Theme 2 - measures of economic performance

Question 1

What is inflation?

Answer 1

The sustained increase in general price level

Question 2

What are the 2 principles to measure inflation?

Answer 2

The CPI (consumer price index) and RPI (retail price index)

Question 3

How does CPI measure inflation?

Answer 3

The Consumer Price Index (CPI) is an index that is often used to measure inflation by tracking the changes over time in the prices paid by consumers for a basket of goods and services.

Question 4

What is the basket of goods?

Answer 4

Goods that are typically bought by consumers. Currently around 700 goods that are weighted depending on relative importance.

Question 5

How does RPI measure inflation?

Answer 5

The Retail Price Index (RPI) is a price index calculated and published by the U.K.’s Office of National Statistics.

Question 6

What are some of the limitations of CPI?`

Answer 6

CPI measures the average prices paid on the basket of goods however, some people do not fit this average.
Another drawback may be innovation - over a particular time consumer expenditures may contribute hugely to an economy but CPI may not pick this up until it becomes a staple.

Question 7

What is disinflation?

Answer 7

Disinflation refers to the rate at which inflation is occurring. If inflation is increasing, disinflation will continue to show inflation but at a slower rate.

Question 8

What is deflation? Example?

Answer 8

Deflation refers to the direct decrease in prices. This may occur in a deep-recession where demand is extremely low and people may not be able to afford higher prices.

Question 9

What are the 3 causes of inflation?

Answer 9

Demand-pill, cost push and the growth of money supply.

Question 10

What is demand-pull?

Answer 10

Caused by excessive demand for something and not enough supply to meet it. Firms will increase their prices as they are profit maximisers. Increases in AD will create some demand-pull inflationary pressure.

Question 11

Causes of demand-pull

Answer 11

Some e.g include:
Reduced taxations - increase disposable income
Lower interest rates - borrowing is more attractive
Weak exchange rate - increased exports

Question 12

What is cost-push?

Answer 12

When there is an increase in costs of production, firms will increase their prices to protect profit margins.

Question 13

Causes of cost-push inflation? Use wages as an example

Answer 13

Wages is one of the highest costs of production. If prices rise then workers demand higher wages. If the higher wages costs are then reflected onto higher then workers continue to demand higher wages leading to a wage-price spiral.

Question 14

What is the growth of money supply?

Answer 14

A measure of the amount of money within the economy

Question 15

How can the government increase the money supply?

Answer 15

Printing more money through the bank of England, the government can buy bonds of financial institutions creating liquidity.

Question 16

Some problems of deflation

Answer 16

People may halt purchases as they think that prices will decrease further in the future. Consumption decreases.
Firms loose confidence to invest, AD decreases.

Question 17

Effects of inflation on Firms

Answer 17

Inflation decreases consumer spending and confidence reducing AD. Increases costs, decrease demand and decrease animal spirits reducing firms confidence to invest in capital stock.

Question 18

Effects of inflation on workers

Answer 18

Inflation can lead to increased costs and a fall in demand from a lack of consumer confidence may mean decrease profits for firms. This may cause people to be unemployed as firms substitute labour for another factor of production.

Question 19

Effects of inflation on consumers

Answer 19

Inflation means peoples nominal increase depreciates in value. People will consume more as they have less real money to spend. This means that consumers will decrease demand.

Question 20

Effects of inflation of the government

Answer 20

High inflation can cause GDP growth to slowdown – leading to lower tax revenues & increased borrowing
High inflation can lead to increased market interest rates making government borrowing more expensive

Question 21

What are two ways of measuring unemployment?

Answer 21

LFS (labour force survey) which surveys a number of households within the UK in different employment situation and questions them. Claimant count measures the number of people who claim benefits from being unemployed out of full-time education.

Question 22

What is meant by being underemployed?

Answer 22

This means when people who are in part-time work demand long shifts in order to gain more money. Could help firms because they do no have to increase wages if they get people to work more. Also occur if people have a job that they are over-qualified for.

Question 23

What are the 5 types of unemployment?

Answer 23

Structural, seasonal, frictional, cyclical and real-wage inflexibility.

Question 24

What is Frictional unemployment?

Answer 24

Type of short-term unemployment when someone is moving in-between jobs or, new workers are entering the labour market.

Question 25

What is structural unemployment?

Answer 25

When supply of labour is higher than demand of labour.
Occupational immobility = when certain skills are not demanded and so people cannot find work.
Geographical immobility = When there is demand for work in an area but an individual is unwilling to move from increase in cost of living or family ties.

Question 26

What is seasonal unemployment?

Answer 26

When supply for jobs is only available during certain seasons so throughout the rest of the year they are unemployed.

Question 27

What is cyclical unemployment?

Answer 27

This is when there is a decrease in AD from a decrease in demand for goods and services. If this decreases then firms will employee fewer people of reduce their labour force in order to meet the lower output levels.

Question 28

What is real-wage inflexibility?

Answer 28

Fixing wages can result in higher supply of labour and lower demand because of a state of full employment unable to be obtained because equilibrium is below minimum wage. This creates real-wage inflexibility from the difference in supply of labour to demand of labour.

Question 29

How does migration impact unemployment?

Answer 29

More people joining the labour work force which increases employment. As they are foreigners, they get paid lower than minimum wage, lower wages from increased supply of labour.

Question 30

How do skills impact unemployment?

Answer 30

If economy has a low skill set this will increase occupational immobility in structural unemployment as more people do not have the skills to meet supply of jobs.

Question 31

How are workers and consumers impacted by unemployment?

Answer 31

Workers - lose of income, decrease living standards, long-term unemployment as they find it hard to find jobs from loss of skills
Consumers - Area of unemployment in run down areas decreases selection of shops. Less to spend

Question 32

How are firms and governments impacted by unemployment?

Answer 32

Firms - decrease in demand, decrease in profits, long-term unemployment from loss of skills, reduce employability, small pool of skilled people to employ
Govt - Reduce income, lower tax revenues, increase spending on welfare payments for the unemployed, increase borrowing and cuts on public spending.

Question 33

What is the balance of payments?

Answer 33

This controls the flow of money coming into and out a country.

Question 34

Describe the 4 sections on a current account:

Answer 34

• Trade in goods: import of visible goods exceeding exports
• trade in services: imports of invisible goods exceeding exports
• Investment and employment income: flow of money into and out from employment + investment
• transfers - flow of money into and out from transfers

Question 35

Recent data of UK BOP situation:

Answer 35

Trade in goods - large deficit
Trade in services - small surplus
Investment income - surplus
Transfers - deficit

Question 36

Causes of a BOP deficit

Answer 36

• High levels of consumer spending
• Struggling to compete internationally
• external shocks

Question 37

Causes of a BOP surplus

Answer 37

• recession
• domestic currency is low
• High interest rates