Last minute theme 2

Question 1

What are the limitations of the CPI as a measure of inflation?

Answer 1

The CPI is not fully representative, since it is the ‘average’ household expenditure, so will be inaccurate for ‘non’typical’ households, e.g. 14% devoted to motor expenses, doesn’t apply to those who don’t own a vehicle

Question 2

Explain RPI as an alternative measure of inflation

Answer 2

RPI includes the costs of housing while CPI does not
RPI is an arithmetic mean while the CPI is a geometric mean

Question 3

Define purchasing power parities

Answer 3

Purchasing power parities uses an exchange rate to equalise the purchasing power of different currencies by eliminating differences in prices between countries to compare the basket of goods inflation level between countries

Question 4

Define national income

Answer 4

The total value of all goods and services produced by a country over a specific time period, usually a year

Question 5

List market based strategies

Answer 5

Improving labour market flexibility (cut union power and employment laws)
Cutting governmetn spending and borrowing (although borrowing to spend could improve supply side SR)
Lowering business taxes to stimulate investment and lowering income taxes to improve work incentives (but fall in tax revenue)
Reducing red tape to cut the costs of doing business (but not applicable to all industries)
Privatisation of state assets (but hasn’t worked with rail industry)
Opening up an economy to overseas trade and investment (but protection of infant industries)

Question 6

List interventionist strategies

Answer 6

Investing in human capital (time lag)
Investing in public services and building infrastructure (over-budget)
A commitment to minimum wage to improve work incentives (real wage unemployment)
Regional policy to boost under-performing areas
Nationalise key industries (may lead to efficiencies due to lack of profit motive)
Stronger regulation of industries (must make sure regulation doesn’t stifle private enterprise)

Question 7

Causes of current account deficits

Answer 7

Value of currency
Level of productivity
Level of inflation
Economic performance of domestic economy vs trading partners
Level of savings rate
Protectionist measures

Question 8

Remedies of current account deficit

Answer 8

Demand management
Economic cycle
Depreciation / devaluation
Protectionist measures
Supply side improvements