Measure of economic performance

Economic growth

Economic growth is the rate of change of output. It is an increase in long term productive potential of a country

  • Gross Domestic Product (GDP): Value of all good and services produced in an economy within a year

  • Gross National Income (GNI): The value of goods and services produced over time plus net oversea interest payment and dividends

  • Gross National Product (GNP): Value of goods and services produced overtime by citizens of a country both domestically and overseas

Making comparisons about growth

  • Over time: Changing national income levels will show whether an economy has grown or shrunk

  • Between countries: countries vary in population

Purchasing power parities

An exchange rate of one currency to another which compares how much a typical basket of good in the country costs in comparison to the other

  • Provide an alternative to using exchange rates for comparison of GDP

  • Show cost of living

Problem of using GDP to compare living standard

  • Inaccuracy of data (black markets, home produced services, inflation rate)

  • Inequalities (may be a growth in income of just one group of people)

  • Quality of goods and services (higher than 50 years ago)

  • Comparing different currencies

  • Spending

National happiness

The UN report found 6 relevant key factor: GDP per capita, life expectancy, having someone to count on, freedom to make choices, freedom from corruption and generosity

Real income and subjective happiness

  • happiness and income are positively related at low income

  • higher levels of income aren’t associated with happiness

  • happiness depends on the people around us and their income

Inflation

  • Inflation: general rise in prices over period of time

  • Deflation: Fall in prices suggesting a slowdown in rate of growth

  • Disinflation: Prices rising but at a slower rate

Consumer price index (CPI)

Basket of goods, survey, index figure, weights

Limitations of CPI:

  • Not totally representative

  • Does not include house prices

  • Difficult to make comparison with historical data

Retail price index (RPI)

  • Include house prices

  • Takes into account consumers switch to cheaper products during inflation

  • Excludes top 4% of earners and low pensioners

Causes of inflation

  • Demand pull: increase in AD

  • Cost push: increase in AS

Effects of inflation

Consumers:

  • Have less to spend

  • Those in debt are able to pay it off at cheaper value

  • Consumers who have saved their money will lose out as its worth less

  • Psychological effects

Firms

  • Less competitive

  • Reluctant to invest

  • Change their menus, labelling

Government

  • Government revenue will fall

  • Benefits given out

Workers

  • Living standard decreases

  • May lose their jobs

Employment and unemployment

Claimant count

Number of people receiving benefits for being unemployed

International Labour Organisation (ILO)

Through ILO anyone over 16 can be classified as employed, unemployed or economically inactive

  • Employed: Those who do more than one hour of paid work or are temporarily away from work, are on government supported training scheme or do minimum 15 hours of unpaid work for family

  • Unemployed: Those of working age who are able to work, and have actively sought work for the past 4 weeks and are ready to start within 2 weeks

  • Inactive: Those who are neither employed or unemployed

Comparisons between claimant count and ILO

  • Some people may be included in claimant count but not ILO, hidden economy

  • Some people aren’t eligible for benefits but are classed as unemployed. This can be if their partner is working, if they are looking for work along side study, or if they are around state pension age

They both underestimate the fact

  • working part time but would like to work full time

  • on government training schemes but would prefer employment

  • classed as sick or disabled

Under employment

  • those on part time or zero hour contact but would like full employment

  • those in jobs that don’t reflect their skills

  • tends to increase during recession

Migration and skills

Migration:

  • increased jobs

  • immigrants spending increases

  • lower wages

  • supply of labour increased

  • low skilled jobs are mostly affected

Skills

  • higher skills are needed

  • migrant workers may fill these shortages

Impact of unemployment

Worker:

  • decline in living standard due to loss of income

  • feel degraded

  • lose skills

  • lower job security

Firms:

  • fall in profit

  • smaller pool of skilled people

  • low wages

Consumers:

  • less choice

  • firms may bring out sales

Government:

  • fall in tax revenue and higher spending on welfare

  • budget deficit

Society as a whole:

  • social deprivation

  • loss of national output

Balance of payments

Components of balance of payments

the record of all international financial transactions by a country's residents.

Current account is split into different parts

  • Trade in goods

  • Trade in services

primary income results in loans of fop overseas: interest, profit, dividends

secondary income range of mainly government transfers to overseas organisations