2.1- Measures of Economic Peformance

define GDP

value of all goods and services produced in a country in a period of time

can be measured by:

• adding up a country’s income (wages, interest, profits + rents)

• expenditure (C+I+G+(X-M)) (total spending)

• output (adding up value of all goods + services produced

define long run economic growth

an increase in the productive capacity of an economy over time

(outward shift of PPF/ LRAS)

Define short run economic growth

an increase in the real value of goods and services produced

measured by the annual % change in real GDP

what are the 4 components of a trade cycle?

boom

downturn

recession

recovery

What is GDP rate in UK?

2 - 2.5%

define nominal GDP

value at current prices (not adjusted for inflation)

define real GDP

value at constant prices- adjusted for inflation

what is GDP per capita?

takes into account the size of the population

What is GNI?

GDP + net factor income from abroad

define PPP

an exchange rate where the same goods cost the same in different countries

Why PPP matters?

• used to compare living standards between countries more accurately

• adjusts for differences in price levels

• better than nominal GDP for comparing wealth

define inflation

an increase in the average price level

define comparative advantage

when an industry can produce a good or service at a lower cost than a similar industry abroad

define deflation

a fall in the average price level

occurs when negative inflation

define disinflation

a fall in the rate of inflation

inflation still positive

define inflation rate

the change in the average price levels in a given period of time

define CPI

a weighted measure of changes in the average price level of consumer goods + services

define RPI

A measure of inflation based on a basket of consumer goods + services including housing costs

define unemployment

consists of those who are: of working age, who are willing and able to work, actively seeking work but don’t have a job

define LFS

works out number of people: unemployed, employed + economically inactive

define claimant count method

a measure of the total number of people who are claiming unemployment benefits

• lower than LFS figure

DIS of claimant count

• difficult to compare between countries because conditions to claim benefits will vary in different countries

• not everyone can claim benefits (spouse might be earning a set amount of income or have lots of savings) - so lower than LFS figure of unemployment

• could be subject to fraud

DIS of LFS

• sampling errors- 40,000 households sampled but this is not representative of whole of population

• expensive to conduct + interpret survey

• discouraged workers won’t be seeking work but they should be counted in the unemployment figure if they are of working age- (an unused resource)

• underemployment- people who have a job but want to work more hours are considered fully employed (labour market more healthy than it actually is)

• disparities- data may mask inequalities in market because it doesn’t show how rates differ between regions

2 types of disequilibrium unemployment

• cyclical(demand deficient unemployment)

  • fall in AD → firms sell less → reduce output → firms fire workers

• real wage unemployment

  • when wages are forced above equilibrium in a labour market creating excess supply of labour

  • caused by trade unions or min wage

def structural unemployment

immobility of labour due to a long term change in the structure of an industry

factors causing unemployment

• technology advancements- replaces need for physical labour

• loss of comparative advantage- big decline in demand

  • modernisation/ new industry growth

def natural rate of unemployment

unemployment when the labour market is in equilibrium: structural, frictional, seasonal

free market determinants of natural rate of unemployment

• generous benefit system → too much gov intervention

• excessive labour marked regulation → if hiring and firing regulations are strict → firms not willing to take big risks by employing unskilled workers

Interventionist determinants of unemployment

• (not enough gov intervention → blames market failures)

• lack of transport / housing infrastructure → increases geo + frictional unemployment as ppl search within a smaller radius

• lack of in work training programmes → if workers loose their jobs- they still have transferable skills

how is CPI calculated

ONS chooses a basket of goods (bread, netflix)

each item is given a weight based on how important it is on household spending

prices are collected monthly

index is calculated relative to a base year

the % change in CPI = inflation rate

Strengths of CPI

uses weights → more realistic

basket updated yearly → reflects changing habits

internationally comparable

Weaknesses of CPI

• substitution bias→ people switch to cheaper goods when prices rise but CPI may not reflect changes immediately

• quality changes → hard to tell if higher price due to inflation or better quality products (e.g: phones)

• doesn’t reflect individual households → students vs families have different spending patterns

define balance of payments

a record of a country’s transactions with the rest of the world over a given period of time

when does current account deficit occur?

when value of outflows is greater than value of inflows

usually occurs when debit from imports > credit from exports

define current account surplus

when value of the inflows is greater than value of the outflows

usually occurs when debit from imports < credit from exports

When does budget deficit occur?

when UK gov spending > UK gov revenue

define price level

the average of the current prices of goods + services in the economy

def GNI

the total income generated by a country’s factors of production

GDP + net factor income(income earned by domestic workers - income earned by foreign workers)

def economic growth

an increase in real GDP in an economy in a year caused by an increase in AD or an increase in LRAS