THEME 2 - Topic 2 - Inflation, U/E + Balance Of Payments Flashcards
Define inflation
A sustained rise in the average price level of an economy, causing the value of money to fall.
What method is inflation in the UK measured by?
CPI since 2004 by the ONS.
Define a CPI
The consumer price index is a measure of the average level of prices in the UK, the rate of change of which has been used as the government’s inflation target since 2004.
Name 5 disadvantages of using CPI to measure inflation
- Different families have different tastes
- Base year has to have stable prices
- Over long periods CPI becomes meaningless
- New products may not be included- missed trends and updated frequently
- Measures of price changes do not take into account quality of goods
What is the formula for rate of inflation?
Sum (% change in price x weight of good) = inflation
How often is inflation updated?
Monthly.
Who is responsible for inflation in the UK?
Monetary Policy Committee (MPC).
What is the CPI based on?
A basket of commodities.
How many goods/services are collected by the ONS?
Approximately 750.
How many outlets across the whole of the UK are used in CPI?
180,000.
What do they do with the basket commodities?
Calculate an average price for each good in the current year, and compare this to the base year by calculating a percentage change.
What type of index is a CPI?
Weighted index.
How does the ONS calculate the weight of goods?
By using the Living costs + food survey.
How many households take part in the Living costs + food survey?
4,000.
What are the 4,000 households asked to record annually?
Their expenditure over 2 weeks.
Define RPI
The Retail Price Index is an alternative measure to that of the CPI of the average level of prices in the UK.
What did the RPI ignore?
Incomes from higher/lowest 4% of earners and those not from private households.
What year did inflation in the UK start being counted?
1947 so that the workers could claim higher wages due to a higher cost of living.
What happened in 1997?
Tony Blair was elected and replaced the RPI (all items) for the RPI-X.
What did the RPI-X exclude?
Mortgage interest repayments.
What was the inflation target in 1997?
2.5% with 1% either way.
What happened in 2004?
The CPI was introduced because it was an international standard that was easier to compare with the rest of the world.
What does the CPI exclude?
Mortgage interest repayments and council tax.
What was the inflation target post 2004?
2% with 1% either way.
What happened in 2017?
The CPI-H gained more popularity, which adds on housing costs to the CPI.
Define disinflation
Is a fall in the rate of inflation, the average level of prices is rising but at a slower rate than previously, and occurred between October 2022 (11%) to December 2024 (2.5%).
Define deflation
A fall in the average price levels of the economy (negative inflation), which causes the value of money to increase. This occurred in the UK in April and September 2015 at 0.1%.
Define in employment
Are people who are either working for firms or organisations or self-employed.
Define economically active
Are those people who are of working age, who are willing and able to work, who form part of the labour-force, and are either in employment or unemployed.
Define the workforce
Are people who are economically active - either in employment or unemployed.
Define economically inactive
Are those people of working age who are not looking for work, for a variety of reasons, such as discouraged workers.
Define discouraged workers
Are people who have been unable to find employment and who are no longer looking for work, and are economically inactive.
Define unemployed
Are people who are economically active but are not in employment, they are willing and able to work.
Define working age population
The 43 million people as of 2024 who are aged between 16 and 64 in the UK.
Define full employment
It’s a situation where people who are economically active in the workforce and are able to work are able to find employment.
Define the claimant count
The claimant count of unemployment is the number of people claiming job seekers allowance each month
Give the ILO definition of unemployment
People who are of working age who are out of work, want to work, have actively sought work in the last 4 weeks and are available to start work in the next 2 weeks.
Give the ILO definition of the rate of unemployment
It’s a measure of the workforce who are without jobs, but are available for work, willing to work and looking for work.
What is the formula for the rate of unemployment?
Unemployed
——————— x 100
Workforce
What is the internationally recognised method of measure U/E and how many people take part in the UK?
Labour force survey (23,000 households).
Define rate of unemployment
It’s the number of people unemployed as a percentage of the number of people in the workforce.
Define underemployment
Is where an individual is employed in a second-choice occupation or is only able to work part-time but would like to work full-time
Define cyclical unemployment
Is unemployment that arises from the downturn of the business cycle, such as a recession.
Define demand-deficient unemployment
Is unemployment that arises because of a deficiency of aggregate demand in the economy, so that the equilibrium of output is below full employment.
Define frictional unemployment
Is unemployment associated with job search, which is not deemed harmful to the economy because it is in the short-term.
Define classical unemployment
Is unemployment caused by real wages being too high so that workers will want to supply more labour than the business wants to employ.
Define seasonal unemployment
Is unemployment that arises in seasons of the year where demand is relatively low such as skiing.
Define structural unemployment
Is caused by changes in the pattern of economic activity within the economy, and when skills become obsolete.
Define voluntary unemployment
Occurs when an individual chooses to not accept a job at the giving wage rate. (All types of employment)
Define involuntary unemployment
Occurs when an individual, who would like to accept a job at the going wage rate, is unable to find employment. (Only cyclical unemployment).
Define the balance of payments
A set of accounts showing the transactions conducted between one country and the rest of the world.
What type of item is represented by an inflow of money?
Credit item.
What type of item is represented by an outflow of money?
Debit item.
What are the 3 main accounts of the balance of payments?
Current account
Capital account
Financial account
What 4 accounts compose the current account?
Trade in goods (visible trade)
Trade in services (invisible trade)
Current income (primary income)
Current transfers (secondary income)
What are current transfers (SI) ?
Taxes from non-resident workers/businesses, remittances and transfers between institutions.
What 2 accounts compose the current income account?
Current investment income account
Employment income account
What type of transactions compose the employment income account?
Migrant employee transfers
What 3 accounts compose the current investment income account?
Direct investment income account (profits)
Portfolio investment income account (dividends)
Other investment income account (interest)
What refers to the direct investment income account?
Profits.
What refers to the portfolio investment income account?
Dividends.
What refers to the other investment income account?
Interest.
What does the capital account refer to?
Transactions in fixed assets (I.E migrant transfers).
What does the financial account refer to?
Transactions in financial assets.
What 3 accounts compose the financial account?
Direct investment account (FDIs + MNCs)
Portfolio investment account (Buying shares/bonds)
Other investment account (Savings/borrowing)
Which other account does the financial account link to?
Current investment income account.
What must the balance of payments equal?
0.
What does the balance of payments incorporate?
Net errors and omissions items.
How is a deficit in the current account offset?
A surplus in the financial account.
Why does the UK have a deficit in the current account?
Poor international competitiveness meaning the UK imports more goods than it exports.
In the short-term, how can the UK offset its current account?
Selling shares/bonds.
