Measures of economic performance: inflation, unemployment and the balance of payments

Question 1

Define inflation

Answer 1

a sustained rise in the general price level in an economy

Question 2

Why might inflation hinder economic growth?

Answer 2

It may deter firms from investment.

Question 3

What is the most important general price index in UK and why?

Answer 3

Consumer Price Index (CPI) used for government inflation target

Question 4

How often are the items in the CPI “basket” and their weights changed?

Answer 4

annually

Question 5

Why are the items in the CPI “basket” regularly changed?

Answer 5

so that the measure is representative of current consumer spending patterns

Question 6

What information is used to decide on CPI basket updates?

Answer 6

ONS Living Costs and Food Survey, market research data, trade journals and press reports

Question 7

What measure is used as the ONS’s headline inflation index?

Answer 7

CPIH

Question 8

How does CPIH differ from CPI?

Answer 8

CPIH also includes a measure of owner occupiers’ housing costs (OOH) and council tax (but not mortgage costs)

Question 9

What issue arises from fixed weights for items in CPI “basket” mean it may not remain representative of general increases in cost of living?

Answer 9

If price of a good rises, consumers may substitute a cheaper good rather than continue buying the one that rose in price.

Question 10

What inflation measure was used for the government target until 2004?

Answer 10

Retail Price Index excluding mortgage interest payments (RPIX)

Question 11

What two types of households are excluded from RPI but not CPI?

Answer 11

• pensioner households that rely on state support
• highest income households

Question 12

What is the long-term inflation target of UK?

Answer 12

CPI of 2%

Question 13

Why did UK inflation significantly increase in 2022?

Answer 13

• Demand-pull inflation as economy emerged from pandemic
• Cost-push inflation due to pandemic, Brexit and effect of Ukraine conflict on oil and gas supplies

Question 14

What is deflation?

Answer 14

fall in average level of prices

Question 15

What is disinflation?

Answer 15

fall in the rate of inflation

Question 16

Why might deflation be bad for the economy?

Answer 16

Paradox of Thrift: people postpone purchases as expect prices to fall, so demand falls, leading to or perpetuating a recession

Question 17

Why is low inflation generally good for the economy?

Answer 17

It reduces uncertainty so may encourage investment.

Question 18

Define economically inactive

Answer 18

those of working age not working or looking for work

Question 19

Define unemployed

Answer 19

those who are economically active but not in employment

Question 20

Define workforce

Answer 20

those who are economically active, either in employment or unemployed

Question 21

Define discouraged workers

Answer 21

people who have been unable to find employment and no longer looking for work

Question 22

What proportion of UK is of “working age” (16-64)?

Answer 22

about two-thirds

Question 23

Define full employment

Answer 23

where all who are economically active in workforce and willing and able to work at the going wage rates are able to find employment (NB: it does not mean zero unemployment)

Question 24

Would zero unemployment be a good thing for the economy?

Answer 24

No, would make it difficult to find new workers and would be likely to lead to higher wages then higher inflation

Question 25

How is the *claimant count of unemployment measured*?

Answer 25

number of people registered as unemployed and claiming Jobseeker's Allowance (JSA)

Question 26

What is the official UK measure of unemployment?

Answer 26

ILP unemployment rate

Question 27

How is the *ILP unemployment rate* measured?

Answer 27

UK Labour Force Survey, interviewing about 40,000 households per quarter

Question 28

How does the International Labour Organization define unemployment?

Answer 28

Those who don't have a job but want a job and have actively sought one in the next four weeks and are available to start one in next two weeks; and those who have found a job and are waiting to start in next two weeks

Question 29

Which is higher, claimant count or ILO employment rate?

Answer 29

ILO employment rate as not everyone looking for a job is claiming JSA

Question 30

Name one weakness of the ILO unemployment rate?

Answer 30

based on sample to not necessarily fully representative

Question 31

Define *underemployment*

Answer 31

where an individual is employed in a second choice occupation or only able to work part-time but would like to work full-time

Question 32

What is *frictional unemployment*?

Answer 32

unemployment associated with moving from one job to another

Question 33

What is *structural unemployment*?

Answer 33

unemployment arising because of change in patterns of economic activity within an economy

Question 34

What is *cyclical unemployment*?

Answer 34

unemployment that arises during the downturn of the business cycle, eg a recession

Question 35

What is *demand-deficient unemployment*?

Answer 35

unemployment that arises because of a deficiency of aggregate demand so the equilibrium level of employment is below full employment

Question 36

What is *seasonal unemployment*?

Answer 36

unemployment that arises in seasons of year when demand is relatively low

Question 37

How can minimum wage regulations lead to unemployment?

Answer 37

If wages kept artificially higher than the equilibrium level (ie where supply of workers equals demand for workers) then there will be higher supply than demand, ie unemployment.

Question 38

What is *real wage inflexibility*?

Answer 38

If real wages don't adjust downwards, then reduction in demand will lead to unemployment

Question 39

What is *voluntary unemployment*?

Answer 39

when an individual chooses not to accept a job at the going wage rate

Question 40

Name one reason why government policy might mean someone choosing to be voluntarily unemployed?

Answer 40

if unemployment benefits are high relative to wages (not necessarily higher though)

Question 41

What effect will unemployment have on consumers?

Answer 41

lower supply so on average lower standard of living

Question 42

What effect will unemployment have on firms?

Answer 42

* lower demand from products (as consumers can't afford them) * less pressure to pay higher wages

Question 43

What effect will unemployment have on workers?

Answer 43

* For those out of work, lower standard of living * For those in work, potentially lower wages

Question 44

What effect will unemployment have on government?

Answer 44

* lower tax revenues (both income and indirect tax) so government income falls * higher cost of benefits so government spending rises

Question 45

What effect will unemployment have on society as a whole?

Answer 45

As well as the other effects via firms, consumers, workers government ... may be increase in social unrest and criminal activity

Question 46

Define *balance of payments*

Answer 46

set of accounts showing transactions between residents of a country and rest of world

Question 47

Define *current account of the balance of payments*

Answer 47

an account identifying transactions in goods and services between residents of a country and rest of the world, together with primary and secondary income

Question 48

Define *capital account of the balance of payments*

Answer 48

an account identifying transactions in physical capital between residents of a country and rest of the world

Question 49

If a toy made in the UK is exported to France, is this a credit or debit to the balance of payments?

Answer 49

credit, as money comes into UK

Question 50

If a UK resident buys a French bottle of wine, is this a credit or debit to the balance of payments?

Answer 50

debit, as money goes out of UK

Question 51

Since 1980, has the UK current account of the balance of payments been mostly positive or negative?

Answer 51

negative, ie we import more than we export

Question 52

Since 1980, has the UK financial account of the balance of payments been mostly positive or negative?

Answer 52

positive, ie we sell more financial assets than we purchase

Question 53

What are the three main items in the current account of the balance of payments?

Answer 53

balance of trade in goods and services

Question 54

Is balance of UK trade in goods usually positive or negative?

Answer 54

negative, ie more imports than exports

Question 55

Is balance of UK trade in services usually positive or negative?

Answer 55

positive, ie more exports than imports

Question 56

What is *primary income* in the current account of the balance of payments?

Answer 56

investment income

Question 57

What is *secondary income* in the current account of the balance of payments?

Answer 57

current transfers, eg taxes, aid flows, military grants

Question 58

Ignoring data issues, what should be the relationship between the current account, capital account and financial account of the balance of payments?

Answer 58

current account + capital account - financial account = 0

Question 59

What are high interest rates in UK relative to rest of world likely to do to financial account of the balance of payments?

Answer 59

Lead to financial inflows so surplus on financial account