to 18 in summer 2015. Ceteris Paribus, this would reduce the size of the workforce because anyone in education or training is not counted as economically active. However, in the longer term, it is likely to make school leavers more employable.
Tell me how the number of school leavers entering higher or further education affects employment
Although over 40% of students now carry on in education after 18 in the Uk, this is likely to fall now that many students have to pay substantial sums in university fees.
Tell me how the number of people who continue to work beyond the state retirement age affects employment
In the uk, the number of people over 65 who were working quadrupled between 2007 and 2017, this age group comprises over 1.3% of the workforce (around 1.2 million people). It seems likely that this trend will continue, given that the state pension is low relative to other developed countries.
Tell me how level of net migration affects employment
Net migration is the difference between those coming into the country (immigration) and those leaving (emigration). Most immigrants into the UK come to study (37%) but the second most common reason is related to work (34%)
Tell me how the availability of jobs affects employment
There are likely to be higher levels of employment if there are more jobs available
Tell me how level of taxes and benefits affect employment
If taxes on income are high or out of work benefits are generous, there is a disincentive for people to work.
What is labour inactivity
Over 20% of people of working age in the UK are neither employed nor unemployed. This is known as inactivity and comprises people who are of working age but are either not willing or not able to work. The bulk of inactive people are students in full time (usually further) education and the many people looking after children or other dependants. There are also approximately 3 million people who are not able to work because of incapacity such as a health problem.
Define inactivity
A measure of people of working age who are either unwilling or unable to work
What’s the main problem with the measure of inactivity
It can make the levels of unemployment look lower than they really are. Many students are looking for work to supplement their low incomes while studying, and many people are signed off work with a health problem but who would be willing to work if suitable employment was available. There are many carers of dependants (largely women) who are inactive who would like to work but cannot find employment that would cover the cost of childcare. These people do not feature on the unemployment figures but are a measure of hardship caused by the inability to find a suitable job.
What’s the Classical view of causes of unemployment/ cause of real wage unemployment
There are only unemployed people who are not able and willing to work at the going wage rate. In other words, if people would accept a lower wage they could find jobs.
In this view, all unemployment is therefore just a short term problem and the best solution is laissez faire - that is, to leave it to market forces which will eventually ensure that the problem of unemployment will disappear. If people accept lower wages, the cost of living will fall as firms do not need to charge such high prices, so workers will find the lower wages are acceptable once they start working.
For this reason, it is called real wage unemployment or real wage inflexibility
What is real wage unemployment also known as
The Classical view or real wage inflexibility
What is laissez faire
Leave things to market forces.
What is real wage unemployment
wages have been forced above the market clearing wage, people are not willing to work for less.
People who believe that this is the only cause of unemployment think that out of work benefits should be cut, trade union power should be curtailed and there should not be a minimum wage. Therefore, unemployed people will be forced to work.
Define real wage unemployment
A measure of people who are unwilling to work at the going wage rate. Classical economists believe that wages that are kept artificially above the market clearing wage are a main cause of unemployment.
Tell me the 2 very different views on causes of unemployment (there are more causes than 2)
Classical view or the Keynesian view
Classical view = real wage unemployment
Keynesian view = demand deficient unemployment
Tell me the Keynesian view as the cause of unemployment
People can be unemployed even in the long run. This is because there is insufficient aggregate demand in the economy. If you agree that the economy can be in equilibrium but not everyone has a job, you are arguing that there is demand deficient unemployment.
Keynes said that if people spend too little and save too much, then there will be less demand for goods and services which will result in fewer job opportunities. If people are losing jobs, there will be even less spending and so the vicious cycle continues. Even if wages are cut, there will not be more people employed, - in fact lower wages will mean that there is even less spending, so even fewer people are needed in employment.
Apart from saving too much, tell me the other reasons for demand deficient unemployment
A lack of business confidence
An increase in the value of currency, making a country’s goods less competitive
Slow rates of productivity growth relative to other countries
External shocks such as oil price rises for countries that are net oil importers (oil is imported and demand is price inelastic, so if prices rise there will be less spending in oil importing countries)
Increased consumption of imports from low wage economies
What is demand deficient unemployment also known as
Cyclical unemployment or the Keynesian view
Define demand deficient unemployment
Also known as cyclical unemployment, this is caused by a lack of aggregate demand in an economy such as during a recession. Keynesians believe that demand deficient unemployment can at certain times be a mean cause of unemployment, and fiscal or monetary stimulus may be needed to reduce this.
What is structural unemployment
Another cause of unemployment that is not linked solely to an unwillingness of labour to work at the going wage rate is that the economy is undergoing structural change and therefore different types of labour are required.
The skill set of those, for example, who are trained in manufacturing will not have much value in a business based in the service sector. Clearly, over time, as fewer people are trained for manufacturing and more for services, this kind of structural unemployment will disappear. However, as Keynes said ‘in the long run we are all dead’ (yo wth Dr K. 😢😖), so in the view of many there ought to be proactive policies put in place to deal with both demand deficient and structural kinds of unemployment.
Define structural unemployment
A measure of the workers who lose jobs in a declining industry and do not have the skills to work in other industries.
There will always be…
Frictional unemployment
What is frictional unemployment
There will always be frictional unemployment - people who are moving from one job to another - but this kind of unemployment is a sign of a healthy, flexible labour market with people willing to change jobs in order to improve their prospects.
Define frictional unemployment
Refers to people who are unemployed between jobs or beginning the search for a job after entering the workforce.
What is seasonal unemployment
Seasonal unemployment is problematic in some countries. It refers to people who can find work for some months of the year, such as ski instructors or vegetable pickers, but have trouble finding work at other times of the year. This type of unemployment should be addressed by improving the occupational mobility of labour: an improvement in skills means that these workers could find work in other fields when there is no work in their original field. Also, an increase in geographical mobility might mean they could work in other parts of the country or in other countries. For example, the harvesting period varies according to the climate of a region or country.
Define seasonal unemployment
Refers to people who are unemployed at certain times of the year, such as surfing instructors.
Tell me about the net migration
Migration is a term that looks at both immigration (people moving into a country) and emigration (people moving out of a country). Net migration is immigration minus emigration.
Immigration =
People moving into a country
Emigration=
People moving out of a country
Why might migration occur
It might occur because people are looking for work or better paid work, or because taxes are lower in another country. There are also many social reasons for migration, such as to study abroad, as a result of social and political problems in the original country, to accompany family members or to follow a different lifestyle.
Tell me about the significance/implications of migration
The implications of immigration for employment and unemployment depend largely on the reasons for the migration. If immigrants come into a country to fill vacancies, immigration leads to an increase in employment. However, if immigrants are looking for work and either do not find it or displace other people from work, employment may be unchanged and unemployment (surplus labour) might increase. If immigrants are dependants then there will be no direct impact on employment and unemployment.
The higher the level of skills in the labour force…
The more flexible workers will be if there is a change in the requirements in the labour market. Employed people who are highly skilled are likely to be more able to move between jobs and stay in the market if there are shocks in the market. Unemployed people with high levels of skill and flexibility are unlikely to unemployed for long.
List the effects of unemployment
The cost to consumers
The cost to firms
The cost to workers
Cost to the government
Cost to society as a whole
Tell me about the effect of unemployment: cost to consumers
People will have lower incomes and living standards will fall. However, there is a wider unseen cost as people out of work may become demoralised and their skill sets can quickly become obsolete.
Tell me about the effect of unemployment: the cost to firms
Firms will find that people spend less, so they may have to lower prices and make less profit. However, it may mean that people are more willing to stay in their jobs owing to fear of unemployment, so they may be willing to work harder.
Tell me about the effect of unemployment: the cost to workers
Workers without work might find their skills become obsolete or at least out of date. For example, an office worker who has had some years out might be surprised to go back to work and find a whole need set of technology being used.
Tell me about the effect of unemployment: the cost to government
As unemployment rises, the government has to pay more in social benefits and will receive less in tax revenue not only from income tax and national insurance contributions but also from expenditure taxes such as VAT.
Tell me about the effect of unemployment: the cost to society as a whole
Unemployed resources represent an opportunity cost. The economy could produce more without anything being given up. We could all have better standards of living. Unemployment may be associated with an increase in crime, civil unrest and other social problems. However, you should be careful not to make speedy judgements: a lot of crime such as fraud is committed by people in work and social problems such as binge drinking cannot be easily sustained on the income from social benefits.
What is the balance of payments
The balance of payments is a record of payments between one country and the rest of the world. It comprises the current, financial and capital accounts. The most significant element of it is the current account.
What are the components of the balance of payments
It comprises the current, financial and capital accounts. The most significant element of it is the current account.
What is the current account
The current account records trade in goods, trade in services, increment income and current transfers.
What’s the balance of trade
In the current account, the balance of trade is the difference between the value of goods and services exported and the value of goods and services imported.
Sometimes a distinction is made between the balance of trade in goods (the value of goods exported minus the value of goods imported) and the balance of trade in services (the value of services exported minus the value of services imported)
Tell me about the balance of trade in the Uk
The balance of trade is on the current account. With regard to the trade In goods, the UK is a large exporter of pharmaceuticals and cars, but a major importer of foodstuffs and, since 2005, a net importer of oil and gas. In relation to services, the UK is a major exporter of banking and insurance services, but an importer of foreign holidays (because the British like to go abroad)
What is investment income
Investment income is a measure of interest, profit and dividends that are rewards for capital investments in another country. For example, if a British company builds a factory in Poland, the investment does not appear on the current account, but any dividends appear as a positive figure on the UK current account.
What are current transfers
Refer to the movement of funds for which there is no corresponding trade in goods or services. Examples are taxes paid to the E.U., payments to British military personal working in another country and when economic migrants send some of their income back to their families in another country.
Define investment income
The reward for investments in other countries. It comprises interest, profit and dividends.
Define current transfers
The payment of money across international boundaries that has no corresponding output.
Tell me about current account surpluses
A country such as Germany, which exports a large number of high value goods, has a current account surplus on the balance of payments, meaning that more money flows in (for the purchase of German goods and serviced by foreigners) than flows out for imports.
Tell me about current account deficits
a country that enjoys high living standards and which is not as successful in export markets is likely to be running a current account deficit, where outflows are greater than inflows. Examples are the USA, Spain and the UK
Define current account surplus
Where inflows on the current account of balance of payments are greater than outflows
Define current account deficit
Where outflows on the current account of the balance of payments are greater than inflows.
Tell me the different components of the current account
The balance of trade
Investment income
Current transfers
What is the financial account
The financial account records money flows for investment purposes: foreign direct investment and foreign portfolio investment.
What is foreign direct Investment
It is accounted for in the financial account, its buying out assets and ownership of companies in other countries.
What is foreign portfolio investment
Accounted for in the financial account. It is also known as ‘hot money’, which is the speculative movement of money between countries as exchange rates and interest rates change.
What is the capital account
The capital account puts the other two accounts in balance by recording the changes in net assets in each country, as well as errors and omissions.
Are current account imbalances bad or good - how do they affect other macroeconomic objectives
On its own, a balance of payments deficit on the current account is not a problem for an economy as long as it can be funded; it can be a sign that living standards are rising. It becomes a problem when reserves of foreign currencies begin to run low. It might mean that the currency falls in value, which is inflationary (imports become more expensive). It might be a sign that the country is becoming uncompetitive (costs are rising relative to trading partners), which can cause unemployment in the domestic economy. In the long run this might require a painful readjustment, such as tax increases, to reducing spending on imports. Higher taxes and cuts in government spending might solve the current account deficit but are likely to cause a slowdown in economic growth.
Why do countries become interdependent
International trade means that countries become interdependent, relying on each other both for income (through exports) and for resources and goods and services (through imports). This reliance means that the economies are increasingly connected and if one country or area suffers with weak demand this has a direct effect on other countries.
When does interconnectedness between countries become a problem
Interconnectedness becomes a problem when deficits or surpluses on the current account become persistent. We call this a current account imbalance.
What could be a cause of a current account imbalance
May be that a country is spending too much or that it is not producing anything that potential customers abroad want to buy. It may be because of the stage in the business cycle, which clearly may be different for different countries at different times, or the strength of the currency.
For example, if sterling is strong against the dollar, the UK is likely to export less and import more because the price of UK exports rises relative to other products on the world market, and imports become relatively cheap in the uk.
Perhaps the most significant factor in the UK is the loss of competitiveness in the manufacturing owing to higher costs of factors of production in the UK relative to the Far East. It takes time for economies to adjust to changing comparative costs and during the adjustment process the UK is likely to face an ongoing deficit.
When do the costs of a current account imbalance become significant
Only when the deficit (or surplus) becomes unsustainable, I.e the country loses its ability to finance the deficit. Persistent deficits can make the value of a currency fall, so in some economies the government might buy its currency on the foreign exchange market in order to maintain its value. A fall in the value of the currency may restore competitiveness, as it makes imports seem more expensive and exports relatively cheap on international markets. Persistent deficits see net incomes leave the country, which might mean demand in the domestic country is subdued. If you are a worker you might lose your job, but from the perspective of the Monetary policy committee of the Bank of England, subdued domestic demand might be a welcome development, preventing the onset of inflation.
How is economic growth usually measured
By referring to changes in real GDP.
Real GDP may be used to compare rates of growth between countries and over time.
What is a limitation of GDP to do with standards of living
The standard of living refers not only to income but also the quality of life. Consequently GDP has limitations in making comparisons of living standards between countries and over time.
What are measures of national happiness used for
Measures of national happiness are used by some countries to provide an additional measure of living standards.
What’s the UK and ECB’s target inflation
The UK has an inflation target of 2% while the European Central Bank (ECB) has a target of ‘less than 2%’
What the CPI used for
The CPI is used to make international comparisons of the rate of inflation.
What can cause inflation
Inflation may be caused by an increase in aggregate demand (demand pull inflation), rising costs of production (cost push inflation) or excessive growth of the money supply.
Who do the implications of inflation affect
Consumers, firms, workers and the government
Tell me about employment in the UK in 2018
In 2018, there were over 32 million people employed in the UK, meaning that about one in every two people in the population works. The employment rate - the percentage of workers relative to the number of working age - was over 75% in the UK
What benefits do high levels of employment bring
Benefits for workers (higher incomes and the human capital factor - when you work, you gain or retain skills in industry), governments (lower expenditure on social benefits, higher levels of tax receipts) and firms (higher sales and profits). There are said to be improved social effects when people are busy.
How are international comparisons of unemployment rates made
Using the ILO unemployment rate. Unemployment in the UK reached 8% after the 2008-2010 recession, although in many countries it was much higher.
What are the various types/causes of unemployment
Structural, frictional, seasonal, cyclical and real wage inflexibility
What is the current account of the balance of payments concerned with
The trade in goods and services between countries but also includes investment income and current transfers.
What does a balance of trade deficit mean
The value of goods and serviced imported is greater than the value of goods and services exported.
What does an increase in international trade result in
Results in an increase in the interdependence between countries. Consequently, a severe downturn in a major trading economy may have Implications for other countries.
Why is economic growth not the same as GDP
An increase in real GDP is the definition of growth
What is the difference between constant (real) GDP and current (nominal) GDP
Real values have the effects of inflation removed.
What is the difference between GDP and GNI
GDP is the total market value of all goods and services produced in the country in a given year. GNI is GDP plus income paid into the country by other countries, for example interest and dividends.
Bhutan is ranked top of the GNH index, but it has one of the lowest GDPs per capita in the world. How is this apparent paradox explained
Bhutan’s happiness index takes account of the fact that in surveys people report being happy and not worried. Because everyone is equally poor, there is less anxiety about other people doing better among the residents.
Why do developing countries tend to have higher economic growth rates than developed countries
Developing countries can grow more quickly because they are starting from a lower base, so the same input of £100 million into a diamond refinery would have a larger percentage impact on growth figures in Botswana than in the UK.
Why is an index used to measure inflation
An index is used to make comparisons over time and between countries. A base year is chosen and given the value 100, and changes are shown as percentage changes relative to the base year.
Why are there two surveys for the CPI
The expenditure survey shows us the proportion of income spent on each item, so that we can weight the price changes in terms of their importance to us as consumers. The price survey tells us the change in prices for each good and service that is bought.
Why might the CPI not be representative of the rate of inflation experienced by pensioners
The pattern of expenditure of pensioners may be very different from that of the ‘average household’. For example, a pensioner may spend a much higher proportion of their income on heating than an average family where everyone goes out to work.
What is the main difference between CPI and CPIH
Unlike CPI, CPIH includes owner occupiers housing costs, ie it includes changes in residential rents across the UK. It estimates the amount it would cost all UK homeowners to rent their houses and also includes council tax in its calculation.
Under what circumstances might the RPI rise faster than the CPI
If there is an increase in mortgage interest rates then the RPI would be affected but not the CPI
How is inflation measured (clue: many students waste a lot of time by saying what inflation is, instead start with the two surveys and remember to refer to weights in your answer)
The focus of the answer should be on the two types of survey involved and there is opportunity cost involved in defining terms that are not required by the question. A weighted basket of goods, a price survey, an index and a base year should all form part of your answer.
What causes inflation
In terms of the ‘real economy’ (actual goods and services), there are demand pressures (increases in AD resulting in demand pull inflation) and cost pressures (decreases in AS resulting in cost push inflation). There is also the monetary effect of having too much money in the economy, chasing too few goods.
Identify 3 costs of inflation
A cost of inflation for consumers is that their real incomes will fall if the rate of inflation is higher than the increase in wages; a cost for firms is that inflation may increase uncertainty and so lead them to reduce investment; a cost to the government is that some benefits are linked to the rate of inflation and so its expenditure will increase.
What is the difference between the employment rate and employment level
The employment level is the total number employed, whereas the employment rate is the total number employed relative to the number of working age.
Why is the claimant count an inaccurate measure of unemployment
The claimant count is the number of people who receive Jobseeker’s Allowance. There are many who do not actually claim it for various reasons (they might not be out of work for long, for example). These people are not registered in the statistics for the unemployed.
In October 2018 the claimant count was around 968,000 while the ILO method recorded 1.3 million unemployed - what factors might account for this difference
The ILO records a wider range of ages and includes people who are not eligible to claim out of work benefits such as JSA. This may be because they have savings or their partner has a well paid job.
How might an increase in immigration tend to lead to an increase in employment and unemployment
If there is an increase in the number of people of working age (as a result of previous increases in the birth rate or an increase in the retirement age), then it is possible for both employment and unemployment to increase at the same time. Also if there is net migration into the U.K, then some of these immigrants may get jobs while others are unemployed.
If you add together employment and unemployment in the uk, you will reach a figure of around 80% of the working age population. How would you account for the other 20%
They are ‘economically inactive’ because they might be students, looking after dependants or carrying out other functions in the home.
Are your holidays abroad an import?
Yes. The easiest way to decide whether or not something is an import is to look at the direction of the money flows. If money is leaving the country, the trade is an import.
‘America sneezes and the UK catches a cold’. Explain this statement using your understanding of the interconnectedness of economies through international trade
It means that if the USA suffers a recession or banking crisis, the effects will be felt more widely and deeply in the U.K.. this is because up to 17% of our exports go to the USA and our stock markets are inextricably linked, with many companies such as BP listed in both the U.K. and USA.
What are the macroeconomic policies
On the demand side, there are monetary and fiscal policies; on the supply side, there are supply side policies. There are other macroeconomic policies but you do not need to know them for A level
What is contractionary/deflationary fiscal policy
Contractionary/deflationary fiscal policy involves an increase in taxes or a cut in government spending or both.
If the government wants to borrow heavily, how does this affect the distribution of income
If heavy borrowing pushes up interest rates. This tends to affect lower income groups disproportionately more because lower income groups tend to have larger levels of debt relative to income.
