SOL and macro indicators Flashcards
what are the 4 macro goals?
- sustainable and inclusive economic growth
- price stability
- full employment
- favourable position of BOT
what is GDP?
it is the total value of all final goods and services that are produced within the geographical boundary of a country in a given time period (usually 1 year)
what is GNI?
it is the total value of income received by the nationals of a country over a given period of time regardless of where production takes place
GNI = GDP + net property income from abroad
what is real GDP per capita?
it is the total value of all final goods and services that are produced within the geographical boundary of a country in a given time period, measured using constant prices over population
how does higher GDP per capita lead to higher material SOL?
higher GDP per capita means people have more disposable income and thus an increase in purchasing power. since more g&s are available for consumption, there is higher mat SOL
however, economic growth should be both sustainable (low levels of air pollution index) and inclusive (low gini coefficient) in order for continual improvement in SOL
what are the limitations of using GDP as an indicator? (over time)
- changes in GPL
- population growth
➡ therefore, using real GDP per capita as an indicator is preferred as it accounts for both change in population and GPL
- unequal income distribtion
increase in GDP only reflects higher SOL for the avg citizen
➡ use Gini coefficient with real GDP per capita to measure mat SOL of an avg person
varies from 0 (perfect equality) to 1 (perfect inequality)
what is Gini coefficient?
measures the degree of inequality in distribution of income in a country
what are the limitations of using GDP as an indicator? (over space)
when comparing GDP between countries, GDP has to be converted to a common currency using exchange rate
inaccurate as there are differences in cost of living between countries
➡ GDP can be converted using purchasing power parity (PPP) exchange rate: given amt of money to buy the same amount of goods in another country after exchanging it into the currency
e.g. Big Mac Index: Big Mac cost $5 in US and 20 Yuan in China
what is inflation?
sustained increase in GPL over time
how can inflation be measured?
using Consumer Price Index (CPI)
- measures the change in price of a fixed basket of g&s purchased by households over a fixed period of time
inflation rate = (CPI2 - CPI1)/time
generally 2-3% is acceptable
how does CPI assess the economic health of the country?
Low inflation and stable prices create a sound economic environment which
facilitates the process of decision making.
- Stable prices also attracts investment, both local and FDI. This has a positive
effect on economic growth and hence SOL. - By comparing the real incomes of consumers, the material SOL of an average
person in the economy can improve in spite of the higher cost of living.
what is unemployment and how to measure unemployment rate?
when people are willing and able to work but cannot find jobs
unemployment rate = no. of unemployed in labour force / labour force x 100%
acceptable rates: below 4%
never 0 as there is natural rate of unemployment (structural unemployment and frictional unemployment)
how do unemployment rates assess the economic health of the country?
A country with full employment is considered healthy because it is fully utilising its resources and the population can achieve maximum real GDP per capita.
It is thus able to increase material SOL as more of the limited resources are
employed to produce goods and services and are not left idle.
what is BOT
difference between country’s total international receipt from its exports and the total international payment for imports
favourable BOT: export revenue > import expenditure
how does BOT indicate the economic health of a country?
When there is favourable BOT, the country’s currency would also not face the riskof currency depreciation.
It thus maintains a stable exchange rate
* Increases certainty for traders of contractual and delivery agreements. Enhance confidence of foreign investors who are motivated by their rate of returns when converted back to their local currency.
* Facilitates international trade and foreign investment → positive impact on
economic growth and standard of living.
