2.1 - Measures Of Economic Performance Flashcards
(106 cards)
1
Q
What is macroeconomics?
A
The study of the economy as a whole.
Analyses the international economic system.
2
Q
What is economic growth measures by?
A
Gross domestic product (GDP)
3
Q
What is GDP?
A
The value of all goods and services produced in a country in 1 year.
4
Q
What are examples of a country’s incomes?
A
Wages, interests, profits, rents
5
Q
What are examples of a country’s expenditures?
A
Consumption, investment, government spending, imports
6
Q
What is total GDP?
A
The value of all goods and services produced in a country.
7
Q
How do you calculate per capita GDP?
A
Total GDP / population
8
Q
What can we use real capita GDP for?
A
To compare the standard of living of individuals within one country.
9
Q
What is the difference between nominal and real GDP?
A
Real GDP takes into account inflation, while nominal GDP doesn’t.
10
Q
How do you calculate real GDP?
A
Nominal GDP / average price level
11
Q
What is volume?
A
The quantity of goods and services produced in a country.
12
Q
What is value?
A
The monetary worth of the goods and services produced in a country. (Quality)
13
Q
What can volume and value output be used for?
A
Compare the success of output of 2 countries.
14
Q
What is gross national income (GNI)
A
GDP + income paid by other countries
15
Q
What is gross national product (GNP)?
A
GNI - income by non-residents
These are UK passport holders who do NOT live in the UK and therefore don’t pay tax.
16
Q
What is a purchasing power parity (PPP)
A
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.
17
Q
What is the PPP dependent on?
A
Personal income.
Cost of living.
18
Q
What does it mean if a country has high costs of living?
A
They have low purchasing power.
19
Q
What is GDP per capita PPP?
A
A comparison between countries by taking into account the cost of living and exchange rates to compare purchasing power.
20
Q
What 2 values are used to compare living standards between countries?
A
Real GDP per capita
Economic growth
21
Q
What is the problem with measuring living standards with GDP? (5)
A
Low accuracy
Shadow economy isn’t included
Negative externalities aren’t accounted for
Growth may cause inequalities in wealth within a country
22
Q
What are the 6 factors that affect national happiness?
A
Real GDP per capita
Healthy life expectancy
Having someone to count on
Perceived freedom to make choices
Freedom from corruption
Generosity
23
Q
Why has happiness economics been introduced?
A
Because standard measures of living conditions do not account contentment.
Money doesn’t buy happiness - however there is a relationship between real income and subjective happiness.
24
Q
What is the problem with the market in developing countries?
A
They consume what the produce and don’t offer it for sale on the market. There is no monetary value.
25
What is the problem with the market of developed countries?
Increase incomes at the expense of quality of life.
e.g. if salary increases, there may be more stress or longer hours.
26
What is inflation?
The rate of change in the average price level over time.
27
What is disinflation?
The falling rate of inflation.
The price level is still rising, but at a slower extent.
28
What are the 2 ways to measure inflation?
1. Consumer prices index (CPI) - the preferred measure.
2. Retail prices index (RPI)
29
What does CPI do?
Measures household purchasing power with the family expenditure survey.
This survey finds out what consumers spend their income from.
30
How does CPI work?
The data is taken from the family expenditure survey, and a basket of goods of around 700 goods is made.
These goods are weighted based on his much income is spent on them. The more income spent, the higher the weighting.
31
What is the macroeconomic objective for inflation in the UK?
2%, with a 1% buffer on either side.
This is to maintain price stability.
32
What are the limitations of using CPI?
1. Basket of goods only represents the *average* household and doesn’t account for different situations. e.g. not owning a car.
2. Different demographics (age, gender, etc.) have different spending patterns.
3. Has a slow response to new goods and services.
4. Difficult to make historical comparisons. e.g. technology difference
33
How does RPI work?
An alternative measure of inflation.
Unlike CPI, this method includes housing costs - causes a higher RPI value.
It also excludes the too 4% of earners as well as low income pensioners (retired).
34
What does CPI take into account that RPI doesn’t?
CPI accounts for the fact that ‘when prices rise, people switch to a less expensive products’.
35
What are the 3 causes of inflation?
1. Demand pull
2. Cost-push
3. Growth of the money supply
36
What is demand-pull inflation caused by?
Caused by excessive demand in the economy for goods and services.
There is too much money chasing too few goods.
The more demand, the more inflation - this is affected by stimulants of aggregate demand.
37
What are the main triggers for demand-pull inflation? (6)
1. Reduced taxation - increases disposable income so people spend more.
2. Lower interest rates - taking out money is more attractive.
3. General rise in spending.
4. Improved availability of credit - makes things more affordable.
5. Weak exchange rate - boosts export growth.
6. Fast growth in other countries - raises demand for exports.
38
What is the result of lowered interest rates?
Borrowing is more attractive so consumption may rise.
This increases demand.
39
What happens as firms try to meet increased demand?
Demand rises faster than firms are able to provide additional supply, so prices are increased to try and reduce demand.
40
What is cost-push inflation?
When inflation occurs due to firms responding to rising costs of production by increasing prices.
They pass on costs to their customers as they are not able to decrease enough of them.
41
What are the main causes of cost-push inflation? (5)
Wage increases - if prices rise, workers will demand higher wages which becomes more costly.
Higher raw material costs - these are becoming more scarce and in higher demand.
Higher taxes.
Higher import prices - if the pound gets weaker, it gets more expensive to buy foreign goods.
Natural disasters - may disrupt the supply chain / reduce supply of raw materials.
42
What is the money supply?
A measure of the amount or stock of money in the economy.
43
What could an excessive print of money cause?
Hyperinflation - the rate of inflation is super high and uncontrollable.
44
Why do we need a greater supply of money as the economy grows?
Because of increased transactions.
45
How can the government increase the money supply?
Print more notes.
Use quantitative easing - money created electronically used to buy government bonds / financial assets.
Government buys bonds from banks that gives them extra money to encourage lending.
Bank of England can buy bonds of institutions to create liquidity.
46
What is deflation?
This is a decrease in the general price level.
NOTA the same as a falling rate of inflation.
47
When does deflation occur?
During periods of very low growth, due to very low demand.
48
What is the issue with a very low demand economy? (Regarding deflation)
As price fall due to low demand, customers delay purchasing decisions as they believe prices will fall again.
Leads to slowed consumption, which can lead to firms losing confidence to invest, further harming the economy.
49
What happens if inflation is higher in Britain than in other countries?
British goods become more expensive + less competitive, makes them more difficult to export.
50
What is the effect of deflation on firms?
As customers wait to purchase, firm profits fall.
51
How does fluctuating prices from inflation affect firms?
Firms need to calculate and relabel / change price tags.
Acts as additional costs to the business.
52
What happens if a government fails to change excise taxes?
If taxes aren’t adjusted in line with inflation, the % tax on an item will not change, and lead to a fall in government revenue.
53
What happens if a governed fails to change personal income tax allowance?
If this isn’t changed in line with inflation, comsumer taxable income will increase so the government can take more money from them, and the consumer ends up with less disposable income.
54
What happens if workers pay doesn’t rise with inflation?
Their cost of living will increase and their living standard will fall.
Workers in weaker unions are most affected as they are not able to strike for their wage rises.
55
What can deflation cause for workers?
May cause some workers to lose their job due to lack of demand to produce goods and services.
56
What is indexation and what can this do?
It’s a way to adjust wages / taxes so they keep up with inflation.
This can help reduce costs.
57
How can indexation cause further inflation? (Spiral)
1. If wages are indexed with inflation, costs go up.
2. Firms may raise prices to cover increased costs.
3. The higher priced lead to more inflation.
Known as a *wage-price spiral*
58
What is unemployment?
The number of people actively seeking a job but are not able to find one at a point in time.
59
What is an alternative definition of unemployment?
The members of the labour force who want to work and are able to work, but are unable to find a job.
60
What is the level of unemployment?
The number of people who are currently unemployed.
61
What is the rate of unemployment?
(Unemployed / labour force) x100
62
What are the 2 measures of unemployment?
1. Claimant account
2. ILO and UK labour force survey
63
What does the claimant account do?
Measures the number of people claiming job seeker allowance - benefits the government provides to the unemployed.
Also provides the numbers of claimants joining and leaving the country each month.
64
What does it mean if someone is employed?
Do more than 1h of paid work a week or are temporarily away from work.
65
What does it mean if someone is inactive?
Those of working age who are *not* seeking employment or those who seek it but aren’t able to start work.
66
What is the labour force survey (LFS)?
A sample of people living in households.
A legal requirement for all EU countries.
67
What does the LFS ask?
Asks questions about personal circumstances and activity in the labour market so people can be divided into the 3 categories (employed, unemployed, inactive)
68
What are the weaknesses of the claimant account? (4)
1. Not everyone who is eligible signs on to it.
2. Some people claiming benefits aren’t actively seeking jobs.
3. Ages under 16 and over 60 don’t count.
4. People who aren’t eligible for benefits (e.g. retired) but are classed as unemployed will don’t appear in the claimant account.
69
What are strengths of the LFS? (4)
1. Internationally recognised.
2. Picks up trends + reaches potential data analysis.
3. Better guide for government policies.
4. Accepted to be more accurate.
70
What are weaknesses of the LFS?
1. People who work in the hidden economy / fraudulently claim benefits are not included in the measurement.
2. Expensive to gather data.
3. Subject to sampling - generic.
71
What is underemployment?
Occurs when workers cannot find a job that is suitable for their qualifications.
Or those who cannot find enough hours to work.
72
Why has underemployment become increasing common?
1. Graduates are unable to find work of their level and are forced to work in less skilled jobs like in supermarkets.
2. Workers are being put on zero-hour contracts where they are called into work when needed rather than being given a permanent contract.
73
Why is there a record high number of people working in the UK?
Due to the growing population.
74
What will increases in inactivity cause?
Will decrease the size of the labour force, causing a fall in productive potential.
This will cause lower GDP and lower tax revenues for the government as less people are working.
75
What is structural unemployment?
A long-term decline in demand in an industry leading to a reduction in employment.
When the demand for labour is lower than supply in an individual labour market.
This causes people to remain unemployed, and need to be retrained when work is found.
76
What is frictional unemployment?
Occurs due to workers moving between jobs.
May be due to new workers entering the labour market or people choosing to leave their job.
Typically short term, the time people are in between jobs is because they do not have perfect and immediate information about every job opportunity available.
There is always some frictional unemployment within an economy.
77
What is seasonal unemployment?
Occurs when workers are unemployed at different times of the year.
Tends to happen in *seasonal* industries like leisure, tourism, farming,
May also happen in *retail* industries that are more heavily employed over busy periods.
May distort employment figures - unemployment is often seasonally adjusted to level out fluctuations in employment levels to provide more accurate statistics.
78
What is cyclical unemployment?
Happens due to a general lack of demand of goods + services within a country.
When there is a recession in economic growth, there is rising unemployment due to businesses trying to control costs after demand was fallen.
79
What is real wage inflexibility?
Occurs when *real* wage rates are above the *equilibrium* wage rate.
Causes the **supply** of labour to be greater than the **demand**.
This is because workers supply more of their services as they would get paid more.
However firms will demand less workers because wages are higher, which increases their costs.
80
How is real wage inflexibility treated in a free labour market + impact of distortions?
Real wage rates would fall and the market would return to equilibrium.
However, distortions e.g. the NMW and trade union power can maintain real wage rates above their equilibrium.
81
What is demand-side unemployment?
Cyclical unemployment —> fall in demand.
Increase in unemployment.
Fall in RNO (real national output) due to lower rate of economic growth.
Lower prices —> lower rate of inflation.
82
What is supply side unemployment?
Increase in costs —> causes a firm to reduce supply.
They may also scale-back production to avoid surplus.
Will create unemployment due to a lower necessity of output - price levels will increase and cause more inflation.
83
What has migration into the UK caused?
Has increased the supply of labour to UK businesses.
Mainly from Eastern European countries.
84
What is the impact of immigrants coming into the UK regarding the labour force?
Increased supply for lower skilled jobs.
Less likely to claim government benefits from the current population.
85
What is the impact of immigrant spending on local goods and services?
GOOD - creates jobs due to increased demand - increases employment.
BUT - this depends on how much of their income immigrants spend on goods and sending it back to their home country.
86
How does migration affect wages in the UK?
Lower wages are generated as there is an increased supply of labour.
Reduces price equilibrium of labour.
87
How does migration create competition for local workers?
They have more motivation than local workers.
More eager to secure a job, so are more willing to accept lower wages and longer hours.
This rarely impacts middle/higher income brackets.
88
How is the UK being affected by the skills component?
As the economy progresses —> higher skills are required.
There is a skills gap in sciences / practical trades.
89
How does the lack of skills affect firms?
Because there is a scarcity of certain work fields, higher wages are created increases costs for firms.
90
What unemployment type is a lack of skills an example of?
Structural unemployment.
91
What is the consequence if firms do not train staff the appropriate skills?
The government needs to step in - correct market failure which is *expensive*.
May cause long term unemployment due to unmatched skills and job requirements.
92
What is the impact of unemployment on workers?
Loss of income —> decline in living standards.
93
What is stigma?
The negative perceptions faced when out of work.
The process of signing to receive benefits can lead to stress / marital breakdown / suicide, etc.
94
What is the impact of being long-term unemployed?
The longer they are unemployed, the harder it is to find another job due to loss of skill.
95
How does unemployment affect the employed?
Those in jobs will fear lower job security and fear being made redundant.
Firms can use this as a threat if they reduce wages.
96
What is the impact of unemployment on firms?
More unemployment —> decrease in demand for goods —> fall in profit.
Those who are unemployed long term have less skills —> reduces the pool of skilled people to employ.
However, they can offer lower wages knowing people will take the job anyway due to lack of jobs - can help reduce costs.
97
What is the impact of unemployment on consumers?
Consumers in areas of high unemployment will suffer from less choice, degraded quality, etc.
Consumers who are unemployed will have less to spend but may benefit from sales or lower prices that firms have implemented to increase demand.
98
What is the impact of unemployment on governments?
Reduced income —> fall in tax revenues + higher spending on welfare payments for those out of work.
There is an opportunity cost of spending it elsewhere.
Can result in an increased *budget deficit* where the government will need to increase tax or scale back on public / merit goods.
99
What is the impact of unemployment as society as a whole?
Can link to social deprivation - a link between crime and social dislocation.
Areas of high unemployment will see a fall in demand for local goods / services - can lead to fall in income for those workers in the services.
100
How does unemployment affect PNO? (potential national output)
Fall in income due to unemployment means there is a loss of potential output.
Represents an inefficient use of scarce resources - labour is not being used.
101
How does unemployment affect LRAS?
If people leave the labour market permanently - LRAS shifts to the left, reflecting a decrease in the economy’s productive capacity.
102
How does unemployment affect a PPF?
A reduced labour force means the economy can’t reach its potential output level and the country operates *inside* the PPF - indicates inefficiency.
103
How does unemployment affect taxpayers?
The tax paid to the government is redistributed to the unemployment - an example of a transfer payment.
This is not a loss for the government but it doesn’t increase the economies RNO.
—> tax cannot be seen as a *source of compensation* for economic losses.
104
What is done in a primary industry?
Raw materials are extracted.
105
What is done in a secondary industry?
Manufacturing, construction, utilities.
Utilities - electricity / power / energy.
106
What is done in a tertiary industry?
Retail, leisure, banks, personal services, healthcare, etc.
