2.1 Measures of Economic Performance

Economic Growth

The rate of change of output- happens when GDP increases in value

GDP

Gross Domestic Product- The total value of goods and services produced in a country within a year

GDP per capita

The total GDP divided by the population number

Real GDP

GDP adjusted for inflation- the volume of national income

Nominal GDP

GDP disregarding the effects of inflation- the value of national income

GNI

Gross National Income- The value of goods and services produced by a country over a period of time plus net overseas interest payments and dividends

GNP

Gross National Product- The value of goods and services over a period of time through labour or property supplied by citizens of a country both domestically and overseas

Purchasing Power Parities

An exchange rate of one currency for another which compares how much a typical basket of goods in the country costs compared to one in another country- used to compare cost of living internationally

Problems with GDP for living standard comparison

-Doesn’t indicate distribution of income (GDP per capita does)

-Needs to be recalculated in terms of purchasing power

-Doesn’t account for hidden economies

-Doesn’t indicate welfare

Relationship between real incomes and subjective happiness

Real incomes often positively correlate with subjective happiness to a certain extent , as higher income levels can lead to improved living standards and access to resources. Only occurs up until basic needs are met

Inflation

The general increase of prices in an economy

Deflation

the general fall of price

Disinflation

the reduction of the rate of inflation

Indicies

The change of nominal figures into real figures. The base year has a figure of 100 and all figures are compared to this base year figure

CPI

Consumer Price Index - measures household purchasing power, Family Expenditure Survey is used to find how much households spend on a weighted basket of goods. It measures avg price change of these goods and is updated annually

Limitations of CPI when measuring inflation

-Represents an avg, not accurate for all households

-Different demographics have different spending patterns

-Slow to respond to new goods and services (annual renewment)

-Hard to make histroical comparisons, fairly new system

RPI

Retail Price Index- CPI + housing costs - top 4% of income earners and low income pensioners

Demand Pull

When aggregate demand increases, demand for FOPs increases, producers increase prices to make more profit, price increases

Cost Push

When aggregate supply decreases, prices increase due to less access to FOPs

Growth of money supply

Too much money in the economy- causes hyperinflation if money supply increases at a faster rate than real output

Effect of inflation on consumers

-Purchasing power decreases

-Cost of necessities increase

-Real value of debt decreases

Effect of inflation os firms

-Interest rates rise, cost of investing in capital increases, decreases the amount of firms investing

-Workers could demand higher wages, increased cost of production

-Less competitive on a global scale

-Reduced business confidence- less investment

effect of inflation on workers

• real income falls, less disposable income

• Could increase redundancies

2 main measures of unemployment

• The Claimant Count

• ILO ( International Labour Organisation)

What is the Claimant Count?

Counts the number of people claiming unemployment related benefits i.e Job Seeker’s Allowance (have to prove they are actively looking for work)

Issues with Claimant Count?

-Not everyone who is unemployed claims JSA

-People who are employed but in the informal sector could skew numbers

The ILO and LFS

LFS is taken by the ILO- asks people if

• Been out of work for 4 weeks

• Able and willing to start working within 2 weeks

• Workers should be available for 1 hour per week - includes part time unemployment

Gives a higher figure than claimant count

What is underemployment?

Those who have a job, but their labour is not used to their full productive potential

The significance of changes of unemployment rates on consumers

• Less disposable income - standard of living falls

• Affects on mental health

The significance of changes of rate of unemployment on firms

• Larger supply of labour to employ from- wages fall + reduced cost of production

• Consumer spending decreases- loss of profits

• Cost to retrain workers is high

The significance of changes of rate of unemployment on workers

• waste os workers’ resources

• Loss of existing skills due to lack of work

The significance of changes of rate of unemployment on the government

• more spending on JSA- increased opportunity cost

• Less revenue from income tax

What is economic inactivity

those who are not actively looking for jobs but would be part of the labour force

What are the causes of unemployment

• Structural unemployment

• Frictional unemployment

• Seasonal unemployment

• Demand deficiency (cyclical unemployment)

• Real-wage inflexibility

What is structural unemployment

Long term decline in demand for goods + services → decrease in amount of jobs

What is frictional unemployment

unemployment during the time between leaving a job and looking for another job- key reason why 100% employment isn’t feasible. Not exceptionally damaging

what is seasonal unemployment

Only occurs at certain points in the year I.e summer jobs due to increased demand for tourism

What is demand defiance + its other title

Cyclical unemployment - caused by a lack of demand for goods and services. Firms forced to close or make workers redundant to reduce production cost and maintain profit- causes reduced output. (Often during economic recession)

Can also be caused by a increase in productivity- less workers needed for the output

what is real wage inflexibility

A cause of unemployment- wages are above the market equilibrium (between demand and supply) If demand shifts due to decreased consumer spending, wages cannot adjust, causing unemployment

What is the significance of migration for employment and unemployment rates

• increase in migrants = increased supply of labour/ workforce

• Increased people= increased demand for goods + services → increased jobs available

• Bring high quality skills to the domestic workforce → workforce on the whole is more employable

what is a balance payment

A record of all financial transactions made between consumers, firms and the government from one country to other countries

States how much is spent on imports + the value of exports

What are exports

goods and services sold to foreign countries- an inflow of money

What are imports

goods and services bought from foreign countries- an outflow of money

what components make up the balance of payments

• the current account

• The capital account

• The officials financing account

What is a current account

the balance of trade in goods and services (X-M) + rewards on FOPS + current transfers (foreign aid)

What is a current account surplus

there is a net inflow of money into the circular flow of income (UK has surplus with services, but deficit with goods)

What is a current account deficit

When a country spends more on imports from foreign countries than they earn from exports to foreign countries - can cause financial difficulties in the long run

What are the UK’s macroeconomic objectives

• Full employment

• Low, stable inflation (2%± 1)

• A sustainable current account o the balance of payments

• Sustainable economic growth

What effect do changes within the UK’s macroeconomic objectives have on the current account

• Increased exports → greater inflow of money → increased AD → increased economic growth

• Economic decline → consumer spending falls → current account deficit falls

• Economic growth → increased consumer spending → increased current account deficit

• Increased price of raw materials → increased price of imports → higher cost of production for firms → cost- push inflation

What is interdependence and what is it caused by

When the economic conditions of one country affect another. Caused by international trade - changes in quantity a country can export/ import

What is the theoretical sum of all countries trade balance

0 - what one country exports is imported by another

What happens when export markets face economic downturn

Decreases demand for UK foods + services since foreign consumers cannot afford the imports