2.1 Measures of Economic Performance Flashcards

Question

Summarise Real incomes and subjective happiness

Answer 1

- One key finding of psychological research is that happiness and income are positively related at low incomes i.e. if you are poor and your income increases, you will be happier, but higher levels of income aren’t associated with increases in happiness i.e. rich people aren’t necessarily happy and increases in their income won’t necessarily make them happier. - This is called the Easterlin Paradox. An increase in consumption of material goods will increase happiness if basic needs aren’t met (shelter and food), but once these needs are met, an increase in consumption won’t increase long term happiness. -For example, in the UK as we already enjoy a high standard of living, even if GDP doubles, happiness will not increase. - Another finding is that income and happiness depends on the people around us . For example, 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. - Income is linked to social status and higher social status tends to make us happier.

Answer 2

The general increase of prices in the economy which erodes the purchasing power of money

Answer 3

The fall of prices and indicates a slowdown in the rate of growth of output in the economy

Answer 4

The reduction in the rate of inflation

Answer 5

- Prices are combined using information on the average household spending pattern to produce an overall price index - Average household spending is worked out through the Living Costs and Food Survey - It takes into account how much is spent on each item so they are weighted

Answer 6

- We spend more on petrol than on postage stamps - So an increase in petrol will have a bigger impact on the overall rate of inflation

Answer 7

- It is not totally representative as it is impossible for the figure to take into account every single good that is sold in the country - It does not include the price of housing, and since this has tended to rise than the other price of goods, the data may be lower than it should be - It is difficult to make comparisons with historical data, unlike the RPI it was only used since 1996 with estimates going back to 1988 - Some people argue that all inflation indices overestimate inflation because they don't take into account the fact goods and services have improved in quality, so will have to be more expensive

Answer 8

- RPI includes housing costs such as mortgages, interest rates, council tax unlike CPI - RPI doesn't take into account the fact that when prices rise people will switch to products that have gone up less, therefore CPI is generally lower than RPI - RPI excludes the top 4% of income earners and low income pensioners as they are not average households whereas CPI covers all

Answer 9

- Demand Pull - Cost Push - Growth of money supply

Answer 10

- Where prices in a market are determined by demand and supply - A shift in either will cause price to change - Inflation can therefore be caused by an increase in AD

Answer 11

then inflation would increase

Answer 12

- Where firms respond to rising unit costs by increasing prices to protect their profit margins - Caused by any factor which decreases AS

Answer 13

- When there is too much money in the economy - If people have access to money they will want to spend it but if there is no increase in the amount of goods and services supplied, then prices will have to rise

Answer 14

- Consumers will have less to spend if their incomes do not rise with inflation - causing a fall in living standards - Consumers in debt will be able to pay it off at a price which is of cheaper value - Consumers who are owed money lose because the money they get back is cheaper value - Consumers who save will lose out as their money is worth less - Psychological effects: if prices are rising, they may feel less well-off, even if their income is rising in line with inflation, and so this may cause them to decrease their spending

Answer 15

- British goods will be more expensive, so there will be less competition and make it more difficult for firms to export, affecting the balance of payments - Firms can not plan for the future as inflation is hard to predict - Undergoing calculating new prices then changing their menus/labels which can be quite expensive

Answer 16

- Consumers will be encouraged to postpone their purchases as they will wait for the price to fall further - They will also be more likely to save as their money value will rise in the future and they will prevent borrowing as the real value of their debt will increase - This can lead to a fall in demand for goods, leading to a fall in a firms profit, and in turn business confidence which can lead to a long term reluctance to invest

Answer 17

- If the state fails to change excise taxes in line with inflation then real government revenue will fall - If they fail to change personal income tax allowances then real government income will increase and taxpayers will have less money

Answer 18

- If workers do not receiver yearly pay rises of the rate of inflation, they will be worse off and their living standard will decrease - Those in weaker unions tend to be most affected as they are unable to win wage rises in line with inflation

Answer 19

- Cause staff to lose their jobs as there is a lack of demand meaning firms see a fall in profit and have to decrease staff to cut costs

Answer 20

As it represents a waste of resources

Answer 21

- Claimant Count - International Labour Organisation (ILO) - UK Labour Force Survey

Answer 22

- The number of people receiving benefits for being unemployed done each month showing leavers and joiners

Answer 23

- Employed - Unemployed - Economically inactive

Answer 24

- Those who do more than 1 hour of paid work a week - Are temporarily away from work - Are on government supported training scheme - Do minimum 15 hours of unpaid work for their family business

Answer 25

- Those of working age who are without work - Able to work and have been seeking work - Have actively sought work in the last 4 weeks and are available to start in the next 2 weeks

Answer 26

- People of working age not seeking employment - Those seeking employment but not able to start work e.g. studying - Discouraged workers (fed up of applying) - Retired - Those who do not want or need a job

Answer 27

- A sample of people living in households and is a legal requirement for every country in the EU - Asks questions about personal circumstances and activity in the labour market to class people - Only estimate as measured by a sample

Answer 28

- Some people may not be included in the LFS but are in the Claimant Count as they may include people working in the hidden economy or those who fraudulently claim benefits - Some people are included in the LFS but not Claimant Count as people aren't eligible for benefits but are classed as unemployed, making the LFS tend to be higher

Answer 29

- Their partner is working - They are looking for work along full-time study - Around State Pension Age

Answer 30

- The employed and unemployed - They are engaged in labour market and are people employers can look to recruit.

Answer 31

- The percentage of the population of working age who are employed - The unemployment rate is the percentage of the economically active who are unemployed.

Answer 32

- The percentage of the population of working age who are economically active

Answer 33

- Those who are in part time or zero hour contracts when they would prefer to be full time - People who are self-employed but would rather be employees - Those who are in jobs which do not reflect their skill level

Answer 34

- It increases because firms will reduce staff hours and they have to pay expensive redundancies packages

Answer 35

- Decrease in the size of the labour force - Therefore causing a fall in productive potential of the country - Hence, lower GDP and lower tax revenues and less people working

Answer 36

- Frictional - Structural - Seasonal - Cyclical - Real wage inflexibility

Answer 37

- Unemployment due to people moving between jobs

Answer 38

- Usually due to new workers entering the labour market or people who have chosen to leave their previous jobs

Answer 39

- Where there is a long term decline in demand in an industry leading to a reduction in employment

Answer 40

- Perhaps due to increasing international competition or technology - Where the demand for labour is lower than the supply in an individual labour market

Answer 41

- Regional - Sectoral - Technological

Answer 42

- Where certain areas of a country suffer from very low levels of employment due to industry closure

Answer 43

Where one sector suffers a dramatic fall in unemployment

Answer 44

Where an improvement in technology means that jobs are replaced

Answer 45

- Some employment is strongly seasonal in demand - Industries such as tourism are only prominent during certain times of the year and so only demand large numbers of workers at specific times

Answer 46

- Due to a general lack of demand of goods and services within the country

Answer 47

- If there is a recession or severe slowdown in economic growth - Due to a decrease in demand causing businesses to cut employment in order to control costs and restore some of their profitability

Answer 48

- Due to real wages being above their market clearing level leading to an excess supply of labour

Answer 49

- Firms are unable to lower their wage any more as it will go under minimum wage which is illegal so results in unemployment - When unemployed workers refuse to take low paid jobs because they can receive more in welfare benefits

Answer 50

- An increase in net inward migration tends to lead to increased jobs - As most migrants are of working age and often take lower skilled jobs - Due to the circular flow of income, immigrants' spending creates jobs and total employment will therefore increase, but this depends how much money immigrant workers send back home

Answer 51

- Leads to lower wages, particularly for lower paid, lower skilled jobs - Due to firms being able to recruit foreign workers it means the supply of labour is increased and so the price equilibrium of labour is reduced - There will be an increase in competition for jobs and the uk workers who have low motivation and are low skilled are most affected as they are competing in the job market with more skilled workers prepared to take the same job as them

Answer 52

- As economies progress overtime, higher skills are needed to work in them - For the UK to maintain its employment levels, it needs to increase the skills of its workforce over time - Structural unemployment is caused by a lack of or the wrong skills as their skills don't fit the jobs on offer - If firms will not train staff, the state has to step in to correct the market failure but this is costly - Migrant workers may fill these shortages if their skills fit

Answer 53

- Unemployed have a loss of income -> declining their living standards - They will feel degraded by the process of signing on to receive benefits to support their family -> leading to stress, illness, suicide etc. - Long-term unemployed may find it hard to find another job as they lose skills - People in jobs will suffer from lower job security and will dear being made redundant. They could also see a fall in wages because the firm can easily find someone to replace them if they complain about pay

Answer 54

- Decrease in demand for their goods and so this could lead to a fall in profit - Long term unemployment can lead to a loss of skills and reduce employability of workers, so firms have a smaller pool of skilled people to employ - They can offer low wages as people will take the job anyway because they know there is a lack of jobs so have few options

Answer 55

- If live in area of high unemployment they lose out because local shopping centres tend to be run down and don't offer the range of shops available to those in areas of low unemployment -> Suffer of less less choice and maybe decrease in quality of goods - Unemployed consumers have less to spend - BUT, firms may lower prices and put on sales in order to increase demand for their product

Answer 56

- Reduced income results in fall in tax revenues and higher spending on welfare payments, incurring an opportunity cost as the money could be spent elsewhere - Increase in budget deficit. So likely an increase in taxation or scaling back of plans for public spending on public and merit goods and may need to increase borrowing

Answer 57

- Increase in social deprivation -> unemployment has a relationship with crime and social dislocation - Areas of high unemployment often see a fall in demand for local goods and services, leading to a fall in income for those working in the services and sometimes further loss of jobs. - Loss of potential national output and represents an inefficient use of scarce resources. - If people chose to leave the labour market permanently, then this will have a negative effect on LRAS and therefore damage the economy’s growth potential so the country is unable to achieve their desired PPF. - Taxpayers paying money to the unemployed is not a loss for the economy as it is a transfer payment but the economy is affected because there is a fall in national output and the social costs of the unemployed e.g. violence and crime.

Answer 58

A record of all financial dealings over a period of time between economic agents of one country and all other countries Essentially looks at where the money flows

Answer 59

When goods/services come in, so money goes out

Answer 60

When money comes in. so the good/services go out

Answer 61

- Current account - Capital and financial account

Answer 62

Records payments for the purchase and sale of goods and services

Answer 63

Records flows of money associated with saving, investment, speculation and currency stabilisation

Answer 64

- Trade in goods - Trade in services

Answer 65

- Visible goods that are traded, both raw materials or finished goods

Answer 66

- Invisible - E.g. a holiday to spain

Answer 67

- Wages, interest, profit or dividends can be repatriated into the country. For example, a Polish person could send the money they make in the UK back home to Poland or a British person could take the profits from their overseas country back to the UK. - Current transfers are usually done by governments and are when they transfer money into or out of overseas organisations such as the EU. - Income and current transfers can be split into primary and secondary incomes: primary income is the result of loans of the factors of production abroad e.g. interest, profits and dividends (including wages sent to other countries) whilst secondary income is a range of mainly government transfers to overseas organisations, such as the EU.

Answer 68

Balance of trade + Balance of invisibles + Net income and current transfers

Answer 69

Where exports are greater than imports So the current balance is positive

Answer 70

Where imports are greater than exports So the current balance is negative

Answer 71

- Low unemployment - Low and stable inflation - Economic growth at a similar rate to other economies - Balance of payment equilibrium, including current account balance

Answer 72

- Becomes a deficit as there is increased imports due to increased demand

Answer 73

- Export led growth which could cause economic growth, high employment and improve the current account balance

Answer 74

- The proportion of output of an individual economy which is traded internationally is growing. - Many more people (or companies) own assets in other countries such as shares, loans or businesses. - There is increasing migration between countries - More technology being shared on a faster basis.

Answer 75

International trade has meant countries have become more interdependent so a change in the economic condition of one country will affect another, since the quantity they import or export changes. In theory, all current balances should add up to zero as what one country exports another imports

2.1 Measures of Economic Performance Flashcards

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