Theme 2 - Measures of economic performance Flashcards
Gross Domestic Product
Measure of economic activity carried out in the domestic economy over a period.
Sum of output of good and services produced in an economy in a year.
sum of all incomes earned in a country in a year
sum of all expenditure in a year.
DOES NOT include earnings of residents while outside the country.
Actual economic growth
Increase in real incomes or GDP
Potential economic growth
This is the long run expansion of the productive potential of an economy. It is caused by increases in AS. The potential output of an economy is what the economy could produce if resources were fully employed.
Productivity
Measure of the efficiency of a factor of production
Economic growth
The rate of increase in GDP. - more spending, higher incomes and higher output in the economy.
difference between actual and potential economic growth
output gap
Eval. of increasing Incomes (GDP)
someone earns more; work longer hours, and have more work pressures or cost of living is higher such as increased mortgage payments.
Appl. of increasing gdp
country experiencing increases in incomes, output and spending- implies that better standard of living
Real values
Values that have been adjusted to remove the effects of inflation. The effects are removed using an index number that represents the changes in prices and the results are called constant values.-(includes a base year)
nominal values
values that are measured in money terms. Nominal figures are the unadjusted, current values.
gross national product (GNP)
total market value of all goods and services produced by domestic residents (GDP) plus income that residents have received from abroad, minus claimed by non-residents
gross national income (GNI)
GDP + net income from abroad
An evaluation of growth figures depends on
- how I well off the country is in the first place
- how much of the output is self consumed, does not appear as your GDP
- methods of calculation and reliability of data
- relative exchange rates-do they represent the purchasing power of the local currency
- type of spending by government-is money spent on welfare or on quality of life issues such as education and health
purchasing power parities (PPPs)
are when values are expressed in accordance with the amount that the currency will buy in the local economy.
Limitations of using GDP to compare living standards between countries and over time
- subsistence, barter and the hidden economy> farms consume their own output, good and services traded without the price system (barter), and goods paid for without being declared for tax purposes
- the informal economy
- currency values
- income distribution
- size of the public sector
- consumer and capital spending (living standards may increase in the future, but at the expense of living standards today.
- quality issues
public sector
Part of the economy controlled by the government
overcome limitations of measuring gdp
gvhjrtdgfgh tax burden?
gross national happiness (GNH)
And index designed in attempt to define an indicator and concept that measures quality of life in more holistic psychological terms then only using GDP. in the UK the ONS measures national well-being
inflation
a general sustained increase in prices, measured by a change in a weighted index of prices such as the consumer price index (CPI).
deflation
a fall in the general level of prices, i.e. negative inflation
disinflation
a fall in the rate of inflation, i.e. prices are rising more slowly.
Calculating the inflation rate in the UK
1) This is done using the Consumer Prices Index (CPI). It measures household purchasing power with the Family Expenditure SURVEY carried out by the office of national statistics (ONS). The survey finds out what consumers spend their income on. From this, a basket of goods is created. The goods are weighted according to how much income is spent on each item. Each year, the basket is updated to account for changes in spending patterns.
2) Price changes recorded once a month of 650 most common items and this is multiplied by the weights to give a price index.
Limitations of CPI when measuring inflation
- The basket of goods is only representative of the average household.
- only 57% respond to the survey and may not give accurate info
- housing cost not included-Housing costs account for about 16% of the index, yet this varies between people.
- unrepresentative for atypical spending patterns e.g. vegetarians and non-drivers
- CPI is slow to respond to new goods and services, even though it is updated regularly. Moreover, it is hard to make historical comparisons, since technology twenty years ago was of a vastly different quality, and arguably a different product altogether, than now.
Retail price index (RPI)
And index used to measure inflation that includes housing costs such as mortgage interest repayments.- RPI tends to have a higher value than CPI. But not as reliable for international comparisons and the statistical method of basing the data is also unique to the UK
Causes of inflation
- demand pull inflation
- cost push inflation
- money supply
Demand pull inflation
This is from the 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.
Cost push inflation
This is from the supply side of the economy, and occurs when firms face rising costs.
the main triggers for demand pull inflation are:
- A depreciation in the exchange rate, which causes imports to become
more expensive, whilst exports become cheaper. This causes AD to rise. - Fiscal stimulus in the form of lower taxes or more government
spending. This means consumers have more disposable income, so consumer spending increases. - Lower interest rates makes saving less attractive and borrowing more
attractive, so consumer spending increases. - High growth in UK export markets means UK exports increase and AD
increases.
cost-push inflation occurs when:
- Raw materials become more expensive, such as when oil prices rise.
- Labour becomes more expensive. This could be through trade unions,
for example. - Expectations of inflation- if consumers expect prices to rise, they may
ask for higher wages to make up for this, and this could trigger more inflation.
The effects of inflation on consumers
- real value of saving falls as price increases
- Those on low and fixed incomes are hit hardest by inflation, due to its regressive effect, because the cost of necessities such as food and water becomes expensive. The purchasing power of money falls, which affects those with high incomes the least.
- If consumers have loans, the value of the repayment will be lower, because the amount owed does not increase with inflation, so the real value of debt decreases.
The effects of inflation on firms
- Low interest rates means borrowing and investing is more attractive than saving profits. With high inflation, interest rates are likely to be higher, so the cost of investing will be higher and firms are less likely to invest.
- Workers might demand higher wages, which could increase the costs of production for firms.
- Firms may be less price competitive on a global scale if inflation is high, exports=expensive and imports=cheap. This depends on what happens in other countries, though.
- Unpredictable inflation will reduce business confidence, since they are not aware of what their costs will be. This could mean there is less investment.
- investment from abroad decreases
The effects of inflation on government
- The government will have to increase the value of the state pension and welfare payments, because the cost of living is increasing.
- redistribution of income-fixed income will fall and index-linked ones will not lose out
- reduction in real interest rate so cost of borrowing falls
The effects of inflation on Workers
- Real incomes fall with inflation, so workers will have less disposable income.
- If firms face higher costs, there could be more redundancies when firms try and cut their costs.
Level of employment
Number of people in work
Rate of employment
Proportion of people in work relative to the size of the workforce
Workforce
A measure of people working age who are at or are willing and able to work
unemployed
People who are willing and able to work, but not currently employed
level of unemployment
number of people out of work
rate of unemployment
number of people out of work in proportion of the workforce
Measures of unemployment
- The Claimant Count
- The International Labour Organisation (ILO) and the UK Labour Force Survey (LFS)
The Claimant Count
This counts the number of people claiming unemployment related benefits, such as Job Seeker’s Allowance (JSA). They have to prove they are actively looking for work.
-cheap and easy to obtain this data, and useful measure of hardship
Evaluating the Claimant Count
Not every unemployed person is eligible for, or bothers claiming JSA. Those with partners on high incomes will not be eligible for the benefit, even if they are unemployed.
Women entering workforce after maternity leave are not eligible as well as resigned from previous job within last 6 months are refused 3 jobs offered. Although there may be instances of people claiming the benefit whilst they are employed, the method generally underestimated the level of unemployment.
The International Labour Organisation (ILO) and the UK Labour Force Survey (LFS)
The LFS is taken on by the ILO. It directly asks people if they meet the following criteria:
- Been out of work for 4 weeks
- Able and willing to start working within 2 weeks
- Workers should be available for 1 hour per week. Part time
unemployment is included.
evaluation of Labour force survey (LFS)
the survey data are 6 weeks out of date by the time they are published, which happens (by sampling) every month
why does LFS give a higher unemployment figure than the Claimant Count.
Since the part time unemployed are less likely to claim unemployment benefit, this method gives a higher unemployment figure than the Claimant Count.
underemployed
The underemployed are those who have a job, but their labour is not used to its full productive potential. Those who are in part-time work, but are looking for a full-time jobs are underemployed.
employment is affected by:
- the school or compulsory training leaving age
- number of school leavers entering higher of further education
- level of net migration
- availability of jobs
- level of taxes and benefits
inactivity
A measure of people of working age who are either unwilling or unable to work. These could include carers for the elderly, disabled or children, or those who have retired. Some workers are discouraged from the labour market, since they have been out of work for so long that they have stopped looking for work. If the number of the economically inactive increases, the size of the labour force may decrease, which means the productive potential of the economy could fall.
Problems with the measure of inactivity
can make the level of unemployment look lower than they really are - many students looking for work, many people signed off work with a health impairment, cares of dependents (largely women) who are inactive but would like to work but cannot find employment to cover costs of childcare.
The significance of changes in the rates of employment and unemployment on consumers
If consumers are unemployed, they have less disposable income and their standard of living may fall as a result.
There are also psychological consequences of losing a job, which could affect the mental health of workers.
The significance of changes in the rates of employment and unemployment on firms
With a higher rate of unemployment, firms have a larger supply of labour to employ from. This causes wages to fall, which would help firms reduce their costs.
However, with higher rates of unemployment, since consumers have less disposable income, consumer spending falls so firms may lose profits. Producers which sell inferior goods might see a rise in sales.
It might cost firms to retrain workers, especially if they have been out of work for a long time.
The significance of changes in the rates of employment and unemployment on workers
With unemployment, there is a waste of workers’ resources. They could also lose their existing skills if they are not fully utilised.
The significance of changes in the rates of employment and unemployment on the government
If the unemployment rate increases, the government may have to spend more on JSA, which incurs an opportunity cost because the money could have been invested elsewhere.
The government would also receive less revenue from income tax, and from indirect taxes on expenditure, since the unemployed have less disposable income to spend.
The significance of changes in the rates of employment and unemployment on society
There is an opportunity cost to society, since workers could have produced goods and services if they were employed.
There could be negative externalities in the form of crime and vandalism, if the unemployment rate increases.
Real wage inflexibility and classical views for it
A measure of people who are willing to work at the going wage rate. Classical economists argue that wages above the market equilibrium may cause unemployment.
If demand then shifts to the left, due to a fall in consumer spending for example, there would be more unemployment since wages are not able to adjust.
Classical economists would argue that by letting wages be flexible, by removing trade union power and removing the NMW, wages could fall and unemployment would fall to 0.
(short run)
limitations for classical views for real wage inflexibility argument
However, cutting wages during times of weak consumer spending would cause further falls in consumer spending, and there would be even lower economic growth. Moreover, the classical economist argument is made on the assumption of a perfectly competitive market, which is not true in reality.
Demand deficiency (cyclical unemployment)
This is caused by a lack of demand for goods and services, and it usually occurs during periods of economic decline or recessions.
Seasonal unemployment
This occurs during certain points in the year, usually around summer and winter. During the summer, more people will be employed in the tourist industry, when demand increases.
Frictional unemployment
This is the time between leaving a job and looking for another job. It is common for there to always be some frictional unemployment, and it is not particularly damaging since it is only temporary. This is why it is rare to get 100% employment: there will always be people moving between jobs.
Structural unemployment
This occurs with a long term decline in demand for the goods and services in an industry, which costs jobs. This is especially true of jobs in industries such as car manufacturing, where labour is replaced by capital (this is also called technological unemployment). Moreover, the decline of the coal and ship building industries in the UK, led to a great deal of structural unemployment.
aggregate effect of demand deficient unemployment
Firms are either forced to close or make workers redundant, because their profits are falling due to decreased consumer spending, and they need to reduce their costs. This then causes output to fall in several industries.
reasons for demand deficient unemployment
- a lack of business confidence
- an increase in the value of a currency
- slow rates of productivity growth relative to other countries
- external shocks such as oil price rises (oil is imported and demand is price inelastic, so if the price rise there will be less spending in the uk).
- increased use of imports from low wage economies
how is structural unemployment worsened, (geographical and immobility of labour)
This type of unemployment is worsened by the geographical and occupational immobility of labour. If workers do not have the transferable skills to move to another industry, or if it is not easy to move somewhere jobs are available, then those facing structural unemployment are likely to remain unemployed in the long run.
how does globalisation contribute to structural unemployment
Globalisation also contributes to structural unemployment, since production in the manufacturing sectors, such as in clothing or motor cars, moves abroad to countries with lower labour costs. This means that workers trained for these jobs will become unemployed, because the industry has declined in size or has been removed from the economy.
The significance of migration and skills for employment and unemployment
- Migrants are usually of working age, so the supply of labour at all wage rates tends to increase with more migration.
- There could be more competition to get a job due to the rise in the size of the working population.
- Migrants tend to bring high quality skills to the domestic workforce, which can increase productivity and increase the skillset of the labour market. This could increase global competitiveness.
- Migrant labour affects the wages of the lowest paid in the domestic labour market, by bringing them down. This is because migrants are usually from economies with lower average wages than the UK NMW. However, this impact is only small. For the medium and higher income households, it is hard to find evidence of worker displacement or depressed wages.
- The skills of migrant labour could substitute those of the domestic market, so workers could be replaced. If the skills complement the domestic labour market, there could be a welfare gain through higher productivities.
balance of payments
This is a record of all financial transactions made between consumers, firms and the government from one country with other countries. It states how much is spent on imports, and what the value of exports is. it comprises the current, financial and capital accounts
exports
Exports are goods and services sold to foreign countries, and are positive in the balance of payments. This is because they are an inflow of money.
imports
Imports are goods and services bought from foreign countries, and they are negative on the balance of payments. They are an outflow of money.
current account
The current account records trade in goods, trade in services, investment income and current transfers.
trade in goods
measures the movement of tangible products across international borders. uk=larger exporter of pharmaceuticals and cars, but major importer for foodstuffs and net importer of oils and gas.
trade in services
measures movement of intangible output. uk=major exporter of banking and insurance services but importer of foreign holidays.
investment income
the reward for investments in other countries. It comprises interest, profit and dividends
current transfers
the payment of money across international boundaries that has no corresponding output.
current account surplus
A current account surplus means there is a net inflow of money into the circular flow of income. The UK has a surplus with services, but a deficit with goods.
current account deficit
This means the UK spends more on imports from foreign countries, than they earn from exports to foreign countries. If the deficit is large and runs for a long time, there could be financial difficulties with financing the deficit. The UK has a current account deficit.
financial account
records money flows for investment purposes; foreign direct investment (buying out assets and ownership of companies in other countries) and foreign portfolio investment (‘hot money’), which is the speculative movement of money between countries as exchange rates and interest rates change.
capital account
which put the two other accounts in balance by recording the changes in net assets in each country, as well as erros and omissions.
why is a deficit not a problem
not a problem as long as it can be funded;
can be a sign that living standard are rising
why is a deficit a problem
- foreign currencies begin to run lowland country is not paying its way
- currency falls in value, which is inflationary (import become more expensive)
- sign that country is becoming uncompetitive (costs rising relative to trading partners)
- can cause unemployment in the domestic economy, and readjustments in the long-run; tax increases, to stop people from overspening
- although higher tax and cuts can solve problem, they’re likely to slowdown economic growth
The relationship between current account imbalances and other macroeconomic objectives
- By selling more exports to foreign countries, the UK will have a greater inflow of money into the circular flow of income. This will increase AD and improve the rate of economic growth.
- In the UK, during periods of economic decline or recessions, the current account deficit falls. This is because consumer spending falls.
- During periods of economic growth, when consumers have higher incomes and they can afford to consume more, there is a larger deficit on the current account.
- If imported raw materials are expensive, there could be cost-push inflation in the UK, since firms face higher production costs.
The interconnectedness of economies through international trade
- In theory, the sum of all countries’ trade balances should be zero, since what one country exports will be imported by another country.
- If the UK’s main export market, such as the EU, faces an economic downturn then demand for UK goods and services will fall, since consumers in the EU are less able to afford imports.
- International trade has meant countries have become interdependent. Therefore, the economic conditions in one country affect another country, since the quantity they export or import will change.
sustainablity
needs of the present are met without compromising the ability of future generations to meet their own needs.
cause of current account imbalance
- country spending too much
- not producing anything potential costumers abroad want to buy
- stage of business cycle, different at different times, or strength of the currency
when is current account imbalance significant
it if is unsustainable
effect of persistent deficit
- can make the value if a currency fall, so in some economies the government might try to buy up surplus currency in order to maintain its value. (doesn’t happen in the uk)
- also see net incomes leave the country, which might mean demand in the domestic country is subdued.-subdued demand might be a welcome development, preventing the onset of inflation.
