Theme 2 - Measures of Economic Performance

Question 1

define Inflation

Answer 1

An increase in the general price level of an economy

Question 2

What is CPI inflation

Answer 2

Consumer Price Index is an internationally recognised measure of calculating inflation, the Bank of England use this rate when setting their inflation target

Question 3

explain 4 steps in the calculation of CPI inflation

Answer 3

1 An annual Household Expenditure Survey is used to identify a typical basket of goods that is consumed (around 650). 2 Each item is weighted depending on how much income on average is spent on this product. 3 A monthly price survey takes place to check the prices of the basket goods at different retailers. 4 Taking into account the weights of each item an index is created which tracks the price level of all basket goods and can be compared to the base year.

Question 4

Why do basket items have to be updated each year (CPI)

Answer 4

to reflect the changing composition of consumption, there are many products available today that hadn’t even been invented two decades ago and the basket must reflect current consumer patterns

Question 5

if inflation is 2% in 2013 and 1% in 2014 what happened to the price level

Answer 5

it rose at a slower rate - disinflation

Question 6

define base year

Answer 6

the year with an index number of 100 used to make other years more comparable

Question 7

define weight (CPI)

Answer 7

the weight of product is the relative importance of the product, the higher proportion of income spent on a product the more weight it has due to its greater influence on inflation

Question 8

define weighted index

Answer 8

a composite index where the value at a point in time is calculated by applying weights to items in the idex, CPI is a weighted index

Question 9

why is CPI used over RPI in the UK

Answer 9

it is internationally recognised so international comparisons can be made

Question 10

define deflation

Answer 10

a fall in the general price level

Question 11

define disinflation

Answer 11

a fall rise in the rate of inflation

Question 12

define ‘in employment’

Answer 12

a worker who has a job

Question 13

define ‘the level of unemployment’

Answer 13

total number of people unemployed

Question 14

define ‘the rate of unemployment’

Answer 14

the percentage of the economically active population without a job

Question 15

what is meant by ‘labour force’ or workforce

Answer 15

the number of economically active workers aged 16-65 who are available to work

Question 16

define ‘economically inactive’

Answer 16

people of working age who are not looking for work e.g. maternity or students

Question 17

define ‘discouraged workers’

Answer 17

people who have given up looking for work

Question 18

define structural unemployment

Answer 18

people who don’t have the skills that employers require due to the decline of an industry

Question 19

define cyclical or demand deficient unemployment

Answer 19

Unemployment due to downturn in the economy

Question 20

define Frictional unemployment

Answer 20

people between jobs

Question 21

define youth unemployment

Answer 21

people 16-24 who are unemployed

Question 22

why is youth unemployment particularly undesirable

Answer 22

if a young person doesnt get a job, there is a higher chance of them becoming a discouraged worker which decreases potential economic growth

Question 23

Voluntary unemployment

Answer 23

a person unwilling to accept a job at the prevailing wage rate

Question 24

Involuntary unemployment

Answer 24

someone willing to accept a job at the prevailing wage rate but cannot find one

Question 25

define the participation rate

Answer 25

the ratio of people who are economically active as a percentage of all working age people

Question 26

define the dependency ration

Answer 26

the ratio of people who are not working as a proportion of the total population

Question 27

define underemployment

Answer 27

either when someone takes second choice occupation or someone who cannot find full time work and so does part time

Question 28

define seasonal unemployment

Answer 28

Unemployment caused by time of year e.g. skiing resort in summer

Question 29

how is Claimant Count measured

Answer 29

the number of people claiming JSA

Question 30

how is ILO measured

Answer 30

• Internationally recognised
• Monthly Labour Force Survey asks people about their working habits.
• Someone who is out of work, have actively sought work in the past 4 weeks and is readily available to work in the next 2, or who are out of work but starting a new job in the next 2 weeks.

Question 31

advantages and disadvantages of Claimant Count

Answer 31

good: Accurate and measures how much unemployment is costing the government in terms of benefits.
bad: excludes people seeking work and not claiming benefits while including people claiming benefits but not actively seeking work.

Question 32

advantages and disadvantages of ILO

Answer 32

good: includes a broader age range and people not claiming benefits, also internationally viable.
bad: doesn’t help measure the cost of unemployment related benefits

Question 33

what impact does migration and immigration have on unemployment

Answer 33

• if migrants are of working age, willing to work and can plug a skills gap then it can reduce the dependency ratio and increase the size of the labour force and reduce unemployment rate.
• If immigrants not of working age then this increases dependency ratio.
• If immigrants are of working age, willing to work but are replacing domestic workers then this would decrease the wage rate, may increase productivity as people compete for jobs but also may increase unemployment rate. May also increase voluntary unemployment if the wage rate falls below the accepted rate by domestic workers.

Question 34

identify and explain the consequence of unemployment on consumers

Answer 34

Have less income so are able to consume less, consumer welfare and SoL falls

Question 35

identify and explain the consequence of unemployment on firms

Answer 35

sell fewer products so make less profit, may reduce investment and lead to further redundancies if businesses find they have surplus capacity.

Question 36

identify and explain the consequence of unemployment on workers

Answer 36

Less confidence in the employed and workers may have to work longer hours or change their pay and conditions. Hysteresis may occur in the long run.

Question 37

identify and explain the consequence of unemployment on the government

Answer 37

receive less in income tax revenue and spend more on out of work benefits like JSA

Question 38

identify and explain the consequence of unemployment on society

Answer 38

can cause increases in mental illnesses like depression, can cause crime and civil unrest

Question 39

Advantages and disadvantages of inward migration

Answer 39

-when there is a skills gap: increases productive potential of an economy, leading to growth, can improve international competitiveness and improve the position of the balance of payments, generates more income tax and corporation tax revenue for the government so can reduce budget deficit.
-When there is not a skills gap: they can replace domestic workers and reduce wage rates which may cause civil unrest.
Disadvantages: some migrants are economically inactive and do not contribute to output and so may put pressure on public services e.g. NHS, housing, and increase the dependency ratio

Question 40

define ‘balance of payments’

Answer 40

a record of all the financial transactions between a country and the rest of the world.

Question 41

define Current Account

Answer 41

-Trade in goods
-Trade in services
-Current transfers
-Investment income
(FOR ALL- exports are a credit, imports are a debit)

Question 42

define net exports

Answer 42

exports minus imports

Question 43

distinguish between a current account surplus and a current account deficit

Answer 43

a current account deficit is when the total of the items in the current account in negative. vice versa

Question 44

what might cause a current account surplus or deficit

Answer 44

deficit- might be caused by lack of international competitiveness, a high marginal propensity to import, domestic incomes rising, high exchange rate, global recession.
surplus- the opposite

Question 45

Disadvantages of a current account surplus or deficit

Answer 45

deficit means there is a leakage from the circular flow of income which can decrease economic growth
- surplus means there is an injection into the circular flow of income so can lead to inflation

Question 46

how does current account surplus or deficit affect other macro objectives

Answer 46

deficit can cause problems for economic growth and unemployment
-surplus can cause inflation

Question 47

explain, using SPICEE how the exchange rate affects the current account

Answer 47

if the pound is strong then imports will be cheap and exports will be expensive so we will be in a deficit as more will import and there will be less demand for exports and vice versa

Question 48

what accounts of the balance of payments would these appear in (All UK citizens living in the UK) 1 holiday in France 2 polish worker sending wages back to Poland 3 the sale of a UK embassy building in Syria

Answer 48

1 Trade in services (import/ debit item)
2 current transfer (Import/debit item)
3 investment income (export/ credit item)

Question 49

explain a scenario where two countries are interconnected by trade

Answer 49

Apple is a US company but they manufacture many of their products at the Foxconn factory in China. If there is a problem in the Chinese economy e.g. there is high inflation, this will affect the production cost for apple - so in this way a US company will be affected by economic events in china.