Measurement of macroeconomic performance

Question 1

What are main objectives of a government macroeconomic policy ?

Answer 1

1.Economic growth
2.Employment
3.Price stability
4.Satisfactory balance of payments
Note:
They could have other aims such as balancing the budget, fairer income distribution.

Question 2

What is economic growth ?

Answer 2

Short run growth is growth of real output resulting from using idle resources (factors of production)

Long run growth is an increase in the economy’s potential level of real output ( outward shift of ppf curve )

Question 3

How do you represent economic growth using ppf ?

Answer 3

1. SRG - point from inside curve to on curve
   2.LRG - outward shift of curve

Question 4

How do you measure growth ?

Answer 4

Using real GDP which is the sum of goods and services produced over a period of time. ( real GDP takes into account inflation )

Question 5

What is full employment ?

Answer 5

1. when unemployment falls to 3% ( better one is there will always be some unemployment )
2. where number of workers willing to work equals no. of workers employers are willing to hire. ( can be represented by intersection of AD for labour and AS for labour graph)

Question 6

How is unemployment measured ?

Answer 6

1. Claimant account - no. of people claiming unemployment benefits.

2.Labour force survey - quarterly labour survey of households occupation.

Question 7

What is price stability ?

Answer 7

It is achieving low inflation ~ 2%

Question 8

What is inflation, deflation and disinflation ?

Answer 8

1. Continuous rise in average price level
2. Continuous fall in average price level
3. When rate of inflation is falling but still positive

Question 9

How is inflation measured ?

Answer 9

1. CPI - calculates average price increase of a basket of consumer goods and services. (used for state pensions and welfare benefits and setting monetary policy target)
2. RPI - used for TV and motor licences

Note:
Price index is percentage of price changes in comparison to base rate. ( for comparison )

Question 10

What is a balance of payment ?

Answer 10

It measures all the currency flows into and out of a country in a particular time period.

Question 11

What is the current account of the balance of payment ?

Answer 11

It measures the currency flows in payment for exports, imports, primary and secondary income.

Question 12

What is the balance of trade ?

Answer 12

The difference between money value of country’s imports and exports - forming the largest component of BoP

Question 13

What is a balance of trade deficit and surplus ?

Answer 13

1. Deficit - money value of imports exceeds exports
2. Surplus - money value of exports exceeds imports

Question 14

How do policies conflict ?

Answer 14

It occurs when 2 policy objectives cannot be achieved at the same time due to a trade off. Therefore policy makers find acceptable combinations.

Question 15

What are examples of policy conflicts ?

Answer 15

1. Between full employment and economic growth - satisfactory balance of payments or exchange rate.

2.Between full employment and control of inflation.
3.Between economic growth and greater income equality.

4.Between higher living standards now and in the future.
Note:
some economists believe that this is not a problem in the long run.

Question 16

What are performance indicators ?

Answer 16

They provide info for judging the success or failure of policies.

Question 17

What are the 2 types of performance indicators ?

Answer 17

1. Lead indicators: provides info about the future state of the economy stemming from the way people are currently forming their expectations e.g no. of expensive summer holidays booked.
2. Lag indicators: provide info about the past and current economic performance and the extent to which policy objectives have been achieved e.g GDP levels, employment, CPI and RPI

Question 18

What is the use of index numbers ?

Answer 18

They are used for comparisons such as CPI and RPI. Where the goods and services in the shopping baskets and the weights attached to them are meant to reflect the spending of the “average British family”.