Theme 2: Measures of Economic Performance Flashcards
List the macroeconomic objectives
Sustainable economic growth
Low unemployment
Low inflation
Balanced current account
Reducing the budget deficit
Reducing inequality
Environmental sustainability
Explain the main 4 macroeconomic objectives
Sustainable economic growth ~3% - Higher living standards, materially better off, higher disposable incomes
Low unemployment ~4% full capacity - increased spending power, less crime, less spent on benefits
Low inflation ~2% - protects real terrm spending power, encourages investment, more competitive prices
Balanced current account - afford to pay for its imports
Explain economic growth and how it is measured
The long run expansion of an economy’s production potential. Measuerd through a country’s GDP
Give the difference between ‘nominal’ and ‘real’
Nominal national income: the value of national income
Real national income: the volume of national income, adjusted for inflation
Give the difference between ‘value’ and ‘volume’
Value: the amount of goods multiplied by the prices sold for
Volume: the amount of goods produced
Explain the benefits of using GDP to measure living standards
Good approximation of how much is produced by the economy
Greater spending within the economy / consumption of products with higher GDP
Per capita measure is internationally comparable and consistent
Explain the problems of using GDP to measure living standards
Must be adjusted (for inflation / population / costs of living etc…)
Doesn’t indicate how equal income distribution is
Shows the level of production, but not the pattern
Doesn’t indicate the level of environmental degradation
Excludes ‘shadow’ economy
No indication of how growth is achieved
Explain the purpose of PPPs
Makes meaningful comparisons between countries about average standards of living
Define Purchasing Power Parities (PPPs)
Economic indicators that compare the relative value of currencies across different countries by determining the amount of goods and services one unit of currency can buy in each country
Define inflation
A sustained rise in the general price level over three consecutive quarters
Define deflation
A sustained fall in the general price level over three consecutive quarters
Define disinflation
A fall in the rate at which the general price level is rising
Explain how the rate of inflation is measured using the Consumer Price Index (CPI)
Measured using a ‘basket of goods’
Weighted according to consumption, designed to reflect the average household
Approximately 700 items, updated each year to follow trends in spending patterns
Data is gathered by a family expenditure survey
Calculated as an index number against a base year
Explain the limitations of CPI in measuring the rate of inflation
Doesn’t include housing costs even though these account for significant expenditure for most households
Some people don’t follow the average spending ptterns, so their inflation rates may vary compared to the average
Attempts to account for the value or weight of goods may not be precise
The 700 items are only updated once a year, so sudden changes in the spending pattern are not considered
Sampling issues, e.g. underestimates
Explain the difference between the CPI and RPI
RPI takes into account housing costs such as mortgage interest payments and council tax
CPI uses a geometric mean to calculate inflation, which tends to be more accurate in measuring price changes, while RPI uses an arithmetic mean
Explain how demand pull inflation is caused
Aggregate demand rises faster than aggregate supply
Explain how cost push inflation is caused
Higher costs of production across the economy shifts SRAS inwards
Explain the impact of inflation on individuals
Implies that incomes fall in real terms
If inflation is higher than the interest rate, the real value of savings decreases / the real value of loans decreases, making them more manageable for consumers
Reduces real values of debt / savings
Those in poor bargaining positions can’t get pay rises
Explain the impact of inflation on government
Fall in value of national debt
Increased inequality
Deterioration in trade balance due to lack of exports
Dealing with inflation reduces resources to fix other objectives
Explain the impact of inflation on firms
Fall in exports due to lack of international competitivity
Uncertainty leads to lower investment
Lower profits with cost push, greater profits with demand pull
Can cause tight monetary policy which can harm investment
Explain the impact of inflation on the economy
Unemployment rises
Lower investment leads to lower real output, fewer jobs
Worsened current account due to lack of international competitivity
Define unemployment
Someone of working age who is willing to work and actively seeking work who currently does not have a job
Define underemployment
When a worker’s skills are not used to their full capacity / they are not working as many hours as they would like
Define employment rate
The proportion of the working age population in employment
Define unemployment rate
The proportion of the working age population who are unemployed (unemployed * 100 / economically inactive)
Define inactivity rate
The proportion of the working age population who are not economically active (students, carers, sick, retired)
