Measirements Of Econ Performance Flashcards
(95 cards)
0
Q
GDP
A
Total amount of goods and services produced in a country in one year
1
Q
Economic growth
A
Measure of an increase in real gross domestic product
2
Q
Potential economic growth
A
Measure of the increase in productive capacity of economy
3
Q
Recession
A
If economy has two consecutive quarters of negative economic growth then it is in a recession
4
Q
Standard of living
A
Measure of the quality of life : can include physical assets and consumption and less easily measured variables such as happiness, lack of stress, length of hours worked , lack of pollution and capacity of houses
5
Q
Why does income rise not necessarily mean rise in sol
A
Depends on distribution of money
Whether inflation has been taken into account
Amount spent on investment and long-term socially beneficial projects
Population change
6
Q
Growth in different countries evaluation (6)
A
Income distribution
Size of public sector- if much of the spending in the economy is by the government it might or might not improve welfare of the population
Subsistence/ barter/black economy : if farmers consumer their own products , if goods are being traded without price system or if goods are being traded without being declared for tax purposes ( hidden economy - UK 7%, Russia 50% ,)
Methods of calculation and reliability of data
Relative exchange rates- do they represent the purchasing power of local currency
Type of spending by government -is money spent on warfare or on quality of life issue such as education and health
Consumer and capital spending -spending on investment goods might mean standard of living increases in the future but at the expense of living standards today
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Q
Inflation
A
Sustained rise in general price level
8
Q
CPI
A
Measure of inflation used for inflation targeting in UK
Does not include housing costs such as mortgage interest /rent
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Q
RPI
A
Includes housing costs
10
Q
Inflation target
A
The gov tasks the Monetary Policy committee with the objective of 2% inflation
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Q
Base rate of interest
A
Tool used primarily in the UK to control the level of inflation
It is the cost of credit that the central bank set for its immediate financial translations and other rates of interest in the economy are based pro rate against this
12
Q
Problems with CPI
A
Sampling problems - only 57% of households respond to survey - may not actually give accurate info
The 650 items in basket only changed once a year but tastes and fashions change more quickly than this - does not reflect the fact that ‘buy one get one free’ temporarily change spending habits’
For people with atypical spending patterns the. CPI will not be representative e.g. Vegetarians & non-drivers
When quality of goods changes the measure breaks down because it is not comparing like with like and monthly mortgage payments often form large part of households spending
Does not include housing costs such as mortgage repayment or rent
13
Q
Problems with RPI
A
Not as reliable for international comparisons and the statistical method basing the data is also unique to the UK
Because RPI includes the cost of mortgage payments and these will rise if interest rates rise any interest rise implemented to tackle inflation will have a one off effect of making inflation appear worse which makes policy makers look incompetent
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Q
Level of employment
A
Number of people in work
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Q
Rate of employment
A
Proportion of people in work relative to the size of the workforce
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Q
Factors that influence levels of employment
A
School leaving age Number of school leavers entering higher education Level of net migration Availability of jobs Level of taxes and benefits
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Q
Cyclical
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Lack of spending / demand means people are out of work
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Q
Structural
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Where industries are in decline and workers skills are becoming out of date
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Q
Frictional
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Where people are between jobs
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Classical
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Problems with the supply side of labour -minimum wage is too high
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Q
ILO
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Conducted by Labour Force Survey
Face to face interview followed by telephone survey of 60,000 households including whether anyone on the household has been out of work for 4 weeks and is ready to start in the next 2 weeks
Relate to anyone over 16
6 weeks out of date by the time they are published
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Q
Claimant count
A
Number of people claiming JSA
No everyone who is eligible to claim benefits does so - tight stigma attached ( if you resigned from previous job within last 6 months or have refused 3 jobs offered you cannot claim)
Have to prove in interview centre very 2 weeks
Must be over 18
Quick and cheap and a useful measure of actual hardship
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Q
Costs of unemployment
A
Cost to individual - lower incomes and living standards will fall - people loose morale and skills become obsolete
Cost to firms - people spend less - less profit
Cost to gov- more benefits and less tax
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Benefits of unemployment
Entrepreneurship opportunities
Keeps inflation down
People work harder to keep jobs
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HDI
Composite measure of the quality of life which is valuable for comparing living standards in different countries
Health- life expectancy at birth
Education- years of schooling
GDP per head at purchasing power parity
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Evaluation of HDI
Reliable and fairly easy to obtain indicators
Takes income into account but qualifies it in terms of coots of living
Gives no indication of distribution of incomes- indication of deprivation might make it more useful -Human Poverty Index
Life expectancy is easy to measure but gives no indication of quality of life
Years of schooling may be unreliable if students are repeating years as they fail to make progress
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Mobile phones per thousand of the population
allows to catch fish to be brought to port where prices are highest
can be used to develop a cashless trading system in a country where the currency and finance systems are insecure
don't rely on constant supply of electricity and therefore are a strong indication that a country can develop despite problems in infrastructure
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Proportion of workers involved in agriculture
The higher the number of employees involved in agriculture the weaker the opportunities for development
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Leakage
Outflow from the circular flow of money- savings , taxes, imports
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Injections
Investments which increase capital stock
Government spending
Exports
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Multiplier effect
The number of times a change in incomes exceeds a change in net injections that caused it
It is the knock on effect on incomes when injections and withdrawals change
If there is any change in spending in an economy , the final impact on incomes will be much greater than the initial impact
The greater the leakages the smaller the multiplier
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Marginal propensity to consume
How much of any extra pound earns is re spent within economy
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Aggregate demand
Total planned expenditure on goods and services produced in the UK
C+I+G+(X-M)
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Why is AD curve downwards sloping?
Lower prices in an economy mean increased international competitiveness so there are more exports and fewer imports
The total amount of spending will be approximately equal whether prices are high or low because people have approximately the same amount of money to spend so the area under the curve will be fairly constant
At higher price levels , interest rates are likely to be raised by the monetary authorities meaning that investment will fall and saving may increase
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Consumption
Spending of households on goods and services
Main component of AD
Measures the amount consumers wish to spend at various price levels
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Main determinants of consumption (5)
Interest rate: if they rise then it costs more to borrow - increases the opportunity cost of spending - more money can be earns by leaving money in bank
Consumer confidence: if households feel secure in their jobs, future prospects for economy they are more likely to buy big items such as cars
Wealth effects: increase in share / house prices means households are willing and able to spend more
Level of employment and wage rates: higher the level of employment , the more will be spent in the country
Supply of credit: fall in supply of credit acts as constraint on consumption
Distribution of income:lower income families have higher propensity to consume
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Investment
Increase in capital stock
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Determinants of investment (5)
Interest rates: if they rise I falls because it costs more to borrow money to invest
Confidence levels: if firms think they will sell more in future they will invest more today
Risk:
Corporation tax : when low costs decrease and I native to invest increases
Gov bureaucracy: if gov relaxes planning restrictions - as they have done recently with building in UK firms are more likely to invest in building projects
Technology : affects productivity of capital goods - improvement will increase return on any investment
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Government spending
Governments can choose how much they spend and deliberately manipulate total speeding in the economy by changing their own level of spending - discretionary fiscal policy
Gov does not have to balance its books in short run- can spend more than earns form tax
If gov spends more than it earns - budget deficit - will increase AD
If gov spends less than it earns - budget surplus -contraction of AD
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Net exports
Change in exchange rate: if it rises net exports will fall as exports will be less competitive and imports will be more competitive in do exotic economy. Hew ever in the short run a strong exchange rate might increase the value of exports and decrease the value of imports SS spending pattern do not adjust quickly to price changes
Changes in state of world economy: value of UK exports = heavily dependent on growth rates around the world
Non-price factors: quality of engineering, realisability of after sales service , tariffs , transport costs
Tariffs and quotas- encourage trade
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Aggregate supply
Amount that firms are willing to supply at various price levels
Based on costs of production& incorporates rent , wages , interest & profits
As prices rise firms are generally willing to supply more but there comes a point when firms reach maximum capacity
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Why does AS shift?
Labour
Productivity gap closes: if workflow becomes more efficient AS will shift to right
Education& skills: more output per worker
Health spending: fewer days off sick & active for longer ( however spending on health may be absorbed into wage increased of staff in health service & majority of healthcare spending goes on the elderly / very young - not economically active
Product market
Sources of raw materials :
Exchange rates fall: if pound gets stronger , imports become cheaper and AS increases
International trade increases: competition drives down prices and inefficient domestic firms give way to overseas firms with a comparative advantage so AS increases
Technological advances: reduce costs
Regulation changes:
Changes in tax and benefit system: cut in tax and in benefits increases AS
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Equilibrium
Balancing point where there is no tendency to change
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Actual growth
Measure of changes in real GDP, measure by adding up all the incomes in the country
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Potential growth
Shows how much economy would produce if all the resources were being used
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Output gap
Difference between actual. GDP and potential GDP
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Causes of output gap ( negative)
Resources available are not suited to economy's needs
Welfare system pays generously for some people not to work
Relocation of production to other countries
Increased competitiveness in other countries
Structural changes -economy no longer produces output tailored to needs of market
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Policies to shift AS
1) Cutting corporation taxes
2) Remove regulations and other restrictions preventing firms from growing
3) Encouraging investment by forcing banks to lend money, or by cutting interest rate, or quarantine easing
4) increasing competition in markets and allowing more monopolies
5) Privatising for subsidising industries
6) improving labour market by increasing educational standards
7) Productivity may increase by spending on NHS - shorter ques so people get to work quicker
8) cutting income tax and cutting benefits
9) Improving infrastructure
10) measures to make imports cheaper such as cutting tariffs mean that production costs for firms will fall
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Constraints on growth
1) Gov instability
2) labour market problems
3) Probate sector debt
4) lack of access to international trade , high level of tariffs and other forms of protectionism
5) absence of capital markets
6) currency instability or a fixed exchange rate or exchange rate too high
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Benefits of growth
1) Increased incomes and standards of life
2) Firms get increased profits
3) Gov experience boom- more revenues from taxes and less people need benefits
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Costs of growth
1) Income inequality
2) Environmental problems
3) Balance of payments problems on current account
4) Bottlenecks in economy
5) Social dislocation and stress
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Demand side policies
Deliberate manipulation by government of aggregate demand in order to achieve its macroeconomic objectives
Fiscal- management of spending and taxation with the aim of changing total level of spending in economy
Monetary- use of interest rate
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Quantitative easing:
Is an injection of money / liquidity into economy by central bank
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How effective is monetary policy
Time lag: likely to take 18-24 months to have full effect ( some mortgage holders have fixed rate mortgages, some people do not have an alternative option)
Worsens income distribution
People who have debts are hit
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Fiscal policy
Change in gov spending or taxation
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How effective is fiscal policy?
1) only changed once a year
| 2) crowding out effects
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Supply side policies
Labour market policies:
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Natinal income
| Importance (3)
Monetary value of the flow of output of goods and services produced in an economy over a period of time
Seeing ; rate of Econ growth
Changes to average living standards
Changes to the distribution of income between groups within the population
Comparison on between different countries
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Expenditure method
Aggregate demand : GDP= C+I+G+ (X-M)
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Income method
Income from people in jobs and self employed+profits of private sector business + rent income form the ownership of land
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What in ones are not included in the income approach?
Transfer payments - state pension
Private transfers of money from one individual to another
Income not registered with tax authorities -shadow economy
Subsistence farming and barter transactions
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Value added
Increase in the value of goods and services as a result of the production process
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Gross national income
Final value of incomes flowing to UK owned factors of production what her they are located in the UK or overseas
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Gross domestic income
Incomes generated within the geographical boundaries of country
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NPIA
Net balance of interest, profits and dividends coming into the UK from our assets owned overseas matched against the flow of profits and other income from foreign assets located within UK
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Remittance
Transfer of money across national boundaries by migrant workers
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National income issues
1) collecting data: inaccurate or incomplete
2) hidden economy
3) home produced services - DIY , childcare , subsistence farming
4) public sector : put is calculated using cost of running public service ( if school can have less teachers but still achieve same outcome) there may be a problem
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Difficulties with comparing national income over time
Prices
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What factors affect size of multiplier? (4)
1) marginal propensity to save/ consume - will be largest when consumers spend large proportion of any additional income ; occurs when consumers are confident about future , asset prices are rising ( wealth effect) and interest rates are low ( discourages saving)
2) taxation and import expenditure - if marginal income tax rates are high , injections into circular flow will be quickly leaked to gov + if there're is a high marginal propensity to import injections will be quickly leaked to foreign economies
3) elasticity of AS curve: as AD moves towards maximum capacity ( output gap is reduced and spare capacity is used up) additional outwards shifts in AD result in a smaller increase in real output and a larger rise in general price level - therefore multiplier effect is most effective in downturn and inflationary in boom times
4) time lags : can take several months for the full impact of the injection to be realised
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Calculating multiplier
Multiplier=1/(sum of propensity to save+tax+import)
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Accelerator effect
Increase in national income results in a proportionally larger rise in investment ( the demand for capital goods is driven by the demand that the firm is supplying to the market)
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Accelerator effect will tend to be higher when: (3)
Rate of change of consumer income and spending is strongly positive
Amount of spare productive capacity for businesses is low
Available supply of investment funds is high
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Criticism of simple accelerator model
Capital stock of a business can rarely be adjusted immediately because of adjustment costs ( cost of lost business due to installation of new equipment / cost of re training workers) and time lags
Ignores spare capacity and ability of businesses to outsource production to other businesses to meet short term rise in demand
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Expansion
Consumer & producer confidence improving
Output & expenditure increasing
Employment increasing as firms look to expand production
Firms begin to increase investment
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Boom
```
Confidence high
GDP growing quickly
Increasing AD puts upward pressure on prices
Economy moves close to full employment
Firms v keen to invest
```
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Downturn
Growth rate of GDP decreases
Consumption & investment begin to slow
Firms begin to lay off workers in attempt to reduce costs
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Recession
GDP growth goes negative ( productive capacity shrinking)
Unemployment high
Low consumer confidence leads to reduction in spending
Firms reluctant to take on debt & invest
Falling AD puts down pressure on prices
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Recovery
GDP growth begins to pick up again
Consumers and firms grow in confidence
Unemployment may begin to decrease (after time lag)
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Positive output gap
Economy is temporarily operating outside its PPF through the unsustainable use of factors of production
Inflationary gap: likely to cause demand pull inflation
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Negative output gap
Caused by deficient aggregate demand
| Deflationary
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Consequence of large negative output gap
1) real GDP levels are lower than they could be and so material living standards are being held lower than night otherwise be the case
2)likely to cause higher levels of cyclical unemployment; as there is a relatively low demand for UK goods and services there is is relatively lower derived demand for UK labour in those sectors ; likely to depress living standards of those households and lead to other social problems such a depression
3)likely to worsen gov's fiscal position - less income tax + people will consume less so here will be les indirect tax revenue & businesses will be less profitable so in more from corporation tax will fall
Gov will have to pay more benefits -income support, tax credits, JSA
Consequently fiscal position is likely to move into budget deficit
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Hysteresis effect
The longer someone is unemployed the more likely they are to remain unemployed
Skills of unemployed workers atrophy and become redundant so that they start to become occupationally immobile and that firms will not want to take them back even when economy does recover
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Positive effects of negative output gap
Less demand pull inflation as firms are unable to rise prices or even have to lower them on the face of lower levels of aggregate demand
Better trade position as the lower levels of real GDP and incomes are likely to mean that UK consumers buy fewer imports improving the current account of the balance of payments
With less GDP there will be less environmental damage from industrial production
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What actions does gov take if output gap grows too small?
If output gap= too small then any increases in aggregate demand are likely to cause demand pull inflation and thus gov may need to be more 'hawkish' on inflation and perhaps raise interest rates ( or restrict / reverse quantitative easing) to slow down aggregate demand to prevent CPI inflation from rising above 2% target
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What does gov do when output gap is seen to be growing?
MPC might consider that there is a scope for inflation to fall below target and they can therefore be more 'dovish' and cut interest rates or engage in more quantitative easing tolerating an expansion of aggregate demand to bring CPI inflation back up to the 2% level as mallow more economic growth to happen
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Indicators if the size of output gap
1) unemployment: wasted labour resource which could have been usefully employed to manufacture more production and get us closer to the potential output with higher growth & living standards
EV: not all unemployed workers are able to fill any job vacancy due to the presence of occupational or geographical immobilities of labour. Therefore we could actually be close to capacity ( natural rate of unemployment according to neo-classical economists) with quite a high level of unemployment. Even Keynesians would agree that some some element of frictional unemployment is inevitable as economy is a dynamic place. Therefore a useful measure to take into account is the number of vacancies that are are registered with Job Centres compared to the number of unemployed people. If there is a high ratio of vacancies to unemployed people it might mean that we are close to capacity as the unemployed are unable to fill available positions
2)average earnings data: if firms are finding it difficult to recruit extra staff that they need because economy is closer to capacity ( smaller output gap) then we would expect to see rate of rise of wages accelerate as they are trying to pay more to take staff from other firms. It may also mean that existing workers fell less under threat of replacement & redundancy and they may demand higher wages. Thus faster wage growth = sign that output gap is getting smaller ( therefore rate of inflation is an indication of how close economy is to capacity)
3) Input Price Data such as PPI- when economy gets close to capacity firms will find it more difficult to acquire capital machinery, land, raw materials. Prices of these inputs will rise and so Producer Price Index will rise
4) Rates of capacity utilisation - Bank of England agents ask employers whether they are finding it hard to obtain staff with necessary skills and how close to capacity their firm is running
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Shocks to AD
1) Big rise/fall on exchange rate- affecting export demand and having follow on effects on output , employment, incomes & profits of businesses linked to export industries
2) Recession in one or more of our main trading parters which affects demand for our exports of goods and services
3) slump in housing market
4) credit crunch
5) unexpected cut/ rise in interest rates or change in gov taxation & spending
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MPC
| MPS
Proportion of an additional £1 of income that consumers are willing to spend
Proportion of an additional £1 of income that consumer chooses to save
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Wealth
Stock concept -total worth of individual's assets whether physical ( houses, cars) or financial ( cash, money in banks, shares)
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Unsecured borrowing
Loan/ overdraft which is not tied to value of another asset
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Secured borrowing
Lending where borrower must use another asset as collateral for the loan
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Equilibrium
Where level of income flowing round the system is constant in successive time periods
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Causes of spare capacity
Demand -decline in consumption, loss of market share due to poor marketing, seasonal variations in demand ( off peak times)
Supply- increases in capacity not yet matched by increased demand, introduction of new technology on anticipation of higher demand, improvements in productivity
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How can spare capacity be useful?
Allows businesses to respond to short term or an unexpected increase in demand when there is some productive slack , aggregate supply is price elastic
