2.1 - Measures Of Economic Performance

Question 1

Gross domestic product

Answer 1

The total market value of the goods and services produced in an economy in a year. It’s given as the value of production, in the local currency. It’s also the sum of all incomes earned in a year and the sum of all expenditure. It doesn’t include earnings by residents while outside the country.

Question 2

Types of economic growth

Answer 2

• actual growth: an increase in real GDP or incomes
• potential growth: an increase in the productive capacity of a country. Caused by an inc labour supply; inc in investment; inc in productivity.

Question 3

Productivity

Answer 3

The output per worker or output per worker per hour worked.

Question 4

Is increasing GDP a good thing?

Answer 4

Inc GDP is a sign that a country is experiencing in income, output and spending. Implies that people have a higher standard of living. But there are reasons this might not be the case. Someone may earn more by working longer hours or having more work pressures. Pollution is likely to increase and many external costs will be incurred.

Question 5

Real vs Nominal

Answer 5

Real: values adjusted to remove the effects of inflation.
Nominal: values measured in money terms

Question 6

GDP per capita

Answer 6

GDP on a per head basis

Question 7

Value vs volume measures

Answer 7

Need to look at value rather than volume. E.g. Germany is the largest exporter in value but China exports a greater volume.

Question 8

GDP vs GNI

Answer 8

GDP does not include earnings by its residents while outside of the country. Gross national income is an augmented version of GDP. GNI is GDP plus net income paid into the country by other countries, for example interest and dividends.

Question 9

What does the evaluation of growth figures depend on?

Answer 9

• level of GDP originally
• how much output is self-consumed, so doesn’t appear on GDP
• methods of calculation and reliability of data
• relative exchange rates, do they reflect PPP
• composition of govt spending, is it on warfare or areas that affect quality of life

Question 10

PPPs

Answer 10

Purchasing power parities are when values are expressed in accordance with the amount that the currency could buy in the local economy.

Question 11

Limitations of using GDP to compare living standards between countries and over time

Answer 11

• subsistence, barter and the hidden economy: farmers consuming own goods or goods paid for without being declared for tax purposes
• the informal economy: some output isn’t recorded because its not bought or sold but it is still output
• currency values: whether to use exchange rate or the PPP
• income distribution: sense of distribution should be taken into account
• size of the public sector: if much of the spending is by the economy is by the government it may improve welfare for the population
• consumer and capital spending: capital may mean standards of living are increasing in the future but not the current living standards
• quality issues: spending on schools may be high but how can the quality be measured
• quality of life issues: rising incomes could be associated with factors that reduce happiness like hours worked and air and noise pollution or stress

Question 12

Measuring national happiness

Answer 12

It’s a response to limitations of GDP. The GNH index has been designed to measure quality of life in holistic and psychological terms than only using GDP. It is only officially used in Bhutan. The ONS measures national wellbeing in the UK.

Question 13

Relationship between real incomes and subjective happiness

Answer 13

The Easterlin Paradox: happiness rises with average incomes, but only up to a certain point. Beyond this marginal Gabonese in happiness fall. This implies that govt should focus on more than just growth.

Question 14

Define inflation

Answer 14

A general and sustained increase in prices, measured by a change in a weighted index of prices such as the CPI.

Question 15

Define deflation

Answer 15

A fall in the general level of prices. Negative inflation.

Question 16

Define disinflation

Answer 16

A fall in the rate of inflation. Prices are rising at a slower rate.

Question 17

Calculating the rate of inflation using the CPI

Answer 17

There are two surveys:
-on expenditure: ONS takes a survey of LCF. It creates the contents of a virtual basket of goods for the average household (around 7000 in the survey). Weights are attached to each good to reflect the relative importance.
-on price: undertaken by civil servants who collect data once a month about changes in the 650 most commonly used goods and services.
The price changes are multiplied by their weights to give a price index. You can measure inflation by calculating the percentage change in this index.

Question 18

Limitations of the CPI

Answer 18

• it doesn’t include housing costs such as mortgage payments or rent. They are often a large part of a household’s spending
• only measures cost of living for average household not to pot bottom 4%
• sampling problems: less than 50% of households respond and they may give false info
• the list is only changed once a year, but tastes and fashions will change more
• people with atypical spending patterns, like vegans, are unrepresented
• when quality of good changes measure breaks down. E.g. phones

Question 19

What’s the retail price index?

Answer 19

An index used to measure inflation that includes housing costs such as mortgage interest repayments. It cant be used for international comparisons. Also RPI includes payments which will rise with interest rates so an IR raises to tackle inflation will make the policy maker appear incompetent.

Question 20

Current uses of the CPI and RPI

Answer 20

CPI:

• public sector pension increases
• B of E inflation target
• some increases in social security benefits

RPI:

• pension scheme increases where riles explicitly refer to the RPI
• regulated rail fares

Question 21

The causes of inflation

Answer 21

Demand-pull inflation: caused by increased AD
Cost-push inflation: caused by increased production costs such as rise in wages or a fall in the exchange rate
Increase in the money supply: the amount of spending power in the economy. Monetarists believe that an increase in the money supply has a direct relationship with inflation.

Question 22

Effects of inflation for consumers

Answer 22

• the real value of savings fall as price rises: if inflation is higher than interest than value of savings fall
• the purchasing power of those on fixed incomes falls as price rises, so living standards fall
• those with high levels of debt benefit as real value of the debt falls

Question 23

Effects of inflation for firms

Answer 23

• loss of international competitiveness: imports become cheap and exports expensive. The balance of trade is likely to worsen
• increased uncertainty: may curb investment
• investment from abroad may decrease
• increased prices may be a sign that firms can make more profits
• real wage differentials can be changed without actually cutting the wages in nominal terms: people wont accept wage cuts but will accept wage rises below the rate of inflation

Question 24

Effects of inflation for the government

Answer 24

• redistribution of income
• reduces the real interest rate so cost of borrowing falls and debt
• inflation provides a cushion against the perils of deflation: deflation causes vicious cycles of underinvestment and reduced spending

Question 25

Effects of inflation for workers

Answer 25

• some expect an increase in wages but firms don’t feel confident about paying higher cost
• there is a trade off between wage inflation and unemployment: the short run Phillips curve

Question 26

Difference between level of employment and employment rate

Answer 26

LOE: number of people in work

Employment rate is the number of people who have a job as a percentage of the working age population.

Question 27

What is the working age population?

Answer 27

• the labour force or currently active population. All people who are currently employed or unemployed.
• the economically inactive: people who are not classed as unemployed because they have not been actively seeking work in the last 4 weeks. Includes people in education and early retirees.

Question 28

Define unemployment

Answer 28

A situation in which someone is willing and available to work, but is not currently employed.

Question 29

The labour force survey

Answer 29

The ILO uses the labour force survey as the official measure in the UK. It’s a sample made of 40000 responding households and 100000 individuals per quarter. Asks whether anyone in the household has been out of work for 4 weeks and is ready to start in the next 2 weeks. It’s more inclusive than the claimant count however the data is six weeks out of data when its published.

Question 30

The claimant count

Answer 30

A measure of unemployment that records the number of people who are claiming Jobseeker’s Allowance or other benefits, such as universal credit. There is stigma attached to benefits, so not everyone claims and the criteria for eligibility is tight, so doesn’t present the full picture of unemployment. ONS states that ‘the claimant count is not an alternative measure of unemployment’. It’s quick and cheap to obtain the data, so can give a useful measure of hardship.

Question 31

What’s underemployment?

Answer 31

A situation in which a worker is employed but wants to work more hours. It became important in the wake of the global financial crisis and the growth of zero hour contracts.

Question 32

Factors affecting unemployment

Answer 32

• the school or compulsory leaving age: reduces the size of the workforce, but in the long term increases employability
• number of leavers entering higher or further education
• number of people who work beyond the state retirement age
• level of net migration: most immigrants come to study but others come to work
• availability of jobs: higher level of employment if more jobs available
• level of taxes and benefits: if high, there is a disincentive to work

Question 33

Inactivity

Answer 33

A measure of people working age who are either unwilling or unable to work. The problem is that it can make the level of unemployment look lower than it actually is. Many students would like to work given the opportunity and many people cant work because of health problems.

Question 34

The types of causes of unemployment

Answer 34

• real wage unemployment
• demand deficient or cyclical unemployment
• structural unemployment
• frictional unemployment
• seasonal unemployment

Question 35

Real wage unemployment

Answer 35

A measure of people who are unwilling to work at the going wage rate. Classical economists believes that wages that are kept artificially above the market-clearing wage are a main cause of unemployment.

Question 36

Demand-deficient unemployment

Answer 36

Also knife number as cyclical unemployment, this is caused by a lack of aggregate remand in an economy such as in a recession. Keynesians believe that demand-deficient unemployment can at certain times be a main cause of unemployment, and a fiscal or monetary stimulus may be needed to reduce this.

Question 37

Structural unemployment

Answer 37

A measure of the workers who lost jobs in a declining industry and don’t have the skills to work in other industries.

Question 38

Frictional unemployment

Answer 38

People who are unemployed between jobs or beginning to search for a job after entering the workforce.

Question 39

Seasonal unemployment

Answer 39

People who are unemployed at certain times of the year, such as surfing instructors.

Question 40

The significance of migration and skills for employment and unemployment

Answer 40

If immigrant crime to fill vacancies employment increases. If imm are looking for work and either font find it or displace people, employment is unchanged but unemployment increases. If imm are dependant then there will be no direct impact on unemployment.

In a highly skilled labour force, workers are more flexible if there’s a change in the requirements of the market. They are more able to move between jobs and stay in the market when there are shocks. They are not likely to be unemployed for long.

Question 41

The effect of unemployment on consumers

Answer 41

People will have lower incomes and living standards will fall. Also people may become demoralised and their skill sets can quickly become obsolete.

Question 42

Effects of unemployment for firms

Answer 42

People spend less so they will have to lower prices and make less profit. But it might mean people work harder as they dont want to become unemployed.

Question 43

Effects of unemployment for workers

Answer 43

Skills may become obsolete or at least out of date, e.g. technology.

Question 44

Effects of unemployment for the government

Answer 44

They have to pay more in social benefits and will receive less tax revenue from not only income tax but also expenditure taxes such as VAT.

Question 45

Effects of unemployment to society

Answer 45

Unemployed resources represent opportunity cost. The economy could produce more without anything being given up. Likely to be increased crime, civil unrest and other social problems.

Question 46

The Balance of payments

Answer 46

A record of payments between one country and the rest of the world. It is comprised of the current, financial and capital accounts.

Question 47

The current account

Answer 47

Records the balance of trade, investment income and current transfers.
The balance of trade: the difference between the value of goods and services exporters and the value imports. Sometimes a distinction is made between trade in goods and trade in services.
Investment income: the reward for investment in other countries. It comprises interest, profit and dividends.
Current transfers: the payment of money across international boundaries that has no corresponding output.

Question 48

Current account deficits and surpluses

Answer 48

Surplus: inflows are greater than outflows
Deficit: outflows are greater than inflows

Question 49

The financial account

Answer 49

Records money flows for investment purposes.

• foreign direct investment: buying out assets and ownership of companies in other countries
• foreign portfolio investment: the speculative movement of money between countries as exchange rates and the interest rates change

Question 50

The capital account

Answer 50

Puts the other two accounts in balance by recording the changes in net assets in each country, as well as assets and interest changes.

Question 51

Current account imbalances and other macroeconomic objectives

Answer 51

A CA deficit isn’t a bad thing unless it can’t be funded, it can be a sign that living standards are rising. It becomes a problem when reserves of foreign currencies begin to run low. The currency may fall in value, which is inflationary. The country is becoming uncompetitive, which can cause unemployment. This may cause tax increases and cuts in government spending. This might solve the current account deficit but cause a slowdown in economic growth.

Question 52

The interconnectedness of economies through international trade

Answer 52

Countries become interdependent, relying on each other for both for income and for resources and goods and services. This means countries are increasingly connected and if one country to area suffers with weak demand this has a direct effect on other countries. Becomes a problem when there are current account imbalances. The costs of an imbalance only become significant when they become unsustainable. The value of the currency may fall. Economies could buy back its currency on the foreign exchange market to maintain its value. A fall in the value of the currency may restore competitiveness. Demand in the domestic economy may be subdued.