Measuring Economic Performance:

WHat are the four macroeconomic indicators?

• Economic growth

• Inflation

• Unemployment

• Balance of payments

What is GDP?

Gross Domestic Product

Measure of economic growth

Measured by the change in national output over a period of time

Output can be measured by the quantity of G/S produced in one year or the value of them

How do you calculate GDP per capita?

Total GDP/population size

What is GDP per capita?

Indicator of standards of living

What is GNI?

Gross National Income

GDP+net income from abroad-foreigners income earned domestically

What is GNP?

Gross National Product

The total output of the citizens of a country whether or not they’re resident in that country

What is Purchasing Power Parity?

Purchasing power is the real value of an amount of money in the terms of what you can actually buy with it.

Using PPP in comparisons of countries’ living standards mitigates GDP pc/GNP/GNI not considering the exchange rate. Using PPP involves adjusting the GDP pc figure to take into account the differences in PP

Results usually expressed in $ for a more accurate and easy comparison

Limitations of using GDP to make comparisons:

GDP + GDP pc do not take into account…

• The hidden economy (economic activity that doesn’t appear in official figures)

• Public spending

• The extent of income inequality

• How long the working week is

• Working conditions

• Environmental damage

What is inflation?

The sustained rise in the average price of g/s over a period of time

What is deflation?

When the average price is falling

What is disinflation?

If the rate of inflation is slowing down

How is the retail price index calculated?

Two surveys, the Living Costs and Food Survey (what do 6000 households spend their money on and the proportion of income spent on them to work out the weighting of each item), and the second survey is based on prices measuring the change in price of roughly 700 commonly used g/s (creates the basket of goods)

How do you calculate index numbers?

New number/base numer x 100

How is the consumer price index different to RPI?

1. Some items are excluded e.g council tax and mortgage interest payments

2. Slightly different formula

3. Larger sample of the population used

4. CPI is the official measure of UK inflation

5. CPI is often a little lower than RPI

What are the limitations of CPI + RPI?

• RPI excludes all households in the top 4% of incomes

• CPI covers a broader range of the population but excludes council tax and more

• Info given in surveys can be inaccurate

• Basket of goods only changes once per year so may miss some short term spending habits

How are RPI+CPI important for government policy?

• Employers and trade unions use them as a starting point in wage negotiations

• Government uses them to decide on increases in state pensions and other welfare benefits

• Some benefits are index-linked and rise automatically each year in accordance to the chosen index

• If CPI is higher in the UK than in other countries their goods become less price competitive so exports will fall and imports will rise

What are the two ways to define unemployment?

1. The level of unemployment is the number of people looking for a job but can’t find one

2. The rate of unemployment is the n.o people out of work as a percentage of the labour force

What is the claimant count?

The number of people claiming unemployment related benefits from the government e.g universal credit, jobseeker’s allowance

Pros: data is easy to obtain, no cost in collecting data

Cons: Can be manipulated by the government to make it seem smaller (e.g raising school leaving age to 19), excludes those looking for work who aren’t on benefits

What is the Labour Force Survey?

Uses a sample of the population and asks people who aren’t working if they’re looking for work

Pros: thought to be more accurate than CC, internationally agreed measure so is easier to use for comparisons with other countries

Cons: expensive to collect and put together data, sample may be unrepresentative of the population as a whole (inaccurate)

Why does the government want to keep track of unemployment figures?

1. high rate of unemployment suggests the economy is doing badly

2. unemployment will lead to lower incomes and less spending

3. unused labour in the economy so fewer g/s can be produced

4. government costs increase due to welfare spending, and less tax revenue

What does the balance of payments record?

The flows on money in and out of an economy. The value of imports and exports

What are the four sections to the current account?

1. Trade in goods (visible trade)

2. Trade in services (invisible trade)

3. International flows of income earned as salaries/interest/profit/dividends

4. Transfers of money from one person or government to another

What is the Human Development Index?

Developed by the UN to measure and rank social and economic development, including social indicators, health (life expectancy), education (average and expected years in school), standard of living (GNI per capita with PPP)

How is HDI used?

• Measures the changes in development levels over time in a country

• Compare the levels of development between countries

What do HDI numbers mean?

0.8+=high level of human development

0.5-0.8=medium level

<0.5=low level

Criticisms of HDI:

• A long life expectancy is not the same as a high quality of life

• Average n.o years in school doesn’t measure the quality of teaching or how well they learn what they’re taught

• GNI pc figures can lead to inaccurate comparisons-doesn’t include the hidden economy which can be a large proportion of the economy in developing countries

• Doesn’t measure the extent of inequality in a country

What are ways other than HDI to measure development?

• % of adult male labour in agriculture

• N.o mobile phones per thousand of the populations (UK 94% of 16+ have a smartphone)

• Levels of disease and malnutrition

• Newspapers bought per thousand of the population

• Energy consumption per head

• Levels of political and social freedom

• Levels of environmental impact and sustainability

• Access to clean water

How does a country’s development affect the 3 sectors of its economy?

• less developed economies often have a large primary sector

• the secondary sector grows as the economy develops and gets wealthier, leading to the growth of negative externalities and the mechanising of the primary sector

• The continued growth will result in an economy dominated by the tertiary sector, negative externalities move to a lesser developed economy as the country begins importing

What are the three sectors of an economy?

1. Primary: mining/agriculture/fishing

2. Secondary: construction/manufacturing

3. Tertiary: teaching/banking/tourism