topic 10 - theme 2 Flashcards
measure of economic performance
what is inflation?
the rate of increase in the average price level in an economy
why is stability of inflation important?
as it is believed that unpredictable fluctuations may discourage firms from investing
how do you calculate index numbers?
(new variable/base year variable) x 100
what is consumer price index (CPI)?
a measure of rate of change in the general level of prices used by the UK government since 2004
what des CPIH and CPI show?
the current level of prices
what is retail price index (RPI)?
a measure of the average level of prices in the UK
what is the difference between RPI and CPI?
- RPI excludes pensioners and the highest income earners
- RPI included mortgage payments
what is deflation?
a fall in the average level of prices (negative inflation)
what is disinflation?
a fall in the rate of inflation
why is deflation bad for an economy?
because of deferred spending
what does deferred spending mean?
where consumers avoid spending now in the hope that prices will fall
- this causes a further fall in aggregate demand
what does aggregate demand mean?
the total demand for goods and services within a particular market.
what does deflation lead to?
- a decrease in overall consumer spending and economic activity
- increase in real debt burden
- increases the real value of debt making it more difficult for borrowers to repay their debts
- defaults, foreclosures and bank failures
- push businesses to lower wages or lay off employees to maintain profit levels
what does unemployed mean?
people who are economically active but are not in employment OR those willing to work, able to work and actively seeking for work but not employed
what does economically active mean?
people who are willing to work and able to work
what does economically inactive mean?
people of working age who are not actively seeking work or are not in employment for a variety of reasons
what does workforce mean?
the portion of the population who are willing and able to work and are either in employment or actively seeking employment
what does full employment mean?
a situation where people who are economically active are able to find employment
- 3% or less unemployment
what does claimant count mean?
the number of people claiming job seekers’ allowance (JSA) each month
how many people are currently included in the claimant count in the UK?
1.7 million
why might the claimant count over-estimate and under-estimate true employment in different people/groups?
as it only counts for people who claim benefits
what is the ILO unemployment rate?
a measure of the percentage of the workforce whoa re without jobs, but are available for work, willing to work and looking for work
what does ILO stand for?
international labor organisation
how to calculate ILO unemployment rate?
(unemployed/labor force) x100
what are the problems with ILO rate of unemployment?
- based on a sample and then extrapolated so may not be 100% accurate
- does not include those who are unable to find work at their desired wage rate as unemployed
what are the causes of unemployment?
- real wage/classical unemployment
- demand-deficient unemployment
- cyclical unemployment
- structural unemployment
- seasonal unemployment
- voluntary unemployment
- frictional unemployment
what does real wage/classical unemployment mean?
unemployment caused by a wage rate being set above equilibrium
what does demand-deficient unemployment mean?
unemployment that arises because of a deficiency of aggregate demand in the economy
what does cyclical unemployment mean?
occurring during a downturn in the economic cycle
what are the causes of cyclical unemployment?
- a decrease in aggregate demand
- reduced consumer spending
- business investment
- government spending
- global economic slowdowns
what is an example of cyclical unemployment?
increased unemployment during the global financial crisis in 2008-2009
what does structural unemployment mean?
unemployment that arises due to the changes in the patterns of economic activity within an economy
-> a mismatch between the skills of labor force and the skills demanded by employers
what are the causes of structural unemployment?
- technological advances
- globalisation
- changes in consumer demand
- labor market rigidities -> regulations, minimum wage laws etc.
what is an example of structural unemployment?
decline of the coal industry in the UK leading to unemployment
what does seasonal unemployment mean?
workers are employed only during certain seasons or periods of the year - based on demand for specific industries
what are the causes for seasonal unemployment?
- weather conditions affecting certain industries -> agriculture or tourism
- seasonal demand for certain products or services
what is an example of seasonal unemployment?
agricultural workers
what is voluntary unemployment?
unemployment arising when an individual chooses not to accept a job at the going wage rate
what is frictional unemployment?
temporarily without a job while transitioning from one position to another or entering the workforce for the first time - voluntary and short term
what are the causes of frictional unemployment?
- job search
- entry and re-entry into the workforce
- mismatch of skills and job requirements
what is an example of frictional unemployment?
a recent uni graduate taking their time to find a job that matches their qualifications
what is the balance of payments?
a set of accounts showing the transactions between residents of a country and the rest of the world over a period of time
what is the balance of payments current account?
the part of the balance of payments account that deals with trade goods (visible trade), trade in services (invisible trade), primary income (investment income) and secondary income (transfers)
what is an export?
a domestically produced good or service sold to residents of other countries
what is an import?
a good or service produced abroad sold to residents whoa re not permanent residents of that country
what is investment income?
profit and interest income flowing into a country that is generated from assets that residents of the country own abroad
what is an example of investment income?
the profits that return the UK Tesco head office from their overseas stores (inward)
what are transfers?
payments flowing between countries in forms such as foreign aid, grants and gifts
what is an example transfers?
foreign aid from Britain to overseas economies (outward)
what is the current account?
most important part of the balance of payments
what does the current account show?
a country’s international competitiveness and whether it is ‘living within it’s means’
what is current account deficit?
occurs when the currency outflows in the current account exceed the currency inflows
- outflows > inflows
what is current account surplus?
occurs when the currency inflows in the current account exceed the outflows
- inflows > outflows
- do not assume surplus is always better
what is exchange rates?
the price of one currency in terms of another
