2.1 - Measures of economic performance Content Flashcards

Question

# 2.1 Measures of economic performance What is Fisher's equation, which describes the relationship between inflation and real interest rate?

Answer 1

Real interest rates = nominal interest rates - inflation.

Answer 2

CPI or RPI

Answer 3

High and unexpected inflation means goods and services are becoming unaffordable - purchasing power of income falls.

Answer 4

* Increased spending increase MPC. - as goods are more expensive * Reduction in the real value of debt * Wage demands

Answer 5

* Less internationally competitive * Increased costs (due to wage demands). * Lower confidence (less animal spirits).

Answer 6

* Revenue from indirect taxes will fall (spending dec). * Revenue from direct taxes will rise (as wages inc). * Reduction in the value of real govt. debt.

Answer 7

Via a family expenditure survey. From this, basket of goods = created, weighted due to amount of expenditure on each item.

Answer 8

* Basket of goods only represents average household. * Different demographics have different spending patterns. * Slow to respond to new goods and services. * Hard to make historical comparisons.

Answer 9

Higher than CPI. (Includes interest rates on mortgage payments, council tax etc).

Answer 10

Top 4% of earners and low income pensioners. (As they are not 'average households').

Answer 11

When prices rise people will switch to product that has gone up by less, unlike the CPI.

Answer 12

* Depreciation in the exchange rate. (WIDEC) - AD increases. (Less imports, improved trade balance) * Lower taxes or more Government spending. ↑ Disposable income. * Lower interest rates - save less and more borrowing + consumption. * High growth - export more and AD increase. (Anything that increases AD).

Answer 13

* Increase in price of Land/Labour - (raw mat / cost of labour) * Expectations of inflation - wage demands = ↑ Cost of Production. * Increase in indirect taxes, these costs are passed on. * The presence of monopoly power. Firms have more price control and set higher prices.

Answer 14

Price rises harm the economy. Shut down of businesses, AD rapidly declines.

Answer 15

1. **Land** - Some countreis eg Saudi Arabia have seen extensive growth due to natural resources 2. **Labour** - Increases in the quantity of workers through demographic changes and migration - Or increases in the labour productivity of the existing labour force 3. **Capital** - Stock of capital needs to grow in order to sustain increasing output - Both physical and human 4. **Technological progress** - Can bring new products onto the market to sell -> extra spending - Reduces existing costs due to efficiency increases eg computers and calculators 5. **Efficiency** - Increased efficiency -> rises in output - In a market economy, competition should lead to greater efficiency 6. **AD** - Generally associated with export-led growth eg with China - LRAS can be expanded through the investment of export earnings

Answer 16

Productive potential will shift outward if there is a greater number of resources available to produce with or if the process of production becomes more efficient

Answer 17

- Asset values decrease - Savers watch money grow prompting an increase in MPS - Low levels of consumer confidence - Low levels of business confidence - Growing national debt in nominal terms

Answer 18

* **Growth & Unemployment**: Disrupts planning, reduces investment, and dampens consumer spending. * **Competitiveness**: Higher inflation than trading partners reduces exports and domestic industry competitiveness. * **Redistribution**: Hurts fixed incomes (e.g., pensions), benefits borrowers, and harms lenders due to devalued debt. * **Shoe-Leather & Menu Costs**: Causes more shopping effort and higher costs for firms to update prices. * **Loss of Confidence**: Creates uncertainty, deterring investment and slowing growth

Answer 19

While workers may see nominal wage increases, their real wages may decline due to inflation. Labor unions may negotiate for higher wages to keep pace with rising prices.

Answer 20

The number of people claiming unemployment benefits.

Answer 21

Those of working age without work, able and seeking work, available for work in the next 2 weeks.

Answer 22

* Employed * Unemployed * Underemployed * Inactive.

Answer 23

* Frictional - between jobs (short-term) * Structural - where the industry has shrunk so people with specialist skills are left unemployed * Seasonal - lifeguards * Cyclical - busienss cycle * Real Wage. - real wages level is above equilibrum - excess supply of labour

Answer 24

* Most likely lose out, loss of income, some may be offset by welfare * Stigma leads to poor health * Longer unemployed = harder to get a job

Answer 25

* Loss of output the unemployed could have produced * Less able to be consumed for consumers * Social costs such as increased crime

Answer 26

* Firms suffer because the unemployed represent loss of potential demand * Full employment is preferable * Could be lower wage rates however * Long-term unemployment represents a loss of human capital as workers become de-skilled

Answer 27

Firms tend to reduce staff hours, as opposed to making them redundant (and paying expensive redundancy packages).

Answer 28

The percentage of economically active people who are employed / unemployed.

Answer 29

Those in part time or zero hour contracts, in jobs which do not reflect their skill level.

Answer 30

* over 18 * not in full time education * available to work * actively seeking work * < £16,000 in household savings (CLAIMANT COUNT DEF OF UNEMPLOYMENT)

Answer 31

* Loss of income * Stigma * Loss of skills * Lower job security for the employed

Answer 32

* Fall in sales / profits. * Smaller pool of skilled workers. * Lower wages (as there is increased supply of labour).

Answer 33

* Fall in tax revenue * Increased spending on benefits * Social deprivation * Loss of national output

Answer 34

1. **Derived demand**: Labour demand depends on demand for the product. 1. **Marginal revenue product**: Revenue added by each worker. 1. **Productivity**: Skilled labour boosts demand through higher output. 1. **Legislation**: Worker rights raise costs, reducing demand. 1. **Capital costs**: Cheaper capital substitutes labour. 1. **Technology**: Advances, e.g., robotics, lower demand (47% jobs at risk by 2040, Oxford study). 1. **Wage rates**: Impact labour affordability. 1. **Economic confidence**

Answer 35

* **Wages** - High wages creates high incentives to work. * **Birth rates and migration** - Large population means large supply of labour. Age determines if population can work. * **Non-monetary benefits** - Supply of labour will increse if there is high job satisfaction. Healthcare, pension, social factors, location, holidays, flexibility, opportunity for promotion. * **Education/training/qualification** - More educated workers means there is a higher supply of workers. * **Trade unions** - Restrict the supply of labour by introducing barriers to entry. You need a degree to teach. Must work for TFL for 2 years before you can become a train driver. * **Working conditions and wages for other jobs** * **Legislation** - Retirement age, school leaving age. * **High government benefits** - reduce the incentive to work.

Answer 36

1. **Education**: State-run schooling and extended compulsory education ensure workforce training. 1. **Training**: Government subsidies counter firms’ underinvestment in employee training. 1. **Immigration**: Attracting educated immigrants boosts overall labor competence.

Answer 37

* Migration can impact employment by changing the supply of labor in specific regions. Immigrants may fill labor gaps, but this can also lead to wage pressures. * Skills are crucial for employment. A highly skilled workforce is more adaptable and less prone to unemployment in a changing economy.

Answer 38

Record of all financial dealings over a period of time. Between economic agents of one country and all other countries.

Answer 39

* (Balance of) trade in goods * (Balance of) trade in services * (Net) income flows from abroad * (Net international) transfer payments.

Answer 40

Not enough exports * Lack of productivity and competitiveness * High inflation * High currency value * Non price factors like poor quality and design High imports * High curency value * Spending habits Other factors * Monetary policy * Supply side policies * Fiscal policy * Trade cycle - Boom times may mean higher imports. (Depends on MPI)

Answer 41

* Competitive economy - High productivity, investment, training, quality * Low inflation * Low exchange rate * Vast natural resource - Kuwait, UAE * Trade cycle * Government policies - competitive supply side policies

Answer 42

**Long-Term Loss of Competitiveness** * Why? Persistent deficits signal that domestic industries (e.g., manufacturing, agriculture) cannot compete globally due to high production costs, outdated technology, or weak innovation. * Result? Over time, industries shrink as imports replace local goods → structural unemployment and reliance on foreign products. **Higher Unemployment** * Why? Import spending leaks money out of the economy (a withdrawal from the circular flow), reducing demand for domestically produced goods and services. * Result? Firms cut production and jobs → rising unemployment, especially in sectors like manufacturing. This further reduces aggregate demand, creating a downward economic spiral. **Imported Inflation** * Why? A large deficit weakens the exchange rate (high demand for foreign currency to pay for imports). * Result? Imported goods (e.g., oil, machinery, electronics) become more expensive → cost-push inflation (rising prices for essentials). Central banks may raise interest rates to stabilize the currency, slowing economic growth. **Fall in GDP** * Why? Net exports (exports minus imports) are a key component of GDP. A deficit (imports > exports) directly subtracts from GDP. * Result? Lower GDP growth → reduced incomes, job losses, and weaker investment → risk of a deflationary spiral (falling demand → lower production → more unemployment).

Answer 43

* Depends on the size of the deficit and how long it persists - Might be cyclical * Depends on what the imports are - capital goods and investment will improve future growth prospects. * Depends on if the exchange rate is fixed or floating, In a floating system, the balance of payments deficit should be self correcting * Might be financed by a surplus on the financial account

Answer 44

* **Retaliation** - Countries with large deficits might retaliate by putting up barriers to trade to reduce imports - American withdrawl from NAFTA * **Resources are focused on producing** to meet export demand rather than export demand, so lower consumer living standards * **Rise in the exchange rate** - makes exports more uncompetitive in the long run. * **Inflation** - high demand for exports could create inflation.

Answer 45

* Fiscal policy - Raise income tax - Consumers have less disposable income. Spend less and import less. Particularly effective for countries with a high MPI. Evaluation * Unemployment and lower growth. Less incentives * Fall in consumption and investment - less aggregate demand means lower business confidence

Answer 46

* This is because it has to pay for everything it consumes and funds in some way - to fund a current account deficit, a country must be selling assets to foreign investors. * It is debatable whether this is sutainable in the long run since, if people invest in a country, at some point they will require a return on their investment, and this will cause a deficit on the financial account

Answer 47

- The balance of payments must always equate to 0 -> if the government runs a current account deficit, it must run a capital and financial accounts surplus

Answer 48

1. **Exchange rate changes** -> If an economy is running a persistent deficit, then a currency devaluation is likely to increase exports and decrease imports thus improving the current account -> A cheaper £ makes imports more expensive for domestic buyers and exports cheaper for foreign buyers -> This assumes that the combined elasticity of demand for exports and imports is greater than one -> the Marshall-Lerner condition -> In the short term, there may be a deterioration of the current account due to the J-curve effect, but in the long term it should improve -> Devaluation is an example of expenditure switching policy -> Expenditure is swithced from higher priced imports to more competative domestically produced goods -> It should be remembered that a devaluation is incredibly hard and expensive to do on a free floating currency 2. **Deflationary policies** -> Policies aimed at reducing AD -> Eg by increasing interest rates or taxes -> Households will have less disposable income and therefore will cut back spending on foreign products -> Equally firms will cut back investment including purchases of imported capital -> imports decline -> Exports could increase if firms switch sales from the depressed domestic market to foreign markets -> Examples of expenditure reducing policies -> Could alternately use reflationary policies to reduce a surplus 3. **Supply side policies** ->Supply side policies aimed at reducing unit labour costs and increasing investment, increasing human capital in the labour force should lead to increased exports and reduced imports -> Major problem being that they are long term policies -> Work by increasing productivity which decreases production costs and thus make exports cheaper, increasing the demand -> Also make domestically produced goods more competative in relation to foreign imports 4. **Protectionism** -> Increasing tariffs or quotas will reduce imports and thus improve the current account -> Only effective if they are not met with retaliation 5. **Currency controls** -> Government may choose to impose or tighten currency controls -> These are controls on the purchase of foreign currency by domestic citizens and firms -> Used today in Russia and Pakistan -> Limit the amount of imports that can be bought and thus improve the current account -> Black markets are likely to occur however

2.1 - Measures of economic performance Content Flashcards

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