Measures of economic performance: inflation, unemployment and the balance of payments Flashcards
Define inflation
a sustained rise in the general price level in an economy
Why might inflation hinder economic growth?
It may deter firms from investment.
What is the most important general price index in UK and why?
Consumer Price Index (CPI) used for government inflation target
How often are the items in the CPI “basket” and their weights changed?
annually
Why are the items in the CPI “basket” regularly changed?
so that the measure is representative of current consumer spending patterns
What information is used to decide on CPI basket updates?
ONS Living Costs and Food Survey, market research data, trade journals and press reports
What measure is used as the ONS’s headline inflation index?
CPIH
How does CPIH differ from CPI?
CPIH also includes a measure of owner occupiers’ housing costs (OOH) and council tax (but not mortgage costs)
What issue arises from fixed weights for items in CPI “basket” mean it may not remain representative of general increases in cost of living?
If price of a good rises, consumers may substitute a cheaper good rather than continue buying the one that rose in price.
What inflation measure was used for the government target until 2004?
Retail Price Index excluding mortgage interest payments (RPIX)
What two types of households are excluded from RPI but not CPI?
- pensioner households that rely on state support
- highest income households
What is the long-term inflation target of UK?
CPI of 2%
Why did UK inflation significantly increase in 2022?
- 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
What is deflation?
fall in average level of prices
What is disinflation?
fall in the rate of inflation
Why might deflation be bad for the economy?
Paradox of Thrift: people postpone purchases as expect prices to fall, so demand falls, leading to or perpetuating a recession
Why is low inflation generally good for the economy?
It reduces uncertainty so may encourage investment.
Define economically inactive
those of working age not working or looking for work
Define unemployed
those who are economically active but not in employment
Define workforce
those who are economically active, either in employment or unemployed
Define discouraged workers
people who have been unable to find employment and no longer looking for work
What proportion of UK is of “working age” (16-64)?
about two-thirds
Define full employment
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)
Would zero unemployment be a good thing for the economy?
No, would make it difficult to find new workers and would be likely to lead to higher wages then higher inflation
How is the claimant count of unemployment measured?
number of people registered as unemployed and claiming Jobseeker’s Allowance (JSA)
What is the official UK measure of unemployment?
ILP unemployment rate
How is the ILP unemployment rate measured?
UK Labour Force Survey, interviewing about 40,000 households per quarter
How does the International Labour Organization define unemployment?
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
Which is higher, claimant count or ILO employment rate?
ILO employment rate as not everyone looking for a job is claiming JSA
Name one weakness of the ILO unemployment rate?
based on sample to not necessarily fully representative
Define underemployment
where an individual is employed in a second choice occupation or only able to work part-time but would like to work full-time
What is frictional unemployment?
unemployment associated with moving from one job to another
What is structural unemployment?
unemployment arising because of change in patterns of economic activity within an economy
What is cyclical unemployment?
unemployment that arises during the downturn of the business cycle, eg a recession
What is demand-deficient unemployment?
unemployment that arises because of a deficiency of aggregate demand so the equilibrium level of employment is below full employment
What is seasonal unemployment?
unemployment that arises in seasons of year when demand is relatively low
How can minimum wage regulations lead to unemployment?
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.
What is real wage inflexibility?
If real wages don’t adjust downwards, then reduction in demand will lead to unemployment
What is voluntary unemployment?
when an individual chooses not to accept a job at the going wage rate
Name one reason why government policy might mean someone choosing to be voluntarily unemployed?
if unemployment benefits are high relative to wages (not necessarily higher though)
What effect will unemployment have on consumers?
lower supply so on average lower standard of living
What effect will unemployment have on firms?
- lower demand from products (as consumers can’t afford them)
- less pressure to pay higher wages
What effect will unemployment have on workers?
- For those out of work, lower standard of living
- For those in work, potentially lower wages
What effect will unemployment have on government?
- lower tax revenues (both income and indirect tax) so government income falls
- higher cost of benefits so government spending rises
What effect will unemployment have on society as a whole?
As well as the other effects via firms, consumers, workers government … may be increase in social unrest and criminal activity
Define balance of payments
set of accounts showing transactions between residents of a country and rest of world
Define current account of the balance of payments
an account identifying transactions in goods and services between residents of a country and rest of the world, together with primary and secondary income
Define capital account of the balance of payments
an account identifying transactions in physical capital between residents of a country and rest of the world
If a toy made in the UK is exported to France, is this a credit or debit to the balance of payments?
credit, as money comes into UK
If a UK resident buys a French bottle of wine, is this a credit or debit to the balance of payments?
debit, as money goes out of UK
Since 1980, has the UK current account of the balance of payments been mostly positive or negative?
negative, ie we import more than we export
Since 1980, has the UK financial account of the balance of payments been mostly positive or negative?
positive, ie we sell more financial assets than we purchase
What are the three main items in the current account of the balance of payments?
balance of trade in goods and services
Is balance of UK trade in goods usually positive or negative?
negative, ie more imports than exports
Is balance of UK trade in services usually positive or negative?
positive, ie more exports than imports
What is primary income in the current account of the balance of payments?
investment income
What is secondary income in the current account of the balance of payments?
current transfers, eg taxes, aid flows, military grants
Ignoring data issues, what should be the relationship between the current account, capital account and financial account of the balance of payments?
current account + capital account - financial account = 0
What are high interest rates in UK relative to rest of world likely to do to financial account of the balance of payments?
Lead to financial inflows so surplus on financial account
