Measures of economic performance

Real

Means that inflation is taken into account

Nominal/current

Means that inflation is left in the figures

GDP

Gross domestic product

• The total market value of all finished goods and services produced in a country during a specific time period

Potential economic growth

A measure of the increase in capacity in an economy

Recession

If an economy has two consecutive quarters of negative economic growth

It means there is less spending, income and output in the economy

What does recession lead to

• Firms closing

• Increased unemployment

• Resulting in a fall in living standards

Standards of living

A measure of the quality of life

relationship between income and living standards

A rise in income doesn’t necessarily mean a rise in living standards, it depends on how the extra money is distributed

• Unequal distribution

  • The rise in income may only go to the rich, not benefitting everyone

• Inflation

  • Nominal income doesn’t show purchasing power

  • Real shows the actual purchasing power

• Investment

  • If the extra income is invested into long term projects (healthcare, infrastructure, tech etc) it can lead to long term sustainable improvements in living standards

• Population

  • The increased income has to be spread over a larger number

GDP per capita

Total GDP/ population

Volume vs value of output

volume is the number of items produced, but they may be falling in price, so has a lower value

Purchasing power parity

an economic tool that compares the value of currencies by showing how much of the same goods and services each currency can buy in different countries

Gross National Income

(GNI) Measures income received by a country both domestically (GDP) and net incomes from overseas

Subjective happiness

A measure of how people feel of themselves

Inflation

A sustained rise in the general price level

CPI

Consumer price index:

• A measure of the average change in prices of a fixed basket of goods and services bought by households, used to calculate inflation.

• Doesn’t include housing costs such as rent or mortgage interest repayments

Retail price index

A measure of inflation that tracks the average change in price of goods bought by households, including housing costs (unlike cpi)

Deflation

A fall in the general price level, it is a sign of stagnation in an economy

Disinflation

Occurs when prices rise slower than they have done in the past, e.g inflation falling from 3% to 2%

Index number

A number shown in relative to another number in percentage terms

Base year

Used for comparison between price levels in different time periods. it is given the number 100

Calculating the rate of inflation

• Inflation in the UK is measured by changes in the CPI

• The CPI is given as an index number

• Usually shown on a year to year basis

Weights

Show the proportion of income spent on items and are used to ensure that the percentage change in price reflects the impact on the average family in terms of their spending

Causes of inflation

• Demand pull inflation

• Cost push inflation

• Growth in the money supply

Demand pull inflation

Caused by an increase in aggregate demand, meaning spending is rising above sustainable levels

• E.g interest rates may be cut, so people want to spend more in shops

• more people buying the same amount of goods means that prices rise

Cost push inflation

Inflation caused by decreases in aggregate supply, meaning costs of production are rising

Or firms are willing and able to produce less at each price level.

E.g an increase in food prices will cause an increase in costs in an economy

Growth in the money supply

Some economists argue that inflation is mainly caused by increases in money supply

Monetarism

The school of economics based on the belief that inflation is the problem of too much money in the economy

Inflation target

In the UK 2%

International competitiveness

The degree to which a country’s goods and services can be sold on international markets

Tight monetary policy

When interest rates are kept high because of inflationary fears

The effects of inflation

• Damages int competitiveness

  • Makes exports expensive and imports cheap, worsening balance of payments

• Damaging for people on fixed incomes

  • If people’s incomes don’t rise in real terms, they will be worse off

• Damaging to workers

  • If the rate of inflation is higher than their nominal wage is rising, meaning real income is falling

• Rising interest rates

  • The monetary policy committee may use tight monetary policy

• Damaging to government

  • Makes it look as if it is unable to control the economy'

  • But it can be good if there are high levels of national debt. because debt dors not change its nominal value with inflation so its cheaper to finance

Economically active

Those people who are at work or willing to work, including unemployed people

Economically inactive

People who are not available to work, such as students or people caring, or those unable to work

Employment measurement

Can be measured as a level (Num of people in work)

or as a percentage ((Num of people in work/ total people who are economically active )x 100)

Unemployment measure

Can be measured as a level (num of people looking for work but cant find it)

or as a percentage (number of people out of work divided by the total number of people who are economically active, multiplied by 100).

Types (or causes) of unemployment

• Cyclical

• Structural

• Frictional

• Seasonal

• Classical or real wage inflexibility

Cyclical (or demand deficient)

where lack of spending in the economy/recession means that people are out of work. In a recession you expect this type of unemployment.

Structural

a mismatch between workers’ skills and the needs of the economy.

Frictional

When people are out of jobs

Seasonal

When people are out of work for some periods of the year e.g ski instructers in the summer

Classical/ real wage inflexibility

When there is a problem with the supply side of labour (e.g min wage too high, increased costs)0

Costs of unemployment

• Costs to the person without an income

• Costs to firms (People dont spend as much in shops)

• Cost to governments (gov has to spend more on jobseekers allowance, and they receive less in taxes)

Measures of unemployment

• The ILO measure

  • (conducted by labour force survey) uses a questionnare to ask people aged 16-65 whether they have been out of work for the past 4 weeks and are ready to start within 2 weeks)

• The claimant count

  • Records people who are successfuly claiming jobseekers allowance

Underemployed

People with jobs that don’t offer enough working hours

This means unemployment figures under represent the problem of joblessness

Human capital

The education and skills a workforce possesses

Significance of increased employment

• Increased incomes (with rises in standards of living)

• Improved skills (human capital) of workers

• Multiplier effects - as increased incomes lead to increased spending, so firms may see increased profits

• Higher gov tax revenue- as more people pay tax and people spend more

Significance of decreased unemployment and inactivity

• Falling gov spending on JSA (jobseekers allowance) and other out of work benefits

• Good because as people are unemployed longer they are less employable

• The job market becomes more flexible (more workers for employers to choose from)

• Decreased dependency ratios

Migration

A term that looks at both immigration and emigration and the overall balance between the two

Immigration

When people enter a country for long term stay

Migration occurs when people?

• Are searching for work/better paid work

• Study abroad

• Escape from social/political problems in their country

• Accompany family members

• Disagree with tax structures

Emigration

When people exit a country for long term stay

Impact of employment with immigration

• If immigrants come into a country to fill vacancies, then immigration leads to an increase in employment.

• But if immigrants are looking for work and either do not find it or displace other people from work, then employment may be unchanged and unemployment might increase.

Balance of payments

A record of international payments over the course of a year

The current account

Records payments for transactions between countries in the present year

It comprises of:

• Trade in goods

• Trade in services

• Investment income

• Transfers

Current account deficit

When the value of goods imported is greater than the value of goods exported

Causes of a current account deficit

• Currency is too strong relative to other countries

  • People with a pound will buy more goods from euros than people with euros buying goods from pounds because of purchasing power

• High inflation relative to other countries

• High wage costs relative to other countries(makes goods more expensive)

• High level of growth, meaning more people buying abroad

Current account surplus

When the value of exported goods is greater than the value of imported goods

Current account surplus

• Currency is too weak compared to other countries (people only buy within the country since buying abroad is more expensive)

• Low inflation relative to other countries

• Low wage costs relative to other countriesd

• Low level of growth in an economy, making it difficult to buy abroad

The interconnectedness of economies through international trade

Int trade means countries are interdependent (rely on each other) for:

• Income (Exports are part of AD)

• For resources (Imports are necessary for the production/consumption of goods in all countries)