THEME 2, Measures of economic performance (2.1) Flashcards
What is economic growth?
Economic growth is defined as the expansion of the productive potential of the economy.
What are goods?
Tangible items e.g. clothes, phones etc
What are services?
Intangible items e.g. private education
What 3 things are used to calculate GDP?
- Expenditure output
- Factor income
- Value of output
How is economic growth measured?
- Income
- Expenditure
- Value of goods and services (OUTPUT)
What is included in Expenditure Output?
- Consumption
- GOVt spending
- Investment spending
- Changing in the value of stocks
- Exports minus imports = GDP
- This is also known as aggregate demand ^
What is Factor Income?
- Incomes for people (salaries and wages)
- Ownership from properties (Rent)
Why is value of output usually overestimated?
- It can be double counted
How is aggregate demand calculated?
Consumption + Investment + GOVt spending
How is GDP per capita an incentive for people to work?
- Income inequality
- Acts as an incentive as people who have worked long degrees or have a higher skill set tend to earn more
What is aggregate demand?
- The total demand for goods and services within a particular market.
What are the 4 factors of production?
- Land
- Labour
- Entrepenurship
- Capital
What is the UK’s long-run trend rate of potential growth?
Should be at 2.5% per annum
* If it is above 2.5% the economy is doing well
* If it is below 2.5% the economy is in recession
What is an exchange rate?
The price of one currency in terms of another
What is the world’s long-run trend rate of potential growth?
The world’s long-run trend rate of (potential) growth of 3.5%.
* If it is above 3.5% the global economy is doing well
* If it is below 3.5% the global economy is in recession
What are the BRIC’s?
Brazil, Russia, India, China
What are the PIG’S?
Portugal, Italy, Greece, Spain
What are the MINT’s?
Mexico, Indonesia, Nigeria, Turkey
What is Purchasing Power Parity?
- PPP
- Measure the total amount of goods and services that a single unit of a country’s currency can buy in another country
- “How far does the same amount of money get me in another country?”, relates to cost of living.
- Looking at a basket of goods and services which can be purchased for the same exchange rate.
Why is some data expressed as PPP adjusted?
- We are adjusting data for differences in costs and prices between countries.
What is the Big Mac index?
- An index used by The Economist
- Uses purchasing power parity (PPP) to think about exchange rates.
What is the IMF?
- International Monetary Fund
What does utility mean?
- Pleasure / happiness
What is the Easterlin Paradox?
- A phenomenon in which increases of a countries GDP per capita income does not necessarily lead to increased happiness or life satisfaction among it’s citizens
Who wrote the Easterlin Paradox?
Richard Easterlin
What did Easterlin observe?
- Easterlin observed that while people in countries with higher incomes tend to report higher levels of happiness, within a given country, there is often little direct relationship between income and happiness.
How should living standards be assessed?
- Not by just considering income, a more holistic approach should be taken
What 7 factors are used to measure Economic Well-being?
- Real disposable income per head
- Average ratings of life satisfaction
- Feelings that things are done in life are worthwhile
- Feelings of anxiety
- Unemployment rate and job expectations
- Household debt to income ratio
- Income inequality (Gini coefficient)
What is the Gini coefficient?
- It is a measure of statistical dispersion intended to represent the income inequality, the wealth inequality, or the consumption inequality within a nation or a social group.
What does the Gini Coefficient measure?
- Income inequality
- Wealth inequality
What is subjective happiness?
- Refers to self-reported levels of happiness with one’s life.
- Usually determined by using questionnaires.
- Involves considering emotions rather than asking about material well-being.
What factors are included in measuring subjective happiness?
- Personality
- Genetics
- Social influences (e.g. a network of small friends)
- Income and wealth
- Health (e.g. the absence of a chronic illness
- Ability to access and enjoy leisure time
How do you calculate index numbers?
- Index = ( X / BASE ) x 100
What is real income?
Income adjusted for inflation.
Is GDP still fit for purpose?
- Technological change makes interpreting GDP difficult
- There is a large informal economy
- GDP was devised for an economy based on mass production, but now we live in a world of increased customisation (e.g. 3D printing)
- Not every transaction is recorded
- GDP per capita is an average… not everyone is ‘average’
- Impact on environment - GDP overlooks the environment of negative externalities
- Real and nominal values.. Are people better off in real terms?
- GDP doesn’t measure the increase in quality of items
What is made off land?
RENT
What is made off labour?
WAGES
What is made off entrepenurship?
PROFIT
What is made off capital?
INTEREST
What is consumption expenditure influenced by?
The rate of interest in an economy
What is the wealth effect?
People with greater wealth tend to have greater levels of consumption, known as the wealth effect: a change in consumption following a change in wealth.
What is the difference between real and nominal?
The nominal value of something is its current price; the real value of something, however, is its relative price over time.
What is the difference between value and volume?
The value of goods/services shows what certain goods/services are worth. However, the volume shows the number of goods/services that are produced.
What is GNI and how is it measured?
- Gross National Income
- The total amount of money earned by a nation’s people and businesses
What is inflation?
- The sustained increase in the general price.
What is rate of inflation?
- Rate of inflation is the percentage increase in CPI over the last 12 months
What is CPI?
- Consumer Price Index
What is an increase in CPI equal to?
- A rise in the cost of living
- A fall in the value of money
Since when does GOVt use CPI to measure rate of inflation?
- December 2003
What was used to measure rate of inflation before December 2003?
- Retail Price Index
- RPI
What do both CPI and RPI measure?
- General price level
- They are not the rate of inflation
How is CPI constructed?
- A family expenditure survey of 6,000 households
- Weights are given to 12 categories of goods and services
- After the weights have been decided for the year, 650 individual products are selected to represent those 12 categories.
- Then each month the prices of those 650 chosen products are measured in 150 locations across the UK.
- The data is then fed into a computer and the index number for each of the 12 categories is updated to reflect the current price levels.
- Finally, an overall weighted index number for the 12 categories combined
Why are weights given to 12 categories of goods and services when measuring CPI?
- To reflect their relative importance
What are the problems associated with using CPI to measure rate of inflation?
- CPI excludes many costs associated with housing
- CPI measures cost of living for the average family and most families are not average
What aspects of housing does CPI exclude?
- Mortgage interest rates
- Housing depreciation
- Estate agent and conveyancing fees
- Buildings insurance
Why is measuring the cost of an average families living problematic when calculating CPI?
- Most families are not average
- For example, at a time when energy prices are rising exceptionally fast a pensioner family with a weighting for energy well above average will see its personal cost of living rising faster than the CPI
What is disinflation?
- A slowdown or a fall in the annual rate of price inflation.
- Consumer prices are still increasing, but more slowly
What is deflation?
- A general decline in prices for goods and services, typically associated with a contraction in the supply of money
What are the three causes of inflation?
- Demand Pull
- Cost Push
- Growth of money supply
What is demand pull (cause of inflation) ?
- Demand side of the economy
- When aggregate demand is growing unsustainably, there is pressure on resources.
- Producers increase their prices and earn more profits.
- It usually occurs when resources
are fully employed.
What is cost push (cause of inflation) ?
- This is from the supply side of the economy
- Occurs when firms face rising costs
What are the main triggers of demand pull (cause of inflation) ?
- A depreciation in the exchange rate, which causes imports to become
more expensive (AD rises) - Fiscal stimulus: lower taxes or more government
spending. (Consumers have more disposable income) - Lower interest rates
- High growth in UK export markets means UK exports increase and AD
increases.
When does cost push (cause of inflation) occur?
- Raw materials become more expensive
- Labour becomes more expensive.
- Expectations of inflation- if consumers expect prices to rise, they may
ask for higher wages to make up for this - Indirect taxes (e.g. VAT)
- Depreciation in the exchange rate, which causes imports to become
more expensive
What is growth of the money supply (cause of inflation) ?
- When there is more money circulating than goods being produced
- E.g. if Bank of England printed more money
What do extreme cases of growth of money supply cause?
Hyperinflation
Under what circumstances only is growth of money supply inflationary?
- It is only inflationary if the
money supply increases at a faster rate than real output.
What is the effect of inflation on consumers?
- Purchasing power of money falls
- If consumers have loans, the value of the repayment will be lower (Real value of debt will decrease as amount owed does not increase with inflation)
- Necessities become more expensive
What is the effect of inflation on firms?
- With high inflation, interest rates are higher, so the cost of investing will be higher and firms are less likely to invest.
- Cost of labour could increase
- Unpredictable inflation will reduce business confidence
What is the effect of inflation on the government?
- The government will have to increase the value of the state pension and welfare payments, because the cost of living is increasing.
What effect will inflation have on workers?
- Unemployment could increase if firms decide to make cuts to save money
- Decrease in disposable income as real income falls with inflation
In 2021/22 how many people lived in poverty in the UK?
- 22%
- 1 in 5
What is Derived demand?
- The demand for a good or service that results from the demand for a different, or related, good or service
What is RPI?
Retail Price Index
How does RPI measure inflation?
- The percentage change in the cost of a basket of retail goods and series.
What does RPI include that CPI doesn’t?
- Council tax and mortgage interest repayments…
- Costs associated with housing
Why do we not aim for 0% inflation?
- A 0% inflation rate is very difficult to achieve.
- Inflation reduces the cost of borrowing, both for firms and households, and this will increase investment.
- There are benefits of a low level of inflation (e.g. allows firms to reduce their costs by not rising wages in line with inflation.)
What is the claimant count?
- Measure of unemployment
- People who are officially registered on JSA
- GOVt’s official measure
Is the claimant count an over estimate or an underestimate of unemployment?
- UNDERESTIMATE
What is the ILO?
- The international Labour Organisation
- Measure of unemployment
- It includes some people not eligible for JSA.
- A survey which asks – are you unemployed and actively seeking work?
Advantage of using ILO for measuring unemployment?
- Allows for comparisons between countries abroad
Disadvantage of using ILO for measuring unemployment?
- It could be subject to sampling errors and may not be truly representative
Disadvantage of using claimant count for measuring unemployment?
- Unique to the UK- so not comparable
What does the word unemployed mean?
- Actively seeking work and unable to find work.
- E.g. People who are retired, stay at home parents or in university are not unemployed
What are the 5 causes of unemployment?
- Structural unemployment
- Frictional unemployment
- Seasonal unemployment
- Demand deficiency and cyclical unemployment
- Real wage inflexibility
What is structural unemployment?
- Industries in decline OR industries growing up (mismatch of skills - not transferable)
- E.g. Ship. Building, Coal, motor vehicle sales IN DECLINE
- E.g. Renewable energy INCREASING
- Geographical and occupational immobility
What is frictional unemployment?
- Gaps between jobs and/or contracts
- “Search time” between jobs
Which two types of unemployment are on the supply side?
- Structural unemployment
- Frictional unemployment
Which three types of unemployment are on the demand side?
- Seasonal unemployment
- Demand deficiency and cyclical unemployment
- Real wage in flexibility
What is seasonal unemployment?
- Out of work in the off-peak season
What is demand deficiency and cyclical unemployment?
- When the economy slows down there is less demand for goods and services therefore there is a lower derived demand for labour.
Example of demand deficiency and cyclical unemployment:
- For example, the COVID-19 pandemic has resulted in a sharp decrease in demand for many goods and services, leading to widespread job losses and increased unemployment.
What is real wage inflexibility?
- Normal markets are able to adjust and equilibrium is restored, however :
- If there was a minimum wage or other inflexibility… the wage can adjust downwards
- This results in an excess supply of labour
What is the effect of unemployment on consumers?
- Increase in inferior goods
- Decrease in normal goods
- Consumer confidence decreases
- Cautious spending
What is the effect of unemployment on firms?
- More choice over recruitment.
- Wages lower
What is the effect of unemployment on workers?
- Job insecurity
- More competitions for vacancies
What is the effect of unemployment on GOVt?
- More money spent on welfare
- Less tax coming in
What is the effect of unemployment on society?
- Higher dependancy ration
- Fewer in work supporting those out of work.
What is the significance of migration and skills for employment and unemployment?
- Моre workers (increased productivity)
- Filling roles that are in short supply
- Increased level of skill
- Wages could be decreased if there are many workers
- Increased levels of employment
What makes up infrastructure?
- Healthcare
- Housing
- Education
What is the balance of payment?
- A record of all a country’s financial transactions with the rest of the world
What three parts make up the balance of payment?
- Current account
- Capital account
- Financial account
What is current account (Balance of Payments)?
- Net trade in goods
- Net trade in services
- Net primary income
- Net secondary income
What is the overall balance of net trade in goods?
- Exports (INFLOW)
- Imports (OUTFLOW)
- Overall this creates a negative balance in the UK
What is the overall balance of net trade in services?
- Exports (INFLOW)
- Imports (OUTFLOW)
- Overall this creates a positive balance in the UK
What is net primary income?
- Wages, interest, dividends, profit, rent, interest, remittances
- FACTORS OF PRODUCTION
What are remittances?
- Remittances are when you earn money in one country and send it to another
What is secondary income?
- Overseas aid
- Joint military operations
- Overseas memberships (e.g. to be a member of the EU)
What do the capital and financial account do?
Record flows of money associated with saving, investment, speculation and currency stabilisation
If exports exceed imports… (BoP)
*There is a trade surplus
* The trade balance is positive
If imports exceed exports… (BoP)
- The country has a trade deficit
- Trade balance is negative
