9. The Measurement Of Macroeconomic Performance

Question 1

Policy objective

Answer 1

A target or goal that a government wishes to achieve or ‘hit’

Question 2

Main policy objectives for a mixed economy (such as the Uk)

Answer 2

. Achieve economic growth and improve living standards and levels of economic welfare
. Create and maintain full employment or low unemployment
. Limit or control inflation, or to achieve some measure of price stability
. Attain a satisfactory balance of payments, usually defined as the avoidance of an external deficit which might create an exchange rate crisis

Question 3

Short-run economic growth

Answer 3

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

Question 4

Long-run economic growth

Answer 4

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

Question 5

Gross domestic product (GDP)

Answer 5

The sum of all goods and services, or level of output, produced in the economy over a period of time

Question 6

Real GDP

Answer 6

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 7

Nominal GDP

Answer 7

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

Question 8

Recession

Answer 8

A recession is defined as 6 months or more of negative economic growth or declining real national output

Question 9

Full employment according to Beveridge’s definition

Answer 9

According to Beveridge’s definition, full employment means 3% or less of the labour force unemployed.

Question 10

Full employment according to the free-market definition

Answer 10

According to the free-market definition, 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 11

Downsides to the free market definition of full employment

Answer 11

. Assumes that there is absolutely no unemployment, there will always be some unemployment because the economy is constantly changing, with some jobs disappearing while new jobs are created.

Question 12

Ways of measuring unemployment in the Uk

Answer 12

. The claimant count (recently dropped)
. The labour force survey (LFS)

Question 13

Economically inactive

Answer 13

Someone who is not working and has not looked for a job for 4 weeks and longer

Question 14

Unemployed

Answer 14

Not working, available for work and have either looked for work in the past four weeks or are waiting to start a new job they have already obtained

Question 15

Inflation

Answer 15

A persistent or continuing rise in the average price level- when most prices rise by some degree across the whole economy

Question 16

Deflation

Answer 16

A continuing tendency for the average price level to fall

Question 17

Disinflation

Answer 17

When the rate of inflation is falling, but still positive

Question 18

Price index

Answer 18

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 19

Consumer prices index

Answer 19

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

Question 20

Difference between price index and consumer price index

Answer 20

while both indices track price changes over time, the price index can be more general and cover a wider range of goods and services, whereas the CPI is specifically tailored to reflect the purchasing behavior of urban consumers.

Question 21

Retail prices index

Answer 21

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

Question 22

Indexation

Answer 22

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 23

Balance of payments

Answer 23

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

Question 24

Current account

Answer 24

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 25

Exports

Answer 25

Domestically produced goods or services sold to residents of other countries.

Question 26

Imports

Answer 26

Good or services produced in other countries and sold to residents of this country.

Question 27

Balance of trade

Answer 27

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 28

Balance of trade deficit

Answer 28

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

Question 29

Balance of trade surplus

Answer 29

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