Theme 2 - Measure of economic performance Flashcards
(116 cards)
1
Q
What is GDP?
A
- The total value added of all goods and services produced in an economy over a period of time
2
Q
What is economic growth?
A
When the total value added of all goods and services produced in an economy increases - an increase in real GDP
3
Q
Why is GDP measured in US dollars?
A
The US economy is the biggest in the world
4
Q
What is GDP per capita?
A
The value of output produced by a country in a year divided by the population of that country
5
Q
What is the difference between real and nominal values and value and volume?
A
Real values make adjustments for inflation
Nominal values are values at current prices
Real values can be described as the volume of national income, nominal values can be described as the value of national income.
The value is equal to the volumes multiplied by the current price level. The value of national income is its monetary value at the prices of the day; volume is national income adjusted for inflation and is expressed either as index number or in monetary terms
6
Q
What are the national income measures?
A
GDP (gross domestic product)
GNI (gross national income)
GNP (gross national product)
7
Q
What is GNI?
A
The value of goods and services produced by a country over a period of time plus net overseas interest payments and dividends. It is affected by profits from businesses owned overseas and remittances sent home by migrant workers. This is increasingly used rather than GDP because of the growing size of remittances and aid.
8
Q
What is GNP?
A
The value of goods and services over a period of time through labour or property supplied by citizens of a country both domestically (GDP) and overseas.
9
Q
How do you calculate real GDP?
A
(nominal GDP/GDP deflator)x100
10
Q
What is the GDP price deflator?
A
It measures the changes in prices for all the goods and services produced in an economy
11
Q
How can national income measures be used to make comparisons about growth?
A
- Over time: Changing national income levels will show us whether the country has grown or shrunk over a period of time.
- Between countries: When countries have a difference in population, a difference in total GDP doesn’t necessarily mean a difference in living standards so to make comparisons, we work out GDP per capita. It is possible for GDP to increase simply because of an increase in prices in the country and inflation is different in every country, so real GDP figures need to be calculated.
12
Q
How is GDP used to compare growth over time?
A
- The data is compared to other countries to put figures in a context. Growth figures over a set period of time can be compared against similar countries to see whether the country has done well or not.
- The figures can also make judgements about economic welfare as growth in national income means a rise in living standards as the economy is producing more goods and services so people have access to more things.
- It is important to use real, per capita figures. If a country’s population grows over time, then this may cause a rise in GDP without a rise in living standards and so provide inaccurate comparisons. We use real GDP in order to strip out the effect of inflation. Inflation is rising prices and therefore can give the impression of GDP growing without any more services and goods being produced.
13
Q
What are the limitations of using GDP to compare living standards between countries and over time?
A
- Inaccuracies of data
- Inequalities
- Quality of goods and services
- Comparing different currencies
- Spending
- Other factors involved in living standards e.g. education
14
Q
Why do inaccuracies of data limit the usefulness of using GDP to compare living standards between countries and over time?
A
Some countries are inefficient at collecting or calculating data and
therefore comparisons can become less effective.
o There is a ‘hidden’ or ‘black’ market in which people work without declaring
their income to avoid tax or to continue claiming benefits, and so GDP is underestimated because these incomes aren’t taken into account. This varies hugely between countries and may change overtime.
o GDP does not take into account home-produced services, for example in many poorer countries people work as subsistence farmers where they grow and consume their own crops without trading, and so the GDP is underestimated. This can also be true in the UK where DIY or the service of house-wives/husbands are not recorded.
o Errors in calculating the inflation rate means real GDP will be slightly inaccurate.
o Over time, methods used to calculate GDP will change and so therefore it can be difficult to compare countries overtime. Similarly, different countries may use different methods to calculate their GDP.
o Also, it is important to take away transfer payments, when money is paid to a person without any corresponding increase in output in the economy. For example, the government taxes people who are employed and then gives it straight to the people who are unemployed. Other examples include pocket money and the selling of second hand goods.
15
Q
Why do inequalities limit the usefulness of using GDP to compare living standards between countries and over time?
A
Increased GDP may be the result of an increase in one group of people’s income, so a growth in the national income may not increase living standards everywhere. Income distribution changes over time and varies between countries, so makes comparisons between countries difficult
16
Q
Why does the quality of goods and services limit the usefulness of using GDP to compare living standards between countries and over time?
A
The quality of goods and services now is much better than 50 years ago, but this isn’t necessarily reflected in the real price of these goods and services. Therefore living standards would have increased more than GDP would suggest since the quality has improved. Improved technology may have caused prices to fall, which would indicate falling living standards, when this isn’t the case
17
Q
Why does comparing different currencies limit the usefulness of using GDP to compare living standards between countries and over time?
A
There are issues over which unit should be used to compare figures: they are usually converted into US dollars because of the size of the American economy. Some people argue that Purchasing Power Parity should be used to take into account the impact of differences in the cost of living in different countries.
18
Q
Why does spending limit the usefulness of using GDP to compare living standards between countries and over time?
A
Some types of expenditure, such as defence, does not increase standard of living but will increase GDP. For example, the GDP of the UK was higher during the Second World War than in the 1930s because a lot of money was spent on defence which increased GDP but it is difficult to argue that standard of living was higher in the Second World War. This therefore makes comparisons difficult as spending varies overtime and between countries.
19
Q
Why is measuring GDP per capita important for an economy?
A
It is a measure of the average income in a country and enables comparisons to be made between countries in relation to changes in standard of living
20
Q
What are the limitations of using GDP per capita to measure living standards and compare prosperity of countries?
A
- Regional variations
- Inequalities of income and wealth
- Externalities such as pollution and congestion
- The Black Economy/shadow economy
- Leisure and working hours
- Value of non-marketed output
21
Q
What differences between developed and developing countries exist that make comparison of growth rates difficult?
A
- Bartering in developing countries may affect the value of the GDP figure (de-value)
- Doesn’t account for price differences in different countries
- Some goods/services are free in some countries but must be paid for in other countries
- Population growth in developing countries may account for most GDP growth
- High levels of subsistence production in developing countries often understate the GDP figure.
22
Q
What is the Human Development Index?
A
A tool developed by the un to measure and ran countries’s levels of social and economic development based on different criteria:
- life expectancy at birth
- Education; mean years of schooling and expected years of schooling
- GNI per capita
23
Q
What is inflation?
A
The sustained increase in general price level over a period of time
24
Q
What is deflation?
A
A fall on general price levels, it indicates a slowdown in the rate of growth of output in the economy
25
What is disinflation?
A reduction in the rate of inflation; prices continue to rise, but at a slower rate
26
What is stagflation?
Inflation rising at a time when the economy is in a recession
27
What is hyperinflation?
a phase of extremely rapid inflation
28
What are the effects of inflation on consumers?
- Fall in real disposable income, and they have less to spend, which could cause a fall in living standards
- Shoe leather costs (time taken to look for better deals)
- Lower consumer confidence
- Real value of debts fall
- Real value of savings and pensions decrease
- Real value of assets won't change
- Psychological effects; because prices are rising, they may feel worse-off, even if their income is rising in line with inflation, which may cause them to decrease their spending
29
What are the effects of inflation on producers/firms?
- Business uncertainty
- Affects competitiveness; if inflation in Britain is higher than in other countries, British goods will become more expensive, and thus less competitive, making them more difficult to export, which will also affect the balance of payments
- If there is deflation, consumers will postpone their purchases until prices fall further, and people will be more likely to save as the value of their money will increase in the future, and they will borrow less as deflation means the real value of their debt increases. This can lead to a fall in demand for goods, leading to a firms' fall in profit and business confidence, which can lead to a long term reluctance to invest
- Inflation is difficult t predict, so firms cannot plan for the future
- Wage inflation
- Flexibility to increase prices
- Menu costs (costs to reprice)
30
What are the causes of inflation?
- Demand pull inflation
- Cost push inflation
- Growth of the money supply
31
What is demand pull inflation?
- Total aggregate demand in the economy rises
- Aggregate supply cannot rise to match the increased demand, so prices are pulled up. Excess demand in the economy
- Causes are likely to be increased consumer demand, first spening on capital goods, export demand, and government spending
- Likely to occur when economy is near to full employment
32
What is cost-push inflation?
- Costs of production rise and firms pass this additional cost onto the consumers in the form of higher prices
- Costs are heavily affected by wage rises as this affects cost per unit. If productivity rises at the same rate as wages, cost per unit will remain the same
- Likely causes: wages, cost of fuel, raw materials, interest on loans, import prices
33
How is inflation measured?
The Consumer Price Index
It is measured using index numbers, which are based in price changes for a basket of approximately 600-700 goods and services commonly bought by typical households
The prices are updated every month by collecting more than 100,000 prices of goods and services across the country to determine the average - The Living Costs and Food Survey
The goods and services in the basket are weighted according to the proportion of income spent on them
34
How do you calculate a price index?
(new figure/base figure) x100
35
How do you calculate the weighted price of a basket of goods and services?
(Price of A x weight) +( price of B x weight) divided by the sum of weights
36
What are the limitations of using the CPI to calculate inflation?
- Not totally representative; impossible to take into account every single good sold, different households spend different amounts on each good, so it only measure an average rate of inflation
- Doesn't include price of housing, which has tended to rise more than the price of other goods, so data may be lower than it should be
- It has limited use as it is a lagging indication - PPI may be better
- More recent than RPI, so difficult to make comparisons with historical data
- The quality of products is ignored; products have improved in quality so will obviously be more expensive
37
What is the Producer Price Index?
PPI measures the average change over time in the prices domestic producers receive for their output. It's a measure of inflation at the wholesale level
38
What are the differences between the RPI and the CPI?
- RPI includes housing costs, such as mortgage and interest payments and council tax, where CPI does not
- CPI takes into account the fact that when prices rise people will switch to products that have gone up by less, so CPI is generally lower than RPI
- RPI excludes the top 4% of income earners and low income pensioners as they are not 'average' households, whilst CPI covers all households and incomes
39
What are the effects on inflation on the government?
If the government fails to change excise taxes in line with inflation, then real government revenue will fall. If they fail to charge personal income tax allowance, then real government income will increase and taxpayers will have less money
Governments may also have to pay union workers more
40
What are the effects of inflation on workers?
- If workers dont receive yearly pay rises of the rate of inflation, they will be worse off and their living standard will decrease. Those in weaker unions tend to be most affected as they are unable to win wage rises in line with inflation
- Deflation could cause some staff to lose their jobs as there is a lack of demand meaning firms see a fall in profit and have to decrease staff to cut costs
41
Evaluation of the effects of inflation
Some of these costs can be reduced if inflation is anticipated, which will allow groups to plan for the future. This can be done through indexation, so wages or taxes are increased in line with inflation. An example of this is workers negotiating with employers for wage rises in line with the predicted CPI or RPI. However, indexation may in itself further inflation because wage increases will reflect past increases. Therefore, if inflation has been at 10% previously but the government wants to reduce it to 2%, this will be difficult if workers are still getting a 10% pay rise due to indexation agreements
42
What is meant by unemployment?
When people who are willing, able and available to work at the going wage rate in a suitable job, but cannot find work, despite an active search
43
What are the measures of unemployment?
- Claimant count
- ILO measure, using the Labour Force Survey
44
What is the Claimant Count?
A measure of unemployment calculated by counting the number of people claiming unemployment benefits on a particular day. Done on a monthly basis
45
What is the ILO measure of unemployment?
Done using the LFS, and covers those who have looked for work in the last 4 weeks and are able to start work in the next 2 weeks. Done on a quarterly basis.
46
Why is the Claimant Count measure always lower than the ILO measure?
- Not everyone claims benefits
- Some people don't meet benefit requirements
- Some people choose not to claim benefits because they are embarrassed
47
When are people unable to claim unemployment related benefits?
- When they haven't built up sufficient NI contributions
- They are living in a household where their partner earns too high of a wage
- They need to have been out of work for several weeks
48
What is meant by underemployed?
The underemployed are those who have a job, but their labour is not used as full productive potential
It also includes those who are in jobs which do not reflect their skill level
Underemployment tends to increase during recessions because firms will just
reduce staff hours instead of making them redundant and having to pay expensive
redundancies packages. It doesn’t have as many negative effects as official
unemployment, but it does mean the underemployed have lower incomes and so will
spend less, reducing aggregate demand and growth of the economy
49
How is the Labour Force Survey carried out?
It surveys 44,000 households monthly, with over 100,000 individuals, and it is internationally recognised
50
What are the causes of unemployment?
- Lack of demand
- Lack of skills
- Geographical immobility
- Decline in certain industries
- Seasonal work
- Redundancy
- Dismissal
51
What are the causes of employment?
- Increased demand
- Changes in taxation
- Changing interest rates
- Increased government spending
52
What are the different types of unemployment?
- Cyclical
- Classical (real wage)
- Structural
- Frictional
- Seasonal
- Regional
53
What is the natural rate of employment?
The equilibrium rate of unemployment - frictional + structural
54
What is meant by inactive?
Those who are neither employed nor unemployed; those of working age not seeking employment, as well as those of working age seeking employment, but not able to start work
55
What are the comparisons between the LFS and the Claimant Count?
- Some people may not be included in the LFS, but would be in the Claimant count, e.g. those who fraudulently claim benefits and people working in the hidden economy
- Some people aren't eligible for benefits, but are classed as unemployed
- Sometime LFS and CC go in different directions; could be because LFS is only a sample, and things could happen in the market which are not covered by CC
- CC is a cheap and quick method, whereas LFS is expensive
- CC isn't suitable for international comparisons, whereas LFS is widely used and makes international comparisons easier
56
Who are the economically active?
The employed and unemployed
57
Who are the workless?
The unemployed and the inactives
58
What is the activity/participation rate?
The percentage of the population of working age who are economically active
59
What are the problems with using a national rate of unemployment?
- Regional variations not reflected
- Age disparities
- Women tend to suffer higher unemployment rates than men and this isn't reflected
- Ethnic minorities tend to suffer from higher unemployment than the national average
60
What is the significance of changes in activity?
Increases in inactivity will decrease the size of the labour force, therefore causing a fall in productive potential of the country . There will be a lower GDP and lower tax revenues as less people are working
Decreases in inactivity could just result in more people being unemployed if there are no jobs available to them
61
What is cyclical unemployment?
When there is insufficient aggregate demand for goods and services in the economy, meaning the demand for labour falls, and firms make more workers redundant as they are no longer required
62
What is real-wage unemployment?
When the demand for labour and the supply of labour are not equal. Real wages are too high in the economy and are downward sticky, which means there is a low demand for labour and a high supply of labour, resulting in unemployment
63
What is seasonal unemployment?
Occurs when workers who specialise in a particular industry where demand fluctuates throughout the year become unemployed in their 'off-season' as they do not find alternative work
64
What is frictional unemployment?
This occurs when workers are unemployed for short periods of time whilst they are between jobs
65
What is structural unemployment?
Occurs when the pattern of demand and production changes in a country, which reduces the demand for labour in these industries and causes workers to be made redundant
66
What is regional unemployment?
This is closely linked to structural unemployment and often occurs where a specific area of a country is hit heavily by a closure of a major employer in that area, resulting in very high levels of unemployment
67
What is the significance of migration for employment and unemployment?
● An increase in net inward migration tends to lead to increased jobs. Since the
1990s, the UK has seen a large increase in immigration from mainly Eastern European countries. Most of these people come to the UK to work, are of working age and often take lower skilled jobs; they are less likely to claim benefits than the
existing population. Due to the circular flow of income, immigrants’ spending creates jobs and total employment increases without an increase in unemployment. This depends how much money immigrant workers send back home.
● However, it also leads to lower wages, particularly for lower-paid, low skilled jobs. UK firms are able to recruit foreign workers meaning that supply of labour is increased and so the price equilibrium of labour is reduced. There is more
competition for jobs and UK workers who have low motivation to work and are low
skilled are most affected as they are competing in the job market with hard working, more skilled workers prepared to take the same jobs as them. The impact of this is only small and middle and higher income wages are rarely affected.
68
What is the impact of skills on employment and unemployment?
Economies progress over time, and as a result, higher skills are needed to work in them. In the UK 50 years ago, many jobs were available for those who couldn’t read or write but now there are few.
For the UK to maintain its employment levels, it needs to increase the skills of its
workforce over time. Structural unemployment is caused by a lack of, or the wrong,
skills.
If firms will not train staff, the government has to step in to correct the market failure
but this is costly. As a result, people become long-term unemployed as their skills
don’t fit the jobs on offer.
Migrant workers may fill these shortages if their skills fit
69
What is the impact of unemployment on individuals?
● Those who are made unemployed normally have a loss of income which usually
results in a decline in their living standards.
● They often suffer from the stigma of being unemployed and feel degraded by the process of signing on to receive benefits to support their family. This can lead to stress, marital breakdown, suicide, physical illness etc.
● The long-term unemployed (those unemployed for more than 12 months) often find it
more difficult to get another job as they lose skills.
● Those who are in jobs will suffer from lower job security and will fear being made
redundant. They could also see a fall in wages because the firm can easily find someone to replace them if they complain about pay.
70
What is the impact of unemployment on firms?
● There will tend to be a decrease in demand for their goods (but this depends on the
YED) and so this could lead to a fall in profit.
● Long term unemployment can lead to loss of skills and reduce employability of workers, so firms have a smaller pool of skilled people to employ.
● They can offer low wages as people will take the job anyway because they know there is a lack of jobs so have few options.
71
What is the impact of unemployment on consumers?
● Consumers in areas of high unemployment lose out because local shopping centres
tend to be run down and don’t offer the range of shops available to those in areas of
low unemployment. They suffer from less choice. The quality of goods may also
decrease.
● The unemployed consumers lose out as they have less available to spend.
● However, firms may lower prices and put on sales in order to increase demand for
their product.
72
What is the impact of unemployment on the government?
● The reduced income results in a fall in tax revenues and higher spending on welfare payments for families with people out of work, incurring an opportunity cost as the money could be better spent elsewhere.
● This will result in an increase in the budget deficit. It will be likely that the government will have to raise taxation or scale back plans for public spending on public and merit goods, such as the NHS or education. They may need to increase borrowing.
73
What is the impact of unemployment on society as a whole?
● Rising unemployment is linked to social deprivation. There is a relationship with crime and social dislocation (increased divorce rates, worsening health and lower life expectancy).
● Areas of high unemployment often see a fall in demand for local goods and services,
leading to a fall in income for those working in the services and sometimes further
loss of jobs.
● It results in a loss of potential national output and represents an inefficient use of scarce resources. If people chose to leave the labour market permanently, then this will have a negative effect on LRAS and therefore damage the economy’s growth potential so the country is unable to achieve their desired PPF.
● Taxpayers paying money to the unemployed is not a loss for the economy as it is a
transfer payment but the economy is affected because there is a fall in national
output and the social costs of the unemployed e.g. violence and crime.
74
What is the balance of payments?
A document that records all financial transactions over a period of time between one country and other countries
75
What is a credit?
Foreign currency flowing into the UK
76
What is a debit?
Foreign currency flowing out of the UK
77
What are some sources of credit?
- exports
- remittances
- foreign direct investments
- foreigners lending money to UK firms or citizens
- money placed in financial institutions by foreign firms or people
78
What are the parts of the balance of payments?
The current account
The Capital and Financial account
79
What is on the current account?
- Trade in goods (visible trade)
- Trade in services (invisible trade)
- Primary income; profits/interest earned, dividend payments into the UK minus these payments out of the UK, also net income earned from employment outside of the UK
- Secondary income; receipt and provision of aid, grants and gifts between countries, remittance payments to families
80
What is on the capital and financial account?
Transactions associated with changes in ownership of assets
- Flows of money associated with saving/ Hot Money Flows, FDI, shares and currency stabilisation
81
What makes up the current account balance?
Trade in goods + trade in services + primary income + secondary income
82
What is a current account deficit?
The monies flowing out of the country from trade in goods and services as well as primary and secondary income are greater than the monies flowing into the country from these transactions
83
What is a current account surplus?
The monies flowing into the country from trade in goods and services, as well as primary and secondary income are greater than monies flowing into the country from these transactions
84
What are the causes of a current account surplus?
- Changes in income at home
- Changes in income abroad
- Changes in exchange rates
- Structural problems - loss of comparative advantage
- interest rates / dividend returns
85
Why could a current account surplus be negative?
- Demand pull inflation
85
What are the causes of a current account deficit?
- recession in home country
- low costs of production / high quality
- Ability to adapt quickly to changes in tastes and preferences
- Depreciation of exchange rate
86
What are sources of credit?
- Exports
- Money placed in financial institutions by foreign firms or people
- Foreigners lending money to UK firms or cititzens
- Foreigners buying shares in UK firms or buying government bonds
- Foreign firms setting up in the UK
87
What is primary income?
Profit/interest earned/ dividend payments into the UK minus these payments out of the UK. Also includes net income earned from employment outside of the country
88
What is secondary income?
Receipt and provision of aid, grants and gifts between countries. Remittance payments to families
89
What is aggregate demand?
The total spending on a country's goods and services at a given price level in a given time period
90
What is the formula for aggregate demand?
AD = C+I+G+(X - M)
C=consumer spending (consumption)
I = investment (addition of capital stock to the economy)
G = government spending
( X - M ) = net trade (exports minus imports)
91
What factors affect the net trade figure?
- Disposable incomes
- Domestic inflation
- Exchange rate
- Protectionism
- State of the world economy
Non-price factors:
- Branding
- Customer service
- Availability of substitutes
- Unique design / patent
92
What factors influence the extent to which the next export figure is impacted?
- Relative price level of exports/imports
- Quality of imports/exports
- Availability of substitutes
- Time frame
-PED
- Marginal propensity to import (the change in spending on imports resulting from a change in household income)
- YED
93
What factors influence consumption?
- Real disposable income
- Structure of the population
- Taxation
- Consumer confidence
- Household debt and future income expectations
- Interest rate
- Wealth
- Availability of credit
- Inflation
94
What is average propensity to consume?
The proportion of disposable income that is spent on consumption of goods and services.
95
How do you calculate APC?
APC = consumption/disposable income
96
What is marginal propensity to consume?
The proportion of a change in income which is spent
97
How do you calculate MPC?
change in consumption / change in income
98
How do you calculate average propensity to save?
saving/disposable income
99
What is wealth, and how does it affect consumption?
The value of assets
If wealth increases, consumption increases
100
What is consumer confidence and how does it affect consumption?
Consumer confidence indicates how consumers feel about the state of the economy and will determine the willingness to spend.
If consumer confidence is high, consumption will be higher
101
What factors influence consumer confidence?
- Job security
- State of the economy / recession
- Bonus / pay expectations
- Ease of obtaining credit
102
How do interest rates affect consumption?
Interest rates are the cost of borrowing and the reward for saving
- High interest rates mean consumer prefer to save rather than spend, so consumption will fall
- Spending financed by credit will fall as high interest rates mean consumers have more to pay back
- mortgage repayments go up, sp require a higher proportion go inform, so consumption of other goods will fall
103
How does the population structure affect consumption?
Young people and old people have a higher APC
104
How does taxation affect consumption?
- Increases in direct taxation will decrease disposable income, so consumption will fall
- An increase in the basic rate of income tax would have a bigger impact than an increase in the upper bands
105
How does household debt and future income expectations affect consumption?
- In the short run, increased household debt will increase consumption, as increased debt means households are spending more
- In the long run, it will decrease consumption as households save ti pay off the debt
- If consumers have poor expectations about future incomes, consumers will focus on paying off existing debts
106
How does the availability of credit affect consumption?
- If it isn't easily available, fewer people will borrow to spend and consumption will decrease
- This was an issue in the 2008/9 financial crisis
107
How does inflation affect consumption?
- High inflation levels cause consumption to fall as the real clay of consumer's disposable income falls
- Some people may increase consumption before prices rise more
108
What factors affect how much someone can save?
- Interest rates
- Real disposable income
- Consumer confidence and expectations
- Population structure
- Saving schemes
- Range and quality of financial institutions
- Government policies
109
What is average propensity to save?
The proportion of disposable income saved
110
What is a target saver?
people who save with a particular target sum in mind
111
What is meant by dissave?
Spending more than your income
112
What did Richard Layard say were needed for happiness?
Family relationships
Financial situation
Work
Community and friends
Health
Personal freedom
Personal values
113
What is the Easterlin Paradox?
Happiness and income are positively related at low levels of income, but higher levels of income are not associated with increasing levels of happiness
Happiness depends on relative income and wealth; we only feel happier if we are better off than the people with whom we compare ourselves
eval: a rise in income no matter what will likely make people feel better iff, so are likely to increase their consumption which may increase their happiness, happiness also depends on other factors
114
What factors are used by the UN to determine national happiness?
GDP per capita
Social support
Healthy life expectancy
Freedom to make life choices
Generosity
Perception of corruption
115
What is a purchasing power parity?
An exchange rate of one currency for another which compares how much a typical basket of goods in the country costs compared to one in another country
