2.1 measures of economic performance

GDP

the total value of goods and services produced in a country within a year

How GDP can be measured

• Output- production

• Expenditure- adds up all the spending in an economy

• Income- sums all income generated by production

Nominal GDP

the actual value of all goods/services produced in an economy in a one-year period

real GDP

the value of all goods/services produced in an economy in a one-year period - and adjusted for inflation

GDP per capita

GDP / the population

• It shows the mean wealth of each resident in a country

• This makes it easier to compare standards of living between countries

GNI

measures the total income earned by a country’s residents and businesses regardless of where that income is generated, during a given period

• often used to compare the economic well-being of a country’s residents

PPP

shows the number of units of a country's currency that are required to buy the same baskets of products in the local economy, as $1 would buy of the same products in the USA or another country

aim of PPP

to help make a more accurate standard of living comparison between countries where goods and services cost different amounts

Limitations of using GDP for comparison

• Lack of information provided on inequality

• Doesn’t take into account quality of goods/services

• Doesnt include unpaid work

National happiness

• While GDP focuses on production, happiness focuses on health, relationships, the environment, education, satisfaction at work and living conditions

Inflation

a sustained increase in the average price of goods and services

• Uk target rate of 2%

Deflation

Fall in the avergae price of goods/services in an economy

How to measure inflation

CPI

RPI

CPI

average change in prices over time of a basket of goods and services typically bought by households, recorded by a survey

• calculated using a weighted basket based on proportion of household spending

1. Identify a basket of commonly brought goods

2. determine weights- how much households typically spend on the goods

3. calculate basket cost in chosen base year

4. find the costs of the exact same basket in the year you want to measure

Limitations of CPI

• not all countries use it so making comparisons is difficult

• does not capture the quality of the products

• only measures consumption on an annual basis

RPI

measures changes in the average price of a basket of goods and services, but includes housing-related costs

• inflation measured by RPI is usually higher than CPI

• more accurate measure

Demand Pull inflation

• Caused by excess of demand in the economy

  

Cost push inflation

• Cost push inflation is caused by increases in the costs of production in an economy

An increase in the cost of production will shift SRAS in

Causes of inflation

• demand pull

• cost push

• growth of the money supply

changes to money supply

• Lower interest rates= increased borrowing—— leading to increased consumption leading to demand pull inflation

Effects of inflation for firms

• Uncertainty. Rapid price changes create uncertainty and delay investment

• Menu change costs. Price changes force firms to change their menu prices too and this can be expensive

effects of inflation on consumers

• Decrease in purchasing power

• Decrease in the real value of savings (as money will be worth less in real terms)

• Fall in real income for those on fixed incomes/pension

Effects of inflation on the gov

• Inflation erodes international competitiveness of export industries

• Trade-offs involved in tackling inflation e.g reducing inflation may increase unemployment and/or reduce economic growth

effects of inflation on workers

• Demand higher wages to compensate for reduced purchasing power

• If wage increases ≠ inflation, motivation and productivity may fall

Unemloyment

someone who is not working but is actively seeking work

Measurement of unemployment

• The International Labour Organisation (ILO) Survey

• The Claimant Count

The ILO survey

• An extensive survey is sent to a random sample of ≈ 60,000 UK households every quarter

• Respondents self-determine if they are unemployed based on the ILO criteria

  • Ready to work within the next two weeks

  • Have actively looked for work in the past one month

• The same survey is used globally so it's useful for making international comparisons

The claimant count

• Counts the number of people claiming job seekers allowance (JSA) in the UK

• More stringent requirement to be considered unemployed than with the ILO survey

• Requires claimants to meet regularly with a 'work coach’

Underemployment

• They want to work more hours than they currently work

• They are working in a job that requires lower skills than they have, e.g. an architect working as a gym instructor

Causes of unemployment

• Structural

• Cyclical

• Frictional

• seasonal

• real wage

Structural unemployment

occurs when there is a mismatch between jobs and skills in the economy

• It usually happens as the structure of an economy changes, e.g. the secondary sector is declining and the tertiary sector is growing: deindustrialisation

Cyclical unemployment

caused by a fall in AD in an economy

• This typically happens during a slow down or recession

seasonal unemployment

occurs as certain seasons come to an end and labour is not required until the next season

• E.g. fruit pickers; summer seaside resort workers; ski instructors

Frictional unemployment

occurs when workers are between jobs

REAL wage unemployment

occurs when wages are inflexible at a point higher than the free-market equilibrium wage

• Usually caused by the existence of minimum wage laws

Significance of migration on employment

• fill labour gaps- low pay, unsafe jobs that native workers are unwilling to do

• create new jobs- migrants spend money on g&s, increasing demand and encouraging businesses to expand

• Immigrants may displace some local workers, increasing the level of unemployment

Effects of unemployment on the gov

• increased spending on benefits

• less tax revenue

• increased spending on retraining

Effects of unemployment on the firms

• Loss of Sales

• Loss of output

• Changes the skill level in the economy

Effects of unemployment on individuals

• loss of income- homelessness

• health issues

• mental instability

• sense of failure

• stress increases

Balance of Payments

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

current account

• goods

• services

• primary income

• secondary income

financial and capital account

• related to savings, investment and currency stabilisation

Credit

Money flowing into the country

Debit

Money flowing out of the economy

Primary income

consists of income transferred by citizens and corporations

Secondary income

Payments at government level

• work bank or foreign aid

AD

the total planned expenditure on goods and services at a given price level

components of AD

• consumption- 60%

• Investment- 17%

• Government Spending- 20.9%

• Net exports- -2.9%

Why is AD sloping downwards

1. The interest rate effect: At higher average price (AP) levels, there are likely to be higher interest rates. Higher interest rates reduce investment and are an incentive for households to save - and vice versa

2. The wealth effect: As AP increases, the purchasing power of households decreases and the AD falls - and vice versa

3. The exchange rate effect: As AP falls, interest rates are likely to fall too. Lower interest rates lower the exchange rate. With a lower exchange rate, the economy's goods/services are more attractive abroad and exports increase, thereby increasing real GDP

Influences on consumption

• changes to interest rates

• Changes to consumer confidence

• Changes to wealth

Investment

the total spending on capital goods by firms

Influences on investment

• rate of economic growth

• Interest rates

• demand for exports

• influence of governent and regulations

influences of government expediture

Government expenditure is influenced by the trade/business cycle and spending linked to achieving policy aims

• Social Protection (Welfare payments such as state pension, universal credit)

• Health care services

• Education

Influence on NET TRADE

Change in Condition	Effect on Exports	Effect on Imports	(X-M)
UK real income increases	Little effect	Consumers purchase more	Trade balance weakens
Real income increases abroad	Customers overseas purchase more UK products; exports increase	Little effect	Trade balance strengthens
UK £ appreciates	Exports more expensive for customers overseas; exports decrease	UK consumers' money goes further abroad; imports increase	Trade balance weakens
UK £ depreciates	Exports less expensive for customers overseas; exports increase	UK consumers' money is worth less abroad; imports decrease	Trade balance strengthens
World economy booms	Increased demand for UK exports	Little effect	Trade balance strengthens
World economy slows	Decreased demand for UK exports	Little effect	Trade balance weakens
Protectionism increases	Depends on retaliation measures from other countries	Decreased demand for imports as they are more expensive	Trade balance strengthens
Protectionism decreases	Likely to increase	Increased demand for imports as they are less expensive

Aggregate supply