macro 2.1 - measures of economic performance Flashcards
GDP?
GDP- total value of goods and services produced within in a year
total GDP- overall GDP for the country
GDP per capita- total GDP/population
real GDP- GDP adjusted for inflation e.g. if nominal GDP is £100bn and inflation is 10% then real GDP is £90bn
nominal GDP- GDP not adjusted for inflation
value —> shows what certain goods/services are worth
volume —> shows the number of goods/services that are produced
GNI and GNP
- GDP may not be the best to measure a country’s output/wealth —> GDP is value of all goods produced inside the country, whether they were produced by citizens of the country or not but it doesn’t consider the income earned by its citizens outside of the country
- Gross national income - GNI = GDP + net factor income (income earned by domestic workers/firms aboard - income earned by foreign workers/firms at home)
Gross national product- income earned by citizens abroad - income earned by foreign workers/firms at home + GDP
growth comparisons between overtime and between countries
- Over time:
- Changing national income levels will show us whether the country has grown or shrunk over a period of time —> the data is compared against similar countries to see whether the country has done well or not —> judgements about economic welfare can be made as growth in national income means a rise in living standards
- Real, per capita figures to make comparisons about growth
- Important to use per capita figures —> if a country’s population grows over time, then this may cause a rise in GDP without a rise in living standards —> inaccurate comparisons
- Important to use real GDP —> strips out the effect of inflation —> inflation is rising prices and can give us the impression that GDP is growing without any more services and goods being produced
- Between countries:
- real GDP per capita —> difficult to make comparisons against different countries with total GDP as countries with larger population may have higher GDP but that doesn’t necessarily mean living standards is higher
PPP (purchasing power parity)?
PPP (purchasing power parity) - an exchange rate of one currency for another which compares how much a typical basket of goods in the country costs compared to one in another country
- comparing basket of goods between 2 diff countries (exactly same goods/services in each basket) —> e.g. UK basket of goods has value of £1000, US basket of goods has value of $1700
- nominal exchange rate: £1 = $1.60
- £ is undervalued against the $
- US will buy UK goods/services —> supply of the $ increases —> demand for £ increases —> leads to appreciation of £ —> reach real exchange rate of £1 = $1.70
what is the big mac index?
- big mac index —> currency is exchanged and compared to price of big mac in the US
- look at price of big mac is USA —> e.g. big mac costs $5 in US and £6 in the UK —> convert £6 into dollars and compare it —> is it cheaper in the UK or the US —> shows us purchasing power of a currency (undervalued or overvalued against ___)
limitations of using GDP to compare living standards
- double counting (including the value of output in the primary sector and then including it again when primary commodity has been manufactured into something) —> inflates GDP figure
- informal activity —> black and hidden markets where people work without declaring their income to avoid tax or to continue claiming benefits// home-produced services e.g. DIY or the service of house-wives/husbands are not recorded —> GDP is underestimated
- some countries are inefficient at collecting or calculating data —> comparisons can become less effective
- negative externalities aren’t included in GDP —> e.g. cost of deforestation and air pollution etc —> if they were included then living standards would be lower than what GDP suggests
- other quality of life aspects —> e.g. education and healthcare
- doesn’t take into account income inequality (e.g. GDP may seem high but most of it could come from very rich ppl whilst there’s lots of people living in poverty)
UK national wellbeing?
6 key factors of UN happiness report?
* real GDP per capita
* health
* life expectancy
* having someone to count on
* perceived freedom to make life choices
* freedom from corruption
UK national wellbeing?
* In 2010, UK Prime Minister launched the Measuring National Wellbeing report to measure how lives are improving. They found that self-reported health, relationship status and employment status most affect personal well-being
* The report is now updated on a quarterly basis rather than annually
Easterlin paradox:
- Happiness and income are positively related at low incomes e.g. if you are poor and your income increases, you will be happier, however if you are rich and your income increases, you won’t necessarily feel happier
Relationship between income and happiness?
- Income and happiness depends on the people around us e.g. if you are the richest out of everyone you associate yourself with, then you will be happier than someone who has the exact same income but is the poorest out of everyone they associate with
inflation
inflation- sustained rise in general price levels
deflation- sustained decrease in general price levels (inflation rate falls below 0)
disinflation- prices rising but at a slower rate
causes of inflation?
- demand pull —> aggregate demand increases so prices increase
- cost push —> COP increases for firms —> increased prices are passed onto consumers
- growth of money supply —> people have more disposable income —> consumption increases —> AD increases —> demand pull inflation occurs —> prices increase
what are index numbers and how do we calculate them?
- converts figures into the same form so figures can be compared —> choosing one year for the base year and adjusting all other figures into equivalent figures
- (new figure/base figure) x 100
how to calculate inflation using CPI?
how to calculate inflation using CPI?
- expenditure survey is carried out by the ONS
- a ‘consumer basket’ of the most popular goods/services is formed with the average prices of goods attached
- prices of goods/services are weighted based on % of income spent
- price x weighting determines the final value of the good/service in the basket —> weighted prices are added to give total weighted price of the basket
- base year selected with index value 100
- weighted prices converted into index numbers
- % change calculations to work out inflation rates (difference/original x 100)
- basket is updated yearly —> items that consumers aren’t buying as much will leave the basket and items that are now popular will enter the basket
limitations of CPI?
- sample size too small
- takes time/long to measure —> expensive —> increases opportunity cost
- not representative of spending patterns due to different demographs —> average basket of goods of british family will be diff to asian family etc —> e.g. ethnic, age, family structure
- inaccuracy when collecting data
- doesn’t account for quality —> CPI may be seem high however quality has increased
- CPI not updated fast enough —> misses trends of spending
- it is a newer measure of inflation which means comparing with past data is very difficult
differences between CPI and RPI?
RPI (retail price index) —> calculated in exactly the same way as the CPI but certain goods/services that are excluded from the CPI are included with the RPI e.g. housing costs
difference between CPI and RPI?
* CPI takes into account the fact that when prices rise people will switch to product that has gone up by less. Therefore, the CPI is generally lower than the RPI.
- RPI excludes the top 4% of income earners and low income earners as they are not ‘average’ households whilst CPI covers all households and all incomes
costs/benefits of inflation on individuals and workers
individuals/workers:
- lower purchasing power if incomes don’t rise in line with inflation —> fall in living standards ❌
- erosion of savings —> interest rates aren’t rising in line with inflation e.g. cost of goods increases but savings stay the same —> less incentive to save// shoe leather costs —> people spend time looking for other bank accounts which give higher levels of interest —> time involved in research —> opportunity cost created ❌
- fiscal drag —> incomes are rising in line with inflation —> pay rise may mean that workers get dragged into higher tax bands —> living standards decrease ❌
- workers will bargain for higher wages —> motivation increases —> productivity increases —> COP decreases —> AS increases —> economic growth ✅
why does inflation occur?
- consumer price spiral —> consumers anticipate high inflation in the future —> rational consumers will bring forward consumption —> if all consumers act rationally, consumption increases so AD increases —> demand pull inflation occurs ❌
- wage price spiral —> workers bargain for higher wages —> COP increases —> pass this onto consumers via higher prices —> inflation increases —> workers bargain for even higher wages ❌
costs/benefits of inflation on businesses
businesses:
- inflation increases —> COP increases due to materials being more expensive —> exports are less internationally competitive —> demand for exports decreases—> revenue from exports decreases —> current account worsens ❌
- inflation —> COP increases due to materials being more expensive —> firms will pass these costs onto consumers via higher prices —> demand decreases —> profits for businesses decrease ❌ (e.g. menu costs changing —> updating menus)
- demand pull inflation occurs due to increased demand —> if demand increases then profits for firms will increase/confidence will increase —> MP to invest increases —> investment increases —> AD increases —> economic growth ✅
costs/benefits of inflation on government?
government:
- inflation —> COP increases due to materials being more expensive —> firms will pass these costs onto consumers via higher prices —> demand decreases —> profits for businesses decrease —> less tax revenue❌
- inflation increases —> COP increases due to materials being more expensive —> exports are less internationally competitive —> demand for exports decreases—> revenue from exports decreases —> current account worsens —> goes against one of the key macro economic objectives ❌
- lower purchasing power if incomes don’t rise in line with inflation —> fall in living standards e.g. poverty —> government has to spend more ❌
- fiscal drag (incomes are rising in line with inflation) —> pay rise may mean that workers get dragged into higher tax bands —> tax revenue for government increases ✅
unemployment?
unemployment —> someone of the working age, who is willing + able to work and actively seeking work but cannot find a job
types of unemployment?
- cyclical unemployment/keynesian demand deficient unemployment —> happens due to fall in AD e.g. when the economy goes into recession —> demand decreases and companies lay off workers to control costs
frictional unemployment:
- Occurs when workers are transitioning between jobs
- This isn’t a serious problem as it is only short term
Structural unemployment:
- Structural unemployment occurs when there is a mismatch between jobs and skills in the economy —> It usually happens as the structure of an economy changes e.g. secondary sector declining and the tertiary sector growing
- This is a more serious form of unemployment due to it being long-term
Seasonal unemployment:
- When people are unemployed due to time of year e.g. summer and xmas jobs
- Only short term so it isn’t serious
Real wage unemployment:
- Level of inflation increases —> COP for firms has increased —> difficult to retain workers —> demand for labour falls —> unemployment occurs
measures of unemployment?
Claimant Count: The number of people in UK claiming unemployment benefits (job seekers allowance)
Negatives of claimant count:
- Difficult to make comparisons between countries —> some countries may not even have unemployment benefits but even if they do, the conditions to claim benefits are very different
- Claimant count tends to be lower than LFS —> not everyone who is unemployed will claim benefits (embarrassment) and not everyone can claim it (if spouse earns a certain amount of income then they won’t be eligible to claim benefits)
- People can fraudulently claim benefits (e.g. providing false information when they’re not entitled to claim it or continue claiming benefits after they have found work) —> inaccurate unemployment figures
Labour Force Survey and International labour organisation: survey conducted by the ONS to class people as employed, unemployed or economically inactive —> the same survey is used globally so it’s useful for making international comparisons —> the LFS use the ILO definition of unemployment and employment
unemployment rate= unemployed/ employed + unemployed (economically active) x 100
Negatives of LFS:
- Sampling errors due to small sample —> inaccurate info
- Costs —> expensive which is why sample size is small
- Discouraged workers (hidden unemployed) aren’t included in the unemployment rate as they’re not seeking work anymore
- Inactive groups e.g. early retired, ppl relying on partners income —> not counted in unemployment rates as they’re not willing to work —> don’t meet the definition of unemployment —> however they should be classed as unemployed since they’re not working
- Underemployed are counted as fully employed —> not included in unemployment stats —> in the UK, you only have to work 1 hour a week to be counted as fully employed
- Doesn’t tell us about disparities (differences in unemployment rates) —> e.g. race and gender etc —> prevents us from addressing inequalities in the labour market
underemployment?
underemployment- a situation where an individual is working but their job does not fully utilise their skills or abilities, and/or does not provide sufficient hours or pay to meet their needs
- tends to increase during recessions —> firms reduce staff hours instead of making them redundant so they don’t have to pay expensive redundancies packages —> underemployed have lower incomes —> MPC decreases —> AD decreases
significance of changes in activity (rates of employment, unemployment and inactivity)?
- Increases in inactivity will decrease the size of the labour force —> leads to a fall in productive potential of the country —> lower GDP —> lower tax revenues as less people are working
- Increase in employment will increase the size of the labour force —> leads to an increase in productive potential of the country —> GDP increases —> more tax revenues as more people are working
- Increase in unemployment —> can lead to lower consumer spending —> AD shifts left —> GDP decreases —> less tax revenue
