Measures Of Performance Flashcards
When does economic growth occur?
When there’s a rise in the value of gdp
What does gdp measure?
The quantity of goods and services produced in an economy
What does economic growth lead to?
Higher living standards
More employment opportunities
What is real GDP?
The value of GDP adjusted for inflation
What is nominal GDP?
The value of gdp without being adjusted for inflation
Total GDP?
Combined monetary value of all goods and services produced within a county during a specific time
GDP per capita
Value of total gdp divided by the population
Useful for comparing relative performance of countries
Volume of gdp
GDP adjusted for inflation
The size of the basket of goods and the real level of gdp
Value of GDP
The monetary value of gdp at prices of the day
The nominal figure
Calculated by volume x current price level
What are the other ways to measure national income?
Gross national product (GNP)
Gross national income (GNI)
What’s gnp
The market value of all products produced in a year by the labour and citizens of 1 country.
Includes GDP
+ income earned overseas from assets
- income earned by overseas residents
What’s gni?
Sum of value added by all producers in a nation
+ net overseas interest payments and dividends
- money sent back by foreigners
What’s purchasing power parity (PPP)?
Estimates how much the exchange rate needs adjusting so that an exchange between countries is equivalent to
Limitations of using GDP to compare living standards between countries overtime
- no indication of distribution of income
- might need to be recalculated in terms of purchasing power ( determined by the cost of living and the inflation rate ) to account for international price differences
- hidden economies ( black markets ) can make gdp comparisons misleading and hard to compare
- no indication of welfare
What factors affect national wellbeing?
- real GDP per capita
- health
- life expectancy
- having someone to count on
- freedom to make life choices
- freedom from corruption and generosity
What’s the relationship between real incomes and subjective happiness?
The higher the gdp per capita the higher the average life satisfaction score
Happiness and income are positively related at low. Income until basic needs are met
Higher income doesn’t lead to increased happiness
What is used to calculate inflation?
Consumer prices index (CPI)
How does the CPI measure inflation?
Measures household purchasing power with the family expenditure survey that finds out what consumers spend their income on
From this a basket of goods is created
Each good is weighted according to how much income is spent on each item
Key points of CPI
- survey used
- weighted basket of goods
- measures average price change of goods
- updated annually
Limitations of CPI
- basket is only representative of the average household
—> eg. Not accurate for people that don’t own cars - different demographics have different spending patterns
- slow to respond to new goods and services
- hard to make historical comparisons
What is the retail price index (RPI)
Alternative measure of inflation
How is RPI different to CPI?
-RPI includes housing costs like payments on mortgage interest and council tax
- RPI excludes the top 4% of earners and low income pensioners
- CPI takes into account that’s hen prices rise people will switch to a product that has gone up by less but doesn’t
Causes of inflation
- demand pull
- cost push
- growth of the money supply
How is Demand pull caused?
- aggregate demand grows unsustainably so there’s pressure on resources
- producers increase their prices and earn more profits- usually occurs when resources are fully employed
Triggers of demand pull inflation
- depreciation in exchange rate
- fiscal stimulus - lower taxes or more gov spending
- lower interest rates
- High growth in export markets
What’s cost push inflation?
It happens when firms face rising costs
Triggers of cost push inflation
- raw materials more expensive
- labour more expensive
- if consumers expect inflation they might ask for higher wages
- indirect taxes if producers pass cost onto consumer
- depreciation in exchange rate causes more expensive imports which makes materials more expensive
- monopolies can exploit consumers using high prices
How does growth of the money supply cause inflation?
- If the BofE printed more money then there would be more money flowing in the economy
- extreme increases can cause hyperinflation
- only inflationary if the money supply increases at a faster rate than real output
Who is affected by inflation?
- consumers
- government
- firms
- workers
How does inflation affect consumers?
- Cost of necessities becomes expensive - LI affected most
- purchasing power of money falls - affects HI least
- if consumers have loans the value of the repayment will be lower - real value of debt decreases
How does inflation affect firms?
- low interest rates means borrowing and investing is better than saving profits so with high inflation and high interest rates firms are less likely to invest
- workers need higher wages so increased costs of production
- might become less competitive
- reduce business confidence because they are unsure of costs so could mean less investment
How is the government affected by inflation?
- need to increase pensions and welfare payments due to increased costs of living
How are workers affected by inflation?
- real incomes fall - less disposable income
- firms might make cuts so there could be more redundancies
Measures of unemployment
The claimant count
The uk Labour force survey (LFO)
Why is it hard to measure unemployment?
- some in employment might claim some unemployment benefits
- some people might not reveal that they’re unemployed in a survey
What is the claimant count?
It counts the number of people claiming unemployment benefits such as JSA
Eligibility for JSA
- People with partners on high incomes can’t get it
- people with savings
Does the claimant count over/under estimate the level of employment?
Under
Link between international labour organisation and the uk labour force survey
The LFS is taken by the ILO
What does the LFS ask?
- out of work for 4 weeks
- able and willing to start work within 2 weeks
- should be available for 1 hour per week - includes part time employment
Does the LFS over or underestimate the unemployment figure?
It overestimates because the part time employed are less likely to claim unemployment benefits
Define unemployed
Those able and willing to to work but are not employed
They are actively seeking work and usually looking to start within the next 2 weeks
Define underemployment
Those who have a job but their labour isn’t used to its full productive potential.
Those who are in part time work but are looking for a full time job
Effects of unemployment on consumers
- less disposable income
- worse standard of living
- bad mental health
Effects of unemployment on firms
- higher rates of unemployment firms have a larger supply of labour to employ from - causes wages to fall and costs of production to decrease
- consumer spending falls so firms may loose profits
- producers that sell inferior goods may see a rise in sales
- might cost firms to retrain workers
Effects of unemployment on workers
- waste of workers resources
- could lose existing skills
- falls in wages as supply of labour increases
Effects of unemployment on the government
- more spent on JSA - causes OC
- less revenue from income tax and from indirect taxes on expenditure
Effects of unemployment on society
- OC to society - workers could have produced goods and services if employed
- negative externalities if unemployment rate increases - crime etc.
Define inactivity
- Those who are not actively looking for jobs
- eg. Careers for elderly, disabled, retired
- if this increases then the labour force may decrease so the productive potential could fall
What are the causes of unemployment
- structural
- frictional
-seasonal - cyclical
Structural unemployment
Skills no longer relevant
Frictional
Time between leaving a job and looking for another job
Seasonal
Different employment during different seasons- higher employment when demand increases etc.
Cyclical
Normally during periods of decline or recessions - firms forced to close or make workers redundant
Significance of migration and skills
- supply of labour increases
- bring high quality skills
- brings down wages
What is the balance of payments?
- A record of all financial transactions made between consumers, firms and the government from 1 country with other countries
- states how much is spent on imports and what the value of exports is
What’s the balance of payments made up of
- the current account
- the capital account
- the financial account
Current account surplus
- There’s a net inflow of money into the circular flow of income
- uk has a surplus with services but a deficit with goods
Current account deficit
Eg. The uk spends more imports from other countries hat they earn from exports
- if the deficit is large and runs for a long time there could be difficulties financing the deficit with
Current account
capital account
Financial account
Government macroeconomic objectives
- full employment
- low, stable inflation
- sustainable current account on balance of payments
- sustainable growth
What should the sum of all countries trade balances be?
Zero
