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Macroeconomics Main > 03 Measuring Macroeconomic Objectives > Flashcards

03 Measuring Macroeconomic Objectives Flashcards

1
Q

Define inflation.

A

A rise in the average price level and a fall in the purchasing power of money.

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2
Q

Define deflation.

A

A fall in the average price level and a rise in the purchasing power of money.

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3
Q

What are the 2 measures of inflation?

A
  • CPI (Consumer Price Index)

- RPI (Retail Price Index)

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4
Q

CPI excludes a number of items RPI includes mainly relating to…

A

housing costs, including:

  • Council tax
  • Mortgage
  • House depreciation
  • Building insurance, estate agents and conveyancing fees
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5
Q

What is the relationship between CPI and RPI over time?

A

CPI and RPI are positively correlated with RPI being more volatile, as it includes housing costs.

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6
Q

In terms of index numbers, what ways are there of measuring inflation?

A
  • Price surveys - to gather what prices firms are setting in the UK currently and so an average can be found
  • The annual family expenditure survey - tells us how much people are spending on different goods and services so they can be weighted according to their importance
  • These both allow for a price index to be calculated of the average price level in the UK, weighted by the amount spent on each good/service.
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7
Q

How to index numbers work?

A
  • An index number is usually started in a base at a value of 100
  • The number itself has no meaning and has no units, it is the changes in the number that are important
  • E.g., if year 1 = 100, year 2 = 115, year 3 = 140
  • In this case inflation between year 1 and 2 was 15% and between year 2 and 3 was 22%
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8
Q

What are the limitations with inflation measurement (Index numbers)?

A
  • Only an average rate of inflation
  • The weightings change over time
  • The index cannot indicate changes in the quality of goods, only the price
  • Sampling issues
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9
Q

Who does the UK government set the inflation target to?

A

The Bank of England.

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10
Q

What is spare capacity in the economy?

A

People are aren’t incentivised to spend because prices are expected to fall - would be detrimental to many firms.

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11
Q

What happens if the Bank of England don’t reach the inflation target (2% CPI + or - 1%)

A

The Governor of the BoE (Andrew Bailey) writes an open letter to the Chancellor of the Exchequer to explain why the target has been missed.

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12
Q

What are the benefits of index numbers?

A
  • Simple way to compare numbers over a period of time because it uses the base number of 100 - makes it useful to identify trends
  • E.g., the FTSE 100 is an index showing the average share price movements of the biggest 100 companies listed on the London Stock Exchange
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13
Q

Index =

A

Current year x 100 base year

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14
Q

Average weighted index =

A

Sum of weighted indicies total weights

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15
Q

Define employment.

A

The total number of people with a job.

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16
Q

Define umemployment.

A

People who are willing, able and available to work at the going wage but cannot find a job despite an active search for work.

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17
Q

If an individual not willing or able or available to work they are…

A

inactive.

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18
Q

The workforce is defined as those between the ages of…

A

16 to 65 who are willing, able and available to work.

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19
Q

How is unemployment measured?

A

Labour Force Survey (LFS):

  • Employed
  • Unemployed
  • Economically inactive

Claimant Count - composite number of people claiming Jobseekers’ Allowance (JSA)

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20
Q

What are the drawbacks of the claimant count?

A

1) Difficult to compare between countries
2) Not everyone will claim
3) Not everyone can claim
4) Could be subject to fraud

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21
Q

How many people are surveyed in the LFS?

A

40,000.

22
Q

How can the unemployment rate be calculated?

A

unemployed/UK workforce x 100

23
Q

What are the drawbacks of the way that that unemployment rate is calculated?

A
  • Sampling errors
  • Cost
  • Discouraged workers - ‘hidden unemployed’
  • Inactive groups
  • The under employed
  • Disparities
24
Q

How can the employment rate be calculated?

A

employed/UK workforce x 100

25
Q

What are the impacts of migration on employement?

A
  • Direct boosts to employment - if they find a job in the UK. They may do this quicker than UK workers as they may be more flexible and accept work that UK workers may not be willing to do
  • Multiplier Effects - if migrants gain employment in the UK then this extra income may be spent in the local economy and provide profits for other businesses
  • Increased Supply of Labour - an increase in migration may increase the supply of labour in many jobs which could decrease the wage and increase the demand for labour
26
Q

What are the impacts of migration on unemployment?

A
  • Direct increase in unemployment - if migrants are willing and able to work but cannot find a job they will be classed as unemployed
  • Dependents joining the labour market - friends and family may attempt to join the labour market with inappropriate skills or when there are a lack of vacancies and increase unemployment
  • Displacement of UK workers
27
Q

How can the impact of migration on employment and unemployment be evaluated?

A
  1. May have no impact on employment or unemployment - if immigrants are unwilling to unable to work or if they are not of working age
  2. Need to consider net migration
  3. Magnitude arguments - depends on how many people migrate
  4. Long-term arguments - immigration length of stay
28
Q

What is the International Labour Organisation (ILO) unemployment measure?

A

The number of people, aged 16-65, who have been out of work for 4 weeks and ready to start in 2 weeks. Based on the LFS.

29
Q

What is the Claimant Count Measure?

A
  • The number of people claiming JSA
  • 18 - retirement (60/65)
  • Registered at the Job Centre Actively seeking employment
  • Ready to start now
30
Q

What are the problems with the ILO measure?

A
  • Sampling issues - the ILO is only a sample of the population and this therefore limits its accuracy. The quantity of the figures will therefore depend on the accuracy and reliability of the surveys
  • Out of date- the ILO measure is 6 weeks out of date when it is published
31
Q

What are the problems with the Claimant Count measure?

A
  • Too open to government manipulation - in the 1980s and 1990s the government introduced over 30 different changes, most of which reduced the unemployment figure
  • Not internationally recognisable and therefore couldn’t be effectively used to make comparisons between countries
  • People may be unemployed but don’t claim
32
Q

Why may the claimant count be lower than the ILO?

A

Because they are deemed unemployed on the ILO measure but are not claiming JSA.

33
Q

Why may people not be claiming JSA?

A
  • Youth unemployment
  • JSA may be harder to obtain
  • Workers do not claim benefits even when entitled
  • Other groups not entitled to JSA but will be counted as unemployed on ILO
34
Q

Why may the claimant count be higher than the ILO?

A
  • The CC may include some people not included in the ILO measure
  • E.g., may claim benefits for being unemployed but actually be in work, usually as self-employed
35
Q

Why may unemployment measures underestimate unemployement?

A

As thye exclude:

1) Part-time workers looking for full-time work
2) Those on government training schemes who would prefer to be in work
3) People not actively seeking work or on benefits but would take a job if offered one
4) Unemployed workers who have been taken off the unemployment register by moving them onto sickness and disability benefits

36
Q

Why may unemployment measures overestimate unemployment?

A
  • People who will never be able to get a job and are unemployable are still counted (unless they become inactive)
  • E.g., with physical or mental disabilities, ex-criminals or with no formal qualifications
37
Q

Define GDP.

A

The value of output of goods and services in an economy over a year - measures national income/output.

38
Q

Define real GDP.

A

GDP adjusted for the rate of inflation - measures real national income/output.

39
Q

Define Economic Growth.

A

An increase in the economic productive potential.

40
Q

What are the measures of Economic Growth?

A
  • GDP
  • GDP per capita
  • GNI (per capita)
  • Green GDP - accounts for the environmental costs of production
41
Q

What are the the downsides of using GDP to measure economic growth?

A
  • Double counting
  • Informal Activity
  • Errors given vast data collection
  • Negativ externalities
  • Income inequality
  • Output produced
  • Other quality of life aspects
42
Q

What are the downsides of using GDP per capita to measure economic growth?

A
  • Same of GDP
  • Factor income abroad and significance of remittances
  • Influence of FDI and repatriation of profit
43
Q

Define Balance of Payments (Current Account).

A

The current account of the BoP comprises the balance of trade in goods and services plus net investment incomes from overseas assets and net transfers.

44
Q

What does the current account record:

A
  • Balance of trade in goods (visible) = exports of goods - imports of goods
  • Balance of trade in services (invisible) = export of services - imports of services
  • Income from employment and investment abroad (IPDS: Interest, profits and dividends)
  • Government and individual transfers
45
Q

The current account is in surplus if…

A

exports are greater than imports.

46
Q

The current account is in deficit if…

A

imports are greater than exports.

47
Q

What is an example of investment income and government/individual transfers contributing to a current account surplus or deficit?

A

If the UK is gaining interest from money invested abroad this will be money flowing into the country just as it is when the UK sells cars to France.

48
Q

What are examples of money flowing out of the UK current account (imports)?

A
  • UK buys oranges from US
  • UK citizens holidays in the US
  • Profits and dividends sent to US from an American owned firm in the UK
  • Transfer of money to US citizens by UK citizens
49
Q

What are examples of money flowing into the UK current account (exports)?

A
  • UK sells apples to France
  • UK sells insurance services to French firms
  • Profits and dividends sent to UK from a British owned factory in France
  • Transfer to the UK from the EU
50
Q

How could the current account be a cause for concern?

A

If:

  • The deficit is large and sustained and therefore harder to finance
  • It indicates a rise in personal debt for consumers
  • It indicates an uncompetitive/declining manufacturing sector
  • The country has a fixed exchange rate and therefore it cannot fall to help self-correct the current account deficit
51
Q

If money is flowing into the UK, the current account is…

A

positive.

52
Q

If money is flowing out of the UK, the current account is…

A

negative.

Macroeconomics Main (17 decks)

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