Macroeconomics 9. The measurement of macroeconomic performance

Question 1

What is a policy objective?

Answer 1

A target or goal that policy-makers aim to ‘hit’

Question 2

What is short-run economic growth?

Answer 2

Growth of real output resulting from using idle resources, including labour, thereby taking up the stack in the economy

Question 3

What is long-run economic growth?

Answer 3

An increase in the economy’s potential level of real output, and an outward movement of the economy’s production possibility frontier

Question 4

What is gross domestic product (GDP)?

Answer 4

The sum of all goods and services, or level of output, produced in the economy over a period of time, e.g. 1 year

Question 5

What is real GDP?

Answer 5

A measure of all the goods and services produced in an economy, adjusted for price changes or inflation. The adjustment transforms changes in nominal GDP, which is measured in money terms, into a measure that reflects changes in the total output of the economy

Question 6

What is nominal GDP?

Answer 6

GDP measured at the current market prices, without removing the effects of inflation

Question 7

What is Eurozone (Euro area)?

Answer 7

The name used for the group of EU countries that have replaced their national currencies with the euro. Before 2019, 19 of the then 28 EU countries were in the eurozone, though this may change in future ways

Question 8

What is a recession?

Answer 8

In the UK and many other countries, a recession is defined as 6 months or more of negative economic growth or declining real national output

Question 9

What is full employment?

Answer 9

According to Beveridge’s definition, full employment means 3% or less of the labour force unemployed. It is the level of employment occurring at the market-clearing real-wage rate, where the number of workers whom employers wish to hire equals the number of workers wanting to work

Question 10

What is a claimant count?

Answer 10

The method of measuring unemployment according to those people who are claiming unemployment-related benefits (Jobseeker’s Allowance)

Question 11

What is a Labour Force Survey (LFS)?

Answer 11

A quarterly sample survey of households in the UK. Its purpose is to provide information on the UK labour market. The survey seeks information on respondents’ personal circumstances and their labour market status during a period of 1-4 weeks

Question 12

What is inflation?

Answer 12

A persistent or continuing rise in the average price level

Question 13

What is deflation?

Answer 13

A continuing tendency for the average price level to fall

Question 14

What is disinflation?

Answer 14

Where the rate of inflation is falling, but still positive

Question 15

What is price index?

Answer 15

An index number showing the extent to which a price, or a ‘basket’ of prices, has changed over a month, quarter or year, in comparison with the price[s] in a base year

Question 16

What is consumer prices index?

Answer 16

The official measure used to calculate the rate of consumer price inflation in the UK. It calculates the average price increase of a basket of 700different consumer goods and services

Question 17

What is retail prices index?

Answer 17

A measure formerly used to calculate the rate of consumer price inflation in the UK

Question 18

What is indexation?

Answer 18

The automatic adjustment of items such as pensions and welfare benefits to changes in the price level, through the use of a price index

Question 19

What is a balance of payments?

Answer 19

A record of all the currency flows into and out of a country in a particular time period

Question 20

What is a current account?

Answer 20

Measures all the currency flows into and out of a country in a particular time period in payment for exports and imports of goods and services, together with primary and secondary income flows (previously known as ‘income flows and transfers)

Question 21

What are exports?

Answer 21

Domestically produced goods or services sold to residents of other countries

Question 22

What are imports?

Answer 22

Goods or services produced in other countries and sold to residents of other countries

Question 23

What is a balance of trade?

Answer 23

The difference between the money value of a country’s imports and its exports. Balance of trade is the largest component of a country’s balance of payments on current account

Question 24

What is a balance of trade deficit?

Answer 24

When the money value of a country’s imports exceeds the money value of its exports

Question 25

What is a balance of trade surplus?

Answer 25

When the money value of a country’s exports exceeds the money value of its imports

Question 26

What is balancing the budget?

Answer 26

When government spending equals government revenue (G = T)

Question 27

What is balancing the budget?

Answer 27

When government spending equals government revenue (G =T)

Question 28

What is a budget deficit?

Answer 28

Occurs when government spending exceeds government revenue (G > T). This represents a net injection of demand into the circular flow of income and hence a budget deficit is expansionary

Question 29

What is trade-off between policy objectives?

Answer 29

Although it may be impossible to achieve two desirable objectives at the same time, e.g. zero inflation and full employment, policy-makers may be able to choose an acceptable combination lying between the extremes, e.g. 2% inflation and 4% unemployment

Question 30

What is policy conflict?

Answer 30

Occurs when two policy objectives cannot both be achieved at the same time: the better the performance in achieving one objective, the worse the performance in achieving the other

Question 31

What are the main policy conflicts and their associated policy trade-offs?

Answer 31

• Between internal policy objectives of full employment and growth and the external objective of achieving a satisfactory balance of payments (or possibly supporting a particular exchange rate)
• Between achieving full employment and controlling inflation
• Between increasing the rate of economic growth and achieving a more equal distribution of income and wealth

Between higher living standards now and higher living standards in the future. This is a example of an ‘intertemporal’ conflict between enjoying something now, or in the future

Question 32

Who are Keynesian economists?

Answer 32

Followers of economist John Maynard Keynes, who generally believe that governments should manage the economy, particularly through the use of fiscal policy

Question 33

Who are pro-free-market economists?

Answer 33

Opponents of Keynesian economists, who dislike government intervention in the economy and who much prefer the operation of free markets

Question 34

What is monetary policy?

Answer 34

The use by the government and its agent, the Bank of England, of interest rates and other monetary instruments to try to achieve the government’s policy objectives

Question 35

What is fiscal policy?

Answer 35

The use by the government of government spending and taxation to try to achieve the government’s policy objectives

Question 36

What is the balance of payments equilibrium?

Answer 36

A situation in which a deficit or surplus on the current account of the balance of payments is exactly matched by capital inflows or outflows in the other parts of the balance of payments

Question 37

What is a macroeconomic indicator?

Answer 37

• Commonly used to measure the performance of an economy, such as real GDP
• Provides information from recent economic performance for judging the success or failure of a particular type of government policy, e.g. fiscal policy or monetary policy
• Can be divided into lead and lag indicators
• Always presented in the form of statistical data: for example, unemployment and growth figures in the case of lagged indicators and more

Question 38

What can an indicator also be used for?

Answer 38

To compare the performance of the UK economy with that of competitor countries

Question 39

What are lead indicators?

Answer 39

They provide information about the future state of the economy, stemming from the way people are currently forming their expectations

Question 40

What do surveys of consumer and business confidence and investment intentions provide?

Answer 40

Information about the likely state of aggregate demand a few months ahead

Question 41

What are lag indicators?

Answer 41

They provide information about past and possibly current economic performance and the extent to which policy objectives such as economic growth and control of inflation have been achieved

E.g. Data on the level of GD, current and recent employment, and unemployment figures

Question 42

What is the accuracy of information provided by performance indicators highly dependent on?

Answer 42

The accuracy of the statistics available from the government and other sources

Question 43

What is a index number?

Answer 43

A number used in an index, such as the consumer prices index, to enable accurate comparisons over time to be made

• Changes in real GDP, and in other economic variables are usually expressed through this

Question 44

What do rising levels of inflation encourage?

Answer 44

Households to bring forward certain purchases

Question 45

What is the problem with a low-interest rate?

Answer 45

It’s a disincentive to save but it is an incentive to spend

Question 46

What is national income?

Answer 46

The flow of new output produced by the economy in a particular period e.g. a year, measured, by the flow of factor incomes

Question 47

What is a national product (national output)?

Answer 47

The flow of new output produced by different industries in a particular period, e.g. a year

Question 48

What is national capital stock?

Answer 48

The stock of capital goods, e.g. buildings and machinery, in the economy that has accumulated over time and is measured at a point in time

Question 49

What is human capital?

Answer 49

The skills, knowledge and experience possessed by the population

Question 50

What is national wealth?

Answer 50

The stock of all goods that exist at a point in time that have value in the economy

Question 51

What is consumption?

Answer 51

Total planned spending by households on consumer goods and services produced within the economy

Question 52

What is the hidden economy (the informal/underground/black economy)?

Answer 52

All the economic transactions conducted in cash which are not recorded in the national income figures because of tax evasion

Question 53

What are some problems that surface when using national income statistics to measure living standards?

Answer 53

• The non-monetised economy
• The hidden economy
• Quality changes
• Negative externalities

Question 54

What limitations does national income data have when comparing living standards in different countries?

Answer 54

• Relative importance of the non-monetised economy
• Exchange rates
• Traded and non-traded goods

Question 55

What are purchasing power parity (PPP) exchange rates?

Answer 55

The rates of currency conversion that equalise the purchasing power of different currencies by eliminating the differences in price level between countries

Question 56

What are the advantages of (PPP)?

Question 57

What are the drawbacks of (PPP)?