Flashcards in Measures of economic performance Deck (227):
What is the formula for a price index?
(New value)/(Base value)x100
What is the formula for inflation?
(New PL - Old PL)/(Old PL)x100
Which products in the UK economy have prices that have risen faster than the rate of inflation?
Petrol, most natural resources and food.
Which product tends to become cheaper overtime?
What is inflation?
A general increase in price levels.
What is deflation?
A general decrease in price levels.
What are index numbers?
A numerical value which reflects the % change in an economic variable since the base year.
What is disinflation?
When prices rise but at a slower rate than previously.
What do CPI and RPI stand for?
Consumer price index and retail price index.
How many goods/services does the basket in CPI have?
What is done to the prices in order to reflect purchasing habits?
They are weighted.
How are prices for the CPI obtained?
Using the price survey.
How many prices are collected overall for the CPI?
What does the Family Expenditure Survey enquire?
How much they spend on each type of good.
What happens to the basket of goods each year and why?
The goods/services are updated each year to reflect changes in technology/fashion.
Which type of mean does the CPI use?
The geometric mean.
Why are housing costs not included in the CPI?
Interest is the main thing that affects housing and the government can manipulate it in order to achieve their goal of a 2% inflation annually.
What mean does the RPI use and how is it different to the CPI as a result?
It uses the arithmetic mean therefore it usually always has a higher value than the CPI.
What is the main difference between the RPI and CPI?
It includes housing costs: mortgage interest repayments, council tax, estate agents' fees, buildings insurance, house depreciation, conveyancing fees and other housing costs.
What type of people are not included in the housing costs?
The top 4% of households by income and pensioners.
What is the reason for why some people are excluded from the housing costs in the RPI?
They aren't representative of an average UK citizen therefore it would distort the amount of income.
When is the RPI usually used?
When you owe the government money.
What is RPIX?
Same as the RPI but without the mortgage interest payments.
What is the CPIH?
Same as CPI but includes housing costs.
What are the benefits of using the CPI?
It is used to measure inflation in most european countries so it is easy to compare our inflation with other countries. We can also see if it was better for the UK to join the euro.
What are the disadvantages of the CPI?
It excludes many housing items meaning that it may underestimate the true cost of living in the UK (especially since around 50% of someone's income is spent on housing).
What are the problems with using price indices in general?
Different households have different tastes and spending patterns hence different weightings - this means a rise in CPI may underestimate or overestimate. Also, not all regions experience identical price changes. There are sampling errors - the sample may not be representative of people living in the UK. For a while, products may not appear to be included in the index.
What is the RPIJ?
A new version of the RPI index but using the same methods as CPI for calculating average prices.
What is the fundamental problem with inflation?
It devalues money.
Which one will rise slower: the CPI or the RPI?
What does unemployment represent?
A waste of scarce resources i.e. labour that is not being used to produced goods and services.
Who does the unemployed consist of?
Part of the working population that are out of work, able to work, and actively seeking employment.
What does the working population exclude?
The economically inactive.
Who are some examples of the economically inactive?
Those in full-time education, raising children, on a training scheme, early retirement and disabled people.
What ages for male and females are considered to be of working age?
Male: 16-64. Female: 16-59.
What does the Claimant Count record?
The number of people receiving Jobseeker's allowance (unemployment benefits).
What conditions must you have to apply for the JSA?
They must declare they are out of work, but capable of, available for and actively seeking work.
What are the disadvantages of using the claimant count as a measure of unemployment?
Some unemployed may choose not to claim, some people are not allowed to claim, the system is vulnerable to benefit cheats who help to over-estimate the figure and it excludes many different categories of people.
What are the advantages of using the claimant count as a a measure of unemployment?
It has up-to-date statistics, cheap to produce and it's the most convenient (practical).
Who does the Labour Force Survey ask?
A random sample of around 60,000 households comprising of 100,000 people to work out how many people are employed or unemployed.
Which method is the official measure of unemployment?
Is the LFS legally enforceable?
What is the definition of unemployment?
To be unemployed, you have to have been without unemployment for the past 4 weeks and available to start work in the next two weeks.
How does the LFS deal with benefit cheats?
There is no incentive in the survey to lie.
Why are there less people claiming benefits?
The government in the most recent years has tightened restrictions on who can claim benefits.
What is another benefit that the LFS has over the claimant count?
It can be used to compare employment levels internationally whereas the JSA can't as different countries have different criteria.
How do you calculate the unemployment rate?
(Unemployed)/(Employed + Unemployed)
How do you calculate the employment rate?
(Employed)/(Employed + Unemployed + Inactive)
How can there be a simultaneous increase in both the employment and unemployment rate?
Rise in net migration and rise in participation rate.
Why is immigration good for employment?
They are more flexible with the types of work they are willing to take on.
What is GDP?
The total value of goods and services produced by a country or the total output of goods and services over a one year period.
What is economic growth?
An increase in GDP.
How are firms and the government linked?
Firms pay taxes to the government and the government returns this money through subsidies.
How are governments and households linked?
The government provides benefits and households pay taxes.
How are households and firms connected?
Consumption and firms pay wages.
How are governments and the rest of the world connected?
Exports, international debt, imports and aid.
How are households and banks linked?
Loans and interest on loans.
How are banks and the rest of the world linked?
Why is there a gap between the claimant count and the ILO?
They measure different things and there are people who are entitled to claim benefits and do not.
What happens to the gap between the ILO measure and claimant count when employment is high?
It tends to widen as people who previously did not have a job start to look for work and as a result they become classified as part of the unemployed. Those who were inactive are unlikely to start claiming benefits.
When is an economy in recession?
When there are two consecutive three-month periods of contraction.
What is GDP used for?
Making decisions about monetary and fiscal policies, it is the principal means of determining the health of the UK economy and it can be used in comparison with other countries.
What is wrong with flash estimates of GDP?
They only include around 40% of the available data.
What happens in the absence of injections or withdrawals?
Output = expenditure = income.
What does GDP exclude?
Imports, transfer payments, private transfers of money from one individual to another and income not registered with the Inland Revenue.
What does real GDP take into account?
The effects of inflation.
What are nominal figures?
Figures expressed in current prices and they represent the values of goods and services produced.
What are real figures?
They are expressed in constant prices and represent the volume of goods and services produced.
What is the formula for real GDP?
Nominal - inflation = real
What are the problems of comparing GDP overtime?
Population growth/change, doesn't account for inequality changes, GDP does not consider what is produced, doesn't account for a range of social factors e.g. happiness, doesn't account for environmental issues, doesn't account for changes in quality of goods.
How do you calculate GDP per capita?
What are the problems of comparing GDP between countries?
Different populations and rate of growth, GDP per capita does not solve inequality as it is an average, it fails to account for differences in social freedom and political freedom, differences in the quality of goods, countries may need to spend money on goods in order to maintain parity with what is natural in other countries e.g. heating for a cold country, income distribution issues (income tends to have more unequal distribution in BRICs), accuracy of figures due to the hidden economy, does not take into account other aspects of living standards, only goods which are traded appear on GDP figures: developing countries grow many crops for personal use.
What does purchasing power parity do?
It takes into account the costs of goods in different countries.
How do you calculate the balance of trade?
Exports of goods - imports of goods
How do you calculate the balance of trade and services?
(Exports of services - imports of services) + balance of trade
How do you calculate net income?
Credit income items (exports) - debit income items (imports)
How do you calculate net current transfers?
Credit current transfers (exports) - debit current transfers (imports)
How do you calculate the current account balance?
Balance of trade in goods and services + net income +net current transfers
What is the balance of payments?
A record of all transactions between one country and the rest of the world.
What is the BoP made up of?
The current account, the capital account and the financial account.
What is the current account made up of?
Trade in goods, trade in services, income (from investment and employment) and current transfers.
What does the capital account entitle?
Money that crosses borders due to migration.
What do current transfers entitle?
Money for which no economic transaction /good/service is given in return.
What does the financial account entitle?
International investment - direct and portfolio.
What is an export?
A credit item - when money enters the UK
What is an import?
A debit item - when money leaves the UK
What is a current account surplus?
When exports are larger than imports
What is a current account deficit?
When imports are larger than exports
What is a current account equilibrium?
When exports and imports are equal
What is income and what does it consist of?
Money generated from investment and work abroad. Consists of wages, profit, interest, dividends.
What does wealth measure?
The value of the total stock of assets owned by a person or country at a particular point in time.
What does income measure?
Income is a continuous flow of earnings overtime
What account is income associated with?
The current account
What account is wealth associated with?
The capital account/financial account
What is economic development?
The process of widening access to employment, healthcare, education, properly functioning civic institutions etc.
What does HDI stand for?
Human development index
How many components is HDI made up of?
How regularly is HDI updated?
Who is the HDI produced by?
How is the health component in HDI measured?
How is the education component of HDI measured?
Mean years of schooling + expected years of schooling
How is the income/standard of living component in HDI measured?
GDP per capita (PPP - purchasing power parity)
What are the rankings for development?
Less than 0.5 is low, 0.5-0.6 is medium, 0.6-0.8 is high and 0.8-1 is very high development.
What are the strengths of the HDI?
It combines the effects of economic growth with other quality of life indicators to provide a broader view of well being, it indicates the extent to which GDP has been used to enhance social welfare and this highlights the success of government policies around the world, it is an international measure that uses a consistent methodology for each country which is ideal for comparison of living standards and therefore it helps to judge which countries need aid, it is more likely to be fair and impartial as the UNDP is not affiliated with a particular country hence it is a true reflection of living standards, it is practical as data is freely available in most countries and cheap to collect and it goes beyond the simple use of GDP per capita.
What are the limitations of HDI?
There may be problems with data accuracy especially with LEDCs as they would want to make their living standards appear to be better and this could undermine the validity of the HDI, there is no data to justify the weighting of the categories and some people argue that the level of resources is really important therefore GDP should have a larger impact, the weightings are rigid for example income has a smaller impact on human development in richer countries, it only has three quality of life indicators - living standards are determined by a range of factors therefore it provides an incomplete picture of living standards, it fails to take into account qualitative factors such as cultural identity and political freedom, it doesn't do anything to overcome the issue of the hidden economy and it doesn't directly take into account poverty or other measures of deprivation however this could be overcome by the human poverty index.
What type of HDI solves the problem of differences in equality?
Inequality - adjusted HDI
What does the price index represent?
The general price level at a given point in time.
Why doesn't inflation necessarily mean that every price in the UK economy is increasing?
The way in which inflation is calculated means that it is just an average which also considers weighted prices.
What is the geometric mean?
This means you multiply all the numbers and if there are n numbers altogether, then you take the nth root.
Which type of inflation is used in comparison with other countries?
Who has the responsibility of measuring inflation in the UK?
The Office for National Statistics.
Why are the ONS worried about the widening gap between the RPI and CPI?
It is undermining the credibility of these indexes especially since most of the gap is due to the different methods of calculating the average.
What does the government use the CPI for?
Uprating state benefits, the state pension and public service pensions.
What is the effect of altering the calculation of the RPI so that it rises as slowly as the CPI?
It would save pension schemes and the government money however it would be a disadvantage to millions of people is their incomes rose more slowly as a result.
What is the inflation target in the UK?
2% plus or minus 1%.
What is the result of the CPI including all private households and the residents of institutional households such as student hostels and foreign visitors to the UK?
It means that some items are included in the CPI that are not included in the RPI such as unit trust and stockbrokers fees, university accommodation fees and foreign students' university tuition fees.
Why does the CPI benefit from greater coherence with macroeconomic data?
The coverage of spending and households is based on the National Accounts.
What is the effect of the CPI combining individual prices?
It has some statistical benefits and makes for better comparison of inflation in different countries.
What is a key advantage of the RPI?
The familiarity and credibility of it based on a longer history.
What do the CPI and RPI measure?
The change in the prices charged for goods and services bought for consumption in the UK.
Why are the prices weighted?
To ensure they reflect the relative proportion of total spending on that item.
What is used to find the composition of the 'basket of goods'?
The Household expenditure survey.
Who is the household expenditure survey issued to?
7000 households of differing incomes living in different regions.
What does the ONS use to calculate an overall average price change after collecting data on prices?
What is the problem with including mortgage repayments in the RPI?
They are directly affected by changes in interest rates so an increase in interest rates means that monthly mortgage interest repayments will also increase so the RPI will rise however interest rates are supposed to combat inflation.
What is the solution to the problem of mortgage repayments with the RPI?
A modified version of the RPI that excludes mortgage repayments is calculated which is called the RPIX.
What is the CPI the same as in terms of Europe?
The European measure of inflation which is called the Harmonised Index of Consumer Prices (HICP).
What happens if the UK is not meeting the target of 2% inflation?
The Governor of the Bank of England has to write a letter to the chancellor explaining why inflation has deviated from the target.
What has led to the achievement of credibility in maintaining low inflation rates?
The Bank of England was made independent of the government and inflation targeting.
What are the benefits of having a target rate of inflation?
It may give policy credibility, it reduces expectations of inflation and wage demands and therefore reduces inflation itself.
What are the disadvantage of having a target rate of inflation?
Governments or central banks may have to sacrifice economic growth to meet the target.
What are index numbers used for?
To track a variable such as price or GDP over a period of time.
What is a base in terms of index numbers?
A comparison year.
What does the working population include?
The employed and unemployed.
What does the population of working age exclude?
Children and pensioners.
What is the definition for the economically inactive?
Those who are not looking for work/ those who are unable to work.
Why might some people choose not to claim JSA?
Due to perceived stigma and they may have no need for the money.
Why are some people not allowed to claim JSA?
They might have a high-earning partner or they may be looking for part time work.
Who is the labour force survey produced by?
The International Labour Organisation (ILO).
How frequently does the labour force survey get issued?
It is a quarterly survey (so every three months).
What happens to confidence levels when there is economic growth in terms of jobs?
There is more confidence for jobs.
What is the employment rate?
The proportion of the working age population that is currently employed.
What is the unemployment rate?
The proportion of the labour force that is not currently employed.
What would cause a rise in the participation rate?
More people taken off incapacity (disability) benefits, more women choosing to work, more young people choosing to work rather than attending university and so on.
What is a consequence of a fall in GDP in terms of employment?
When GDP falls, firms require fewer workers to make goods and services and this can lead to rising unemployment.
How can excessive unemployment be avoided?
If the government can steer the path of actual output so that it grows in line with potential output.
What happens during recessions in terms of employment?
Unemployment rises indicating that there is spare capacity within the economy.
What happens when actual output begins to recover in terms of employment?
Unemployment falls and the economy moves closer to full capacity.
What is another word for the working population?
The Labour force.
Why isn't the claimant count an alternative measure of unemployment?
It does not meet the internationally agreed definition of unemployment specified by the ILO.
Where are the claimant count estimates sourced from?
JobCentre plus administrative system.
Which changes in the benefit system have led to changes in the claimant count?
Eligibility rules for Lone Parent Income Support, a re-assessment by the Department for Work and Pensions of claimants of Incapacity Benefit and the introduction of the Work Programme.
How have eligibility rules for Lone Parent Income Support affected the claimant count?
It has resulted in fewer lone parents being able to claim that benefit resulting in more lone parents claiming JSA while they look for work.
How has the re-assessment by the Department for Work and Pensions of claimants of Incapacity benefits affected the claimant count?
It has resulted in some people who have been declared ineligible for IB claiming JSA while they look for work.
How has the introduction of the Work Programme affected the claimant count?
It has affected people who are claiming benefits for a longer duration - under this programme individuals are more likely to remain on JSA for a single unbroken duration.
What is the definition of the unemployed who have just found work?
They are out of work, have found a job and are waiting to start it in the next two weeks.
Give an example of someone who could claim JSA even if they are employed.
Someone who works fewer than 16 hours a week can be eligible to claim JSA depending on their income.
How is the participation ratio calculated?
(Labour supply)/(population of working age) x 100
How is the female participation ratio calculated?
(Female labour supply)/(female population of working age) x 100
What does the ILO allow in terms of time?
Consistent comparisons over time.
What is the problem with the labour force survey?
It is subject to sampling errors.
Why is GDP per capita a better measure of living standards than GDP?
It doesn't take into account population.
Why do investors care more about GDP growth?
Corporate profits depend on the absolute rate of growth of an economy and companies wanting to invest abroad will favour markets that are expanding more rapidly.
Why do countries not publish GDP per capita each quarter?
Population statistics tend to be less up-to-date than GDP figures and are generally not available on a quarterly basis.
Why is GDP a bad indicator of an economy's wellbeing?
It ignores many factors such as leisure time, income inequality and the quality of the environment.
What is the gross national product?
It is GDP added to the net property income from abroad.
What is the most relevant measure for the prosperity of a nation?
What are the three ways in which GDP can be measured?
Output measure, expenditure measure and income measure.
What does the output measure of GDP include?
This is the value of the goods and services produced by all sectors of the economy: agriculture, manufacturing, energy, construction, the service sector and the government.
What does the expenditure measure of GDP include?
This is the value of the goods and services purchased by households and by government, investment in machinery and buildings. It also includes the value of exports minus imports.
What does the income measure of GDP include?
The value of income generated mostly in terms of profits and wages.
Who publishes the figure for GDP?
How are the measures of GDP calculated?
This involves surveying tens of thousands of UK firms (the main sources used by the ONS are the manufacturing and service industries) and data is collected from government departments covering activities such as agriculture, energy, health and education.
Why does the European Union use estimates of GDP?
It used estimates as a basis for determining different countries' contributions to the EU budget.
What are examples of transfer payments?
National insurance, social security benefits (as no service is offered in return) and student grants from the government.
What are some examples of private transfers of money from one individual to another?
Pocket money/allowances from parents and an individual selling a second hand car.
What economy is an example of income that is not registered with the Inland Revenue?
The Hidden economy.
What measure could be used to take into account the worsening inequality changes?
The GINI coefficient.
Why is it problematic that GDP does not take into account what is produced?
Spending on warfare could increase GDP but not living standards.
List ways in which money is transferred between countries?
Imports and exports of goods and services, aid, foreign investments, loans, interest payments and immigration (sending of wages).
Why might there be some differences in the measures of GDP?
There are some statistical discrepancies between each method.
Which equation is the expenditure method of GDP represented by?
GDP = C + I + G + (X-M)
What types of income are considered in the income measure of GDP?
Income from employment, income from self-employment, rental income, gross trading profits of private companies, gross trading profits of public corporations and other incomes.
What types of output are considered in the output measure of GDP?
Primary sector output, secondary sector output and tertiary sector output.
What does the primary sector involve?
Agriculture and the extraction of natural resources.
What does the secondary sector involve?
Manufacturing and construction.
What does the tertiary sector involve?
Why are there difficulties in measuring GDP?
Due to the presence of the hidden economy, it takes into account market prices and there is a potential margin of error with any estimate.
Why is measuring market prices problematic when it comes to GDP?
It includes the value of indirect taxes such as VAT and indirect taxes are not a part of the output of the economy so this measure inflates the actual value of national income.
Why do changes in the quality and inclusion of new goods mean that GDP is not a true reflection of what is going on in the economy?
Higher quality and/or new products often replace older products as they have new features.
Why does the existence of a human/leisure cost mean that GDP is not a true reflection of what is going on in the economy?
GDP does not take into account leisure time nor is consideration given to how hard people work to produce output. Also, jobs are safer and less physically strenuous than they were in the past - these factors mean that changes in real income could be understated.
Why does the existence of harmful side effects mean that GDP is not a true reflection of what is going on in the economy and what is being done about this?
No subtractions are made to GDP for harmful effects that occur such as pollution however market transactions made in an effort to correct the bad effects are added to GDP.
Why does non-market production mean that GDP is not a true reflection of what is going on in the economy?
These are goods and services that are produced but not exchanged for money - they are not measured even though they have value.
Give an example of a good that is part of non-market production.
When you grow your own food, the value of it will not be included in GDP.
What does the calculation of GDP give us a figure for?
The total level of production within the domestic economy.
What does GDP fail to do in terms of assets?
It fails to capture any of the returns that we receive from our ownership of overseas assets and that foreigners own assets in the UK as well.
What are the effects of purchasing overseas assets?
These investments yield a return that flows back into the UK in the form of interest, profits and dividends.
What is known as the balance between the inflows and outflows of IPDs?
Net property income from abroad.
What does GNP give us a figure for?
The nation's return from all its factors of production.
What does GDP per capita measure?
The average standard of living for the inhabitants of a country.
What is the best measure to use if you want some idea of what is happening in the domestic economy?
What is the best measure to use if you want some idea of what the combined returns from the nation's domestic and overseas assets are?
What are the problems associated with using GDP per capita as a measure of living standards?
They are only an indication of material living standards and tell us nothing about the non-material aspects of the quality of life and it doesn't tell us anything about the degree of inequality in a country.
Why is it a problem that the distribution of income is not included in GDP statistics?
Looking at average income per head may be misleading if there are wide differences in the way in which income is distributed within countries.
Why is it a problem that the underground economy is not included in GDP statistics?
Such unrecorded activity would significantly boost the recorded national income of some countries if it were included.
Why is it a problem that non-traded output is not included in GDP statistics?
We all produce valuable output that is not traded which means that GDP figures significantly underestimate income.
What is not included in GDP statistics in terms of currency?
Using a common currency.
Why is it a problem that exchange rate issues are not included in GDP statistics?
The correct exchange rate is the purchasing power parity which adjusts the price differentials between countries.
Why is it a problem that accuracy of statistics is not included in GDP statistics?
International comparisons can be difficult due to differences in accounting procedures and accuracy of GDP statistics collected in different countries.
What are some examples of current transfers?
Aid, subsidies, charities
What is direct investment?
When you buy machines and land.
What is portfolio investment?
Not actually buying it, just saving.
What does every item of wealth have associated with it?
A flow of income.
What does the standard definition of output allow for?
It means that output can be compared between countries and overtime.
What is the current account?
It records the difference between the imports and exports of goods and services, investment income and current transfers.
What kind of goods are included in the trade of goods?
Manufactured goods, semi-finsihed goods, energy products, raw materials, consumer goods (both durable and non-durable goods) and capital goods.
What does trade in services include?
This includes the exporting and importing of intangible products such as banking and finance, insurance, shipping, air travel, tourism and consultancy.
What does investment income include?
This refers to interest, profit and dividends that we receive each year from our ownership of foreign assets.
What is the effect of a firm owning businesses overseas in terms of investment income?
They may send some of the operating profits back to the UK and this would count as a credit item.
What is the effect of an overseas investment in the UK in terms of investment income?
It may generate a good rate of return and the profits are remitted back to another country - this would count as a debit item.
What do current transfers include?
Government transfers such as foreign aid donations and payments to institutions such as the EU and NATO.
What happens to the current account deficit as the economy grows rapidly?
It tends to get worse.
What is a rise in GDP necessary but not sufficient for?
What is the definition of development?
The reduction and elimination of poverty, inequality and unemployment within a growing economy.
What is development economics concerned with?
The study of the causes of problems facing those economies where the majority of the population are in poverty and with finding solutions to those problems in order to raise the quality of life.
Why is GNI used rather than GDP in the HDI?
Due to the significance of remittances in the global economy and also because of the importance of international aid payments.