theme 2.1 measures of economic performance

economic growth

this refers to the percentage change in GDP in real time

GDP

gross domestic profit - total uk output, total value of goods and services produced in an economy over a period of time

nominal GDP

total market value of the goods and services produced in an economy over a given period, not adjusted for inflation

Real GDP

total market value of the goods and services produced in an economy over a given period, is adjusted for inflation

recession

occurs when an economy has 2 consecutive quarters of negative growth

how to calculate real GDP

nominal GDP x (price level previous year/price level current year)

GDP per capita

the average income of one person in an economy

how to calculate GDP per capita

Total GDP/population level

what does a higher GDP per capita mean

higher average income - higher standard of living

what can GDP per capita be expressed as

Volume and value

volume

quality and untis produced

value

market value and items produced

other ways to measure national income

• GNI

• National happiness

GNI

gross national income- total value of goods and services produced in an economy plus income from overseas(e.g remittances)

national happiness

this measure focuses on wellbeing of the people in an economy

what does national happiness include measures of

• social justice

• sustainability

• social connectedness

• health and education

why would national hapiness reduce even if average GDP is rising

income inequality can happen and reduce happiness therefore a rise in income may not rise national happiness

how is national happiness normally measured

surveys

why are surveys limited in meaasuring national happiness

limited by subjectivity

purchasing power parities

an exchange rate from one currency to another which compares how much a typical basket of goods costs in one country compared to another

why is ppp useful for comparing countries

takes account of the cost of living and so usefull measure to compare living standards

Big Mac index

PPP, compares the cost of big Mac around the world

limitations of using GDP to measure living standards

• shadow economy - unrecorded transactions e.g drugs

• non-financial factors - wellbeing and happiness

• distribution of income

• less reliable if not adjusted for PPP i.e cost of living

• negative externalities - higher GDP - higher activity - higher pollution and congestions which decrease living standards

• non-marketed output - DIY,voluntary work,favours,childcare

inflation

a general and sustained increase in the general price level of goods and services in economy overtime

deflation

a general and sustained decrease in general price level of goods and services in economy overtime

disinflation

occurs when rate of inflation declines but inflation is still positive( price levels increasing at a slower rate)

CPI

consumer price index - average level of prices at a point in time

how to measure inflation

percentage change in CPI

how to measure CPI

finding the average basket of goods and services in a typical uk houshold and measures the average price level depending on spending

found out using surveys

why is CPI a weighted average

because goods and services have different affect on a persons e.g petrol has a higher weighting because it takes up a higher proportion of icome therfore an increas in petrol price will have a bigger impact on the rate of inflation

limits of using CPI

• does not include all goods and services

• updated annually therefore not comparing the same 2 goods every year

• unlikely to represent an individual houshold

• no account on improvements in products, just price changes

RPI

another measure of inflation, calculated same way as CPI but includes mortgage payments

why is RPI sometime more usefull than CPI

because mortgage payments are a huge expense in the cost of living but is less useful for thos without mortgage payments

RPI is also more volatile and affected by interest rate changes

2 types of inflation

demand pull - excess demand outsrips supply causing prices to rise

cost push - when an increase in production costs causes business to put prices up

effects of inflation

• menu costs

• search costs

• uncompetitive exports

• fiscal drag

• uncertainty

• policy response

menu costs

rapid price increases, cost of updating menus,marketing, leaflets, website increases

search costs

increase cost in terms of time + money in researtching latest prices

uncompetitive exports

if UK has a high inflation it implies increase in costs for business causing increase in prices - reducing exports

fiscal drag

when inflation leads to increase in nominal wages which puts people in a higher tax bracket but there is no increase in real wages therefore the people are losing out.

uncertainty

rapidly increasing inflation makes it hard to plan ahead which reduces business and consumer confidence

policy response

when inflation is above target - policy response is to increase interest rates.

unemployment

those of working age that who are seeking work but unable to find employment

economically incative

those of working age who are neither employed or unempoyed i.e not seeking work

2 measures of unemployment

• claimant count

• labour force survey

claimant count

the amount of people receiving job seekers allowancel

labour force survey

this surver records all those who are looking for a job but can’t find one

useful for comparing unemployment between countries because countries use the same methodology

underemployment

when those in work want to but can’t work more hours or are able to fully utilize their skills

form of hidden unemployment

affect of increase employment

increase income - increase living standards

increase tax - increase investment

increase skills and workforce

structural unemployment

occurs when there is a mismatch between the skills of the workforce and the requirements of the job

cyclical unemployment

unemploymenmt tie directly to the economic cycle, high when recession

seasonal unemployment

occurs when unemployment is dependant on the seasons

e.g. tourism

frictional unemployment

temporary unemployment when people are in between jobs or entering the workforce

i.e people that work from contract to contract

real wage inflexibility

Fixing wages above the equilibrium rate (minimum wage) can result in the supply of labour being more than the demand for labour.

migration

flow of people into and out of a country

how does immigration impact the labour market

reduce or increase unemployment

increase tax revenue

effects of unemployment

• long term - de-skilling

• reduce tax + increase G - worsen fiscal position

• health

• income inequality

• poverty

balance of payments

all of the financial transactions in a country with the rest of the world

• current account

• capital account

• financial account

current account

record payment for trade in goods and services and net flow of primary and secondary income

capital account

a record of capital transfers and the acquisition or disposal of non-produced, non-financial assets within a country's balance of payments

financial accounts

covers claims on or liabilities to nonresidents, specifically concerning financial assets.

components of current account

net balance of trade of goods

net balance of trade of services

primary income

secondary income

primary income

net flow of income a country receives and pays on its investments and assets, along with compensation of employees

secondary income

transfer in which one receives something without giving something of same economic value back