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

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

1
Q

Define inflation

A

a sustained rise in the general price level in an economy

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2
Q

Why might inflation hinder economic growth?

A

It may deter firms from investment.

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3
Q

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

A

Consumer Price Index (CPI) used for government inflation target

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4
Q

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

A

annually

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5
Q

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

A

so that the measure is representative of current consumer spending patterns

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6
Q

What information is used to decide on CPI basket updates?

A

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

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7
Q

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

A

CPIH

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8
Q

How does CPIH differ from CPI?

A

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

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9
Q

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

A

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

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10
Q

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

A

Retail Price Index excluding mortgage interest payments (RPIX)

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11
Q

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

A
  • pensioner households that rely on state support
  • highest income households
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12
Q

What is the long-term inflation target of UK?

A

CPI of 2%

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13
Q

Why did UK inflation significantly increase in 2022?

A
  • 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
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14
Q

What is deflation?

A

fall in average level of prices

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15
Q

What is disinflation?

A

fall in the rate of inflation

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16
Q

Why might deflation be bad for the economy?

A

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

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17
Q

Why is low inflation generally good for the economy?

A

It reduces uncertainty so may encourage investment.

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18
Q

Define economically inactive

A

those of working age not working or looking for work

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19
Q

Define unemployed

A

those who are economically active but not in employment

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20
Q

Define workforce

A

those who are economically active, either in employment or unemployed

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21
Q

Define discouraged workers

A

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

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22
Q

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

A

about two-thirds

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23
Q

Define full employment

A

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)

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24
Q

Would zero unemployment be a good thing for the economy?

A

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

25
Q

How is the claimant count of unemployment measured?

A

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

26
Q

What is the official UK measure of unemployment?

A

ILP unemployment rate

27
Q

How is the ILP unemployment rate measured?

A

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

28
Q

How does the International Labour Organization define unemployment?

A

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

29
Q

Which is higher, claimant count or ILO employment rate?

A

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

30
Q

Name one weakness of the ILO unemployment rate?

A

based on sample to not necessarily fully representative

31
Q

Define underemployment

A

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

32
Q

What is frictional unemployment?

A

unemployment associated with moving from one job to another

33
Q

What is structural unemployment?

A

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

34
Q

What is cyclical unemployment?

A

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

35
Q

What is demand-deficient unemployment?

A

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

36
Q

What is seasonal unemployment?

A

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

37
Q

How can minimum wage regulations lead to unemployment?

A

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.

38
Q

What is real wage inflexibility?

A

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

39
Q

What is voluntary unemployment?

A

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

40
Q

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

A

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

41
Q

What effect will unemployment have on consumers?

A

lower supply so on average lower standard of living

42
Q

What effect will unemployment have on firms?

A
  • lower demand from products (as consumers can’t afford them)
  • less pressure to pay higher wages
43
Q

What effect will unemployment have on workers?

A
  • For those out of work, lower standard of living
  • For those in work, potentially lower wages
44
Q

What effect will unemployment have on government?

A
  • lower tax revenues (both income and indirect tax) so government income falls
  • higher cost of benefits so government spending rises
45
Q

What effect will unemployment have on society as a whole?

A

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

46
Q

Define balance of payments

A

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

47
Q

Define current account of the balance of payments

A

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

48
Q

Define capital account of the balance of payments

A

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

49
Q

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

A

credit, as money comes into UK

50
Q

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

A

debit, as money goes out of UK

51
Q

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

A

negative, ie we import more than we export

52
Q

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

A

positive, ie we sell more financial assets than we purchase

53
Q

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

A

balance of trade in goods and services

54
Q

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

A

negative, ie more imports than exports

55
Q

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

A

positive, ie more exports than imports

56
Q

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

A

investment income

57
Q

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

A

current transfers, eg taxes, aid flows, military grants

58
Q

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

A

current account + capital account - financial account = 0

59
Q

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

A

Lead to financial inflows so surplus on financial account

Macroeconomics (8 decks)

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