The measurement of macroeconomic performance

What are the main objectives of government macroeconomic policy?

- Economic growth

- Price stability

- Working towards full employment

- Satisfactory balance of payments

What is a policy objective?

A goal/desired outcome that a government wants to achieve

What is economic growth?

An increase in a country's productive capacity

What are the benefits of economic growth?

- Job creation

- Rising incomes

- Improved standards of kiving

- Improved international competitiveness of the UK economy

- Multiplier and accelerator benefits

- Lower government expenditure

- Increased tax revenues

What is inflation?

The sustained rise in the average price of goods and services over a period of time.

Why is inflation important?

It affects the value of pounds in your pocket, workers' wage demands and consumer confidence

What is the target for inflation in the UK?

2%

What happens if inflation rises above 3%?

The government will try to bring down inflation by:

- Increasing taxes

- Increasing interest rates

What is the impact of increasing taxes and interest rates?

Increasing taxes means people spend less.

Increasing interest rates means the cost of borrowing (e.g bank loans) and mortgages are more expensive so people spend less.

What is the level of unemployment?

The level of unemployment is the number of people who are looking for a job but cannot find one.

What is the rate of unemployment?

The rate of unemployment is the number of people out of work (but looking for a job) as a percentage of the labour force.

What is the labour force?

The number of people of working age who are able, available and willing to work

What is the working age?

16-64

Why is unemployment a problem?

Represents a waste of resources and is generally and indicator of poor economic performance

What is the UK's target for unemployment?

Between 2% and 4%

Why is full employment not seen as achievable target?

- People moving between jobs

- People seeking work post education

- Paternity/maternity leave

What are the benefits of employment?

- Less people claiming job seekers allowance/state benefits

- Higher incomes so improved living standards

- Improved productivity of the UK economy

What is the balance of payments?

A record of the flow of money out of a country and the flow of money into a country

What happens when exports > imports?

Balance of payments surplus

What happens when imports > exports?

Balance of payments deficit

How are balance of payment deficits funded?

Borrowing

What are other objectives of government macroeconomic policy?

- A balanced government budget

- Protection of the environment

- Greater income equality

How is economic growth measured?

Real GDP

What is the difference between real GDP and nominal GDP?

• Nominal GDP measures the value of all the goods and services produced in country in a year at current prices.

• Real GDP is the value of GDP adjusted for inflation to show the true change in production. For example if the economy grew by 4% in a year, but inflation was 2%, real GDP is 2%.

How can GDP be measured?

- Output measure

- Expenditure measure

- Income measure

What is a recession?

negative economic growth for two consecutive quarters

What is an economic depression?

A sustained economic downturn which lasts for a long period of time

How do you measure the rate of economic growth?

Change in GDP / Original GDP x 100

How do you calculate real GDP?

nominal GDP % - inflation rate %

What is GDP per capita?

GDP divided by population

What does GDP per capita indicate?

A country's standard of living

How do you calculate GDP per capita?

Total GDP / population size

Higher GDP per person indicates

higher standard of living

Why is it difficult to compare nominal GDP between countries?

• Volatile exchange rates

• Different price levels

What is purchasing power parity (PPP)?

PPP estimates how much of one currency is needed to purchase a basket of goods compared to another currency.

What are the limitations of GDP?

• GDP does not account for the distribution of income.

  • Two countries with a similar GDPs per capita can have different distributions which cause different living standards.

• GDP does not account for population changes.

  • If real GDP increases but the population increases then living standards as per real GDP per capita will decrease more than real GDP suggests.

• GDP does not account for hidden economies.

  • For example black markets or cash transactions that are not recorded; this can make GDP measures misleading.

How is inflation measured?

Consumer Price Index (CPI) and Retail Price Index (RPI)

How is RPI calculated?

- Living Costs and Food Survey

- Changes in the price of the basket of goods (around 700 of the most commonly used goods and services)

How is CPI calculated?

Similarly to RPI, but it excludes:

- Mortgage interest payments

- Council tax

What are the drawbacks of the CPI?

• Unusual spending habits means CPI doesn’t reflect all consumers

• CPI is only updated once a year so there is a time lag in measuring newly popular goods

• CPI doesn’t consider higher quality leading to higher prices

• CPI excludes mortgage repayments

What are the differences between RPI and CPI?

RPI includes mortgage repayments while CPI does not. As a result, RPI tends to be higher than CPI except when interest rates are low.

How is unemployment measured?

• Claimant Count

• Labour force survey

What is claimant count?

The number of people claiming unemployment-related benefits

What are the pros and cons of the claimant count?

- Easy to obtain

- It excludes people who are looking for work but cannot or choose not to claim benefits

What is the labour force survey?

A survey that asks people who aren't working if they're actively seeking work.

What are the pros and cons of the labour force survey?

- More accurate than the claimant count

- Expensive

What are the conflicting objectives?

- Full employment and a balance of payments

- Economic growth and inflation/price stability

- Price stability and economic growth

- Balance of payments equilibrium and economic growth

Why does full employment conflict with balance of payments?

Full employment means there are more people in jobs and people with higher incomes therefore people have more money to spend. As a result, consumers will purchase imports such as Gucci rather than domestic goods and services which can cause a balance of payment deficit.

Why does economic growth conflict with price stability

In a growing economy people are spending more which leads to inflation.

Why does price stability conflict with economic growth?

In order to limit inflation, governments will increase interest rates which causes people to save rather than spend. As a result, the rate of growth decreases as less people are spending.

Why does a balance of payments equilibrium conflict with economic growth?

In a growing economy people have more money to spend so will be more likely to purchase imports such as Gucci, which affects a balance of payments equilibrium.