measurement of macroeconomic performance

what are the four macroeconomic objectives

economic growth

price stability

balance of payments

full employment

what are the alternative objectives?

balancing the budget

achieving an equitable distribution of income

environmental protection

conflicts between economic growth and inflation

• increasing economic growth causes economy to move closer to full employment

• Prices for remaining resources are bid up, leading to inflation over target rate

conflict economic growth and sustainability

• economic growth → more production → increases pollution, negative externalities, and depletion ( extraction ) of non-renewable resources

• Higher the growth, the faster the depletion → more production so need more resources to produce more.

economic growth and inequality

During high economic growth, profits the owners of factors of production receive are disproportionate to any increase in workers’ wages leading to higher inequality

economic growth and a balanced budget

economic growth driven by expansionary fiscal policy oftrn requires a budget deficit

economic growth and balancing current account

EG usually leads to higher incomes which → increase in imports by households ( spending more ) therefore worsening current account balance

low unemployment and low inflation

Full employment → less workers available to hire, more workers working, so higher wages → which increases overall demand - pull inflation

how did objectives change between 1940s → 1970s?

• keynesian economics

• importance was placed on achieving economic growth and full employment

1980s?

focus shifted to free market economics

during this time UK suffered from high levels on inflation

1990s?

importance was to control inflation

2008→2012

period of economic recession

low economic growth and employment required policies to stimulate demand as low demand was holding back growth and employment, so demand-stimulating policies were needed to help the economy recover.

how is economic growth measured?

real GDP

Nominal GDP

GDP per capita

what is nominal GDP?

the value of all goods and services produced in an economy in a year, measured at current prices.

real GDP?

nominal GDP adjusted for inflation.

what is real GDP per capita?

real GDP divided by population, showing average output per person.

what is inflation?

a sustained rise in the general level of prices

how is inflation measured?

CPI

RPI

what is CPI?

measures changes in the price of a fixed basket of consumer goods and services.

what is RPI?

retail price indices

similar to CPI, but includes housing costs such as mortgage interest and council tax.

how is unemployment measured?

labour force survey

claimant count

what is unemployment?

Individuals willing and able to work but cannot find a job

what is labour force survey

a household survey used to measure unemployment internationally.

what is claimant count

the number of people claiming unemployment-related benefits.

how is satisfactory balance of payments measured?

• favourable current account

what is the balance of payments

records money flowing into and out of a country over a period.

what is current account?

the main part of the BOP, covering trade in goods and services, income, and transfers.

what is a trade deficit?

when imports > exports

what is a trade surplus

when exports are greater than imports

what are index numbers?

a tool used to track changes in prices, quantities or economic activity over time, usually with a base year = 100.

what is base year/base period?

the reference period used for comparison in an index.

what is weighting?

giving items different importance based on how much households spend on them.

how to calculate index?

value in current year/value in base year x 100

formula for CPI

cost of basket in current year/cost of basket in base year x 100

how to calculate inflation rate?

New CPI - Old CPI / Old CPI x 100

how to find weighted value/index?

price x weight

what do you do after calculating each weighted value

add them together to get the total index

How can national income data be used to assess changes in living standards over time?

Rising GNI per capita usually suggests average incomes are increasing, so living standards may be improving.

Why is national income data useful for policy evaluation?

It helps you judge whether economic policy has improved economic well-being over time.

What is a limitation of using national income data over time?

It is only an average, so it hides inequality within a country.

What other limitation affects comparisons over time?

It does not show changes in the quality of goods and services.

What is another weakness of GDP/GNI data over time?

It ignores unpaid and voluntary work.

Why can hours worked make national income data misleading?

Two countries may have similar income, but one may need more hours to produce it, so living standards may be lower.

What environmental limitation does national income data have?

It ignores externalities such as pollution and health costs.

How can national income data be used to compare living standards between countries?

It gives a rough guide to relative wealth and average living standards.

What is a limitation of comparing countries using GDP per capita?

Currency values differ, so the comparison may be inaccurate.

Why is PPP important in international comparisons?

It adjusts for differences in price levels, so you compare what income can actually buy.

What does PPP do?

It equalises purchasing power so the same basket of goods costs the same in each country when converted into a common currency.

How does PPP improve living standards comparisons?

It shows whether people can buy more or less with their income in different countries.