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Theme 2: Measures of Economic performance Flashcards

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1
Q

What is inflation?

A

a sustained increase in the general price level.

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2
Q

What is hyperinflation?

A

Refers to very high and increasing inflation, typically it has to be at least above 50%

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3
Q

What are the 2 types of inflation?

A

1) Demand pull
2) Cost push

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4
Q

Draw a diagram having demand-pull inflation

A
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5
Q

Draw a diagram having cost-push inflation

A
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6
Q

What is deflation?

A

when there is a sustained decrease in the general price level.

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7
Q

What is a deflationary spiral? (Give 5 chains of reasoning)

A

The spiral begins with deflation which is where there is a sustained fall in the general price level. -> Consumers notice the falling prices and decide to delay their purchases and wait for prices to fall further. -> This causes a reduction in AD as consumption is a component of AD. -> The fall in AD lowers the price level again and so consumers further delay their purchases. -> And the cycle repeats.

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8
Q

What are the 2 causes of deflation?

A

1) reduction in aggregate demand
2) increase in aggregate supply.

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9
Q

How does the value of money get affected by the change in general price level?

A

Inflation = decreases value of money
Deflation = increases value of money

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10
Q

Explain the difference between nominal and real income?

A
  • Nominal income is the amount you actually earn.
  • Real income: nominal income with the effects of inflation removed
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11
Q

What is the inflation rate?

A

A measurement which record the percentage change in the general price level

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12
Q

Explain the three stages to calculating the UK’s price level

A

Stage 1 - the ONS (Office of National Statistics) conducts its Living Costs and Food Survey. This involves interviewing 5000 households to find the 650 most common goods and services and to find the percentage of their spending goes on each of these goods and services.

Stage 2 - the ONS conducts a price survey where they collect prices of these 650 goods from across the UK in order to find the average price of each good.

Stage 3 - a weighted average of all the prices is calculated in order to find the price level.

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13
Q

What is disinflation?

A

when the inflation rate is positive but decreasing.

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14
Q

What are the 4 problems with CPI?

A

1) unusual spending habits
2) changes in quality
3) time lag
4) doesn’t include mortgages

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15
Q

Explain why unusual spending habits can be a problem when using the Consumer Price Index measure of inflation. (Give 3 chains of reasoning)

A
  • For consumers with unusual spending habits,
  • the consumer price index with its 650 most common goods and services will not accurately measure changes in their cost of living.
  • This is because these consumers are buying unusual uncommon goods and services which are not in the CPI basket.
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16
Q

Explain why time lags can be a problem when using the Consumer Price Index measure of inflation. (Give 5 chains of reasoning)

A
  • The goods and services in the CPI basket are only updated once a year.
  • When new goods become popular, their price changes aren’t measured, because they’re not yet in the basket.
  • It’s only one year later that these new goods and services are included.
  • So, any change in price of these new goods will not be reflected in the CPI for a year.
  • However, the change in price will impact the consumer’s cost of living immediately and so the inflation rate is less accurate.
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17
Q

Explain why changes in quality can be a problem when using the Consumer Price Index measure of inflation.

A

An increase in prices may be due to an improvement in quality and this is not the same as inflation.

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18
Q

What is a mortgage?

A

A mortgage is an amount of money which is borrowed from the bank in order to buy a house

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19
Q

What is the difference between RPI and CPI

A

RPI includes mortgage payments

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20
Q

What are the 3 advantages of higher inflation?

A

1) The first advantage of high inflation is that is protects against deflation and deflationary spirals.
2) It also reduces the real value of debt and so it can improve equality.
3) The third benefit is that inflation decreases real wages, which can lower costs for firms and the government.

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21
Q

What are the 3 disadvantages of higher inflation?

A

1) The first disadvantage of high inflation is that it can lead to price-wage spirals, which in turn can lead to hyperinflation.
2) Also, it can decrease the real value of wages and savings.
3) A third disadvantage is that high, unstable inflation can reduce investment because it becomes much more risky.

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22
Q

What is the target for inflation?

A

A stable inflation of 2% (+/- 1%)

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23
Q

How do we measure the output of an economy?

A

Using real GDP

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24
Q

What is real GDP?

A

A measurement that measures the amount of goods and services produced in an economy in a year.

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25
What is economic growth?
An increase in real GDP
26
What is nominal GDP
The total price of all goods and services produced in an economy
27
What is the formula for real GDP growth?
Real GDP growth = nominal GDP growth - inflation rate
28
How can real GDP be misleading?
Real GDP can be misleading because it ignores the size of the country’s population.
29
What measurement can help us to see the GDP of a country while accounting for its size of population?
Real GDP per capita
30
What is the formula for GNI?
GDP + net income from abroad (remittances received - sent) = GNI
31
What is real GDP per capita?
The total output produced in an economy in a year divided by the population.
32
What is Gross national income?
Gross Domestic Product plus net income from abroad.
33
What is GNI sometimes written as?
GNP (Gross national product)
34
What is the Easterlin Paradox? (Give 2 chains of reasoning)
- As income increases, happiness increases up to a point as people are able to afford important items like food and a home. - However, the marginal happiness from each extra £ of income then begins to fall as people spend money on things they don’t need and which bring less happiness.
35
Give an example of measuring happiness
The ONS national well being survey
36
Give an example of a country which is focusing on gross national happiness
Bhutan
37
What are the 2 reasons why it’s difficult to deduce which country is richer?
1) nominal GDP is more likely to be measured in different currencies (exchange rates are volatile) 2) different countries have different price levels
38
What is a PPP (Purchasing power parity)?
A measurement between two countries tells us how much of one currency is needed to purchase a basket of goods compared to another currency.
39
What are the 5 limitations of using real GDP as a measurement of living standards?
1) ignores population changes 2) ignores income distribution 3) ignores types of goods and services 4) ignores underground economies 5) ignores subsistence economies
40
Explain why changes in population is a problem when using real GDP to compare living standards.
If the population is growing faster than real GDP then real GDP per capita will actually be decreasing and so, on average, everyone will be worse off than the increase in real GDP suggests. Equally, if the population is growing slower than real GDP, then real GDP per capita will be increasing by more than the increase in real GDP. This means that everyone would actually be better off than real GDP suggests.
41
Explain how the existence of the subsistence economy limits GDP as a measure of living standards. (Give 3 chains of reasoning)
- The subsistence economy is made up of people who produce goods to consume themselves rather than sell. - This production is not recorded as the goods are not sold. - This means real GDP does not measure any of the goods and services produced in the subsistence economy and so it underestimates the total amount produced.
42
What is actual economic growth?
An actual increase in real GDP.
43
What is potential economic growth and how would this be shown on a diagram?
An increase in the full employment potential output level, shown by a right shift of the LRAS.
44
What is the working age population?
includes everyone between the ages of 16 and 64.
45
What is an active population?
People between the ages of 16 and 64 who are actively working or actively seeking work
46
What is the active population also referred as?
Also called the workforce.
47
What is the inactive population?
People between the ages of 16 and 64 who are neither actively working nor actively seeking work. This includes those who are unable to work.
48
What is unemployment?
Unemployment is when somebody is able to work and actively seeking work but is not currently working.
49
What is the unemployment rate?
The percentage of people unemployed out of the active population.
50
What is the unemployment level?
the number of people unemployed.
51
How do you calculate the unemployment rate?
(Unemployment level / active population) x 100
52
What is employment level?
The number of people who are employed.
53
What is employment rate?
The number of employed people as a percentage of the working age population.
54
What is the formula for the employment rate?
(Number of employed people/working age population) x 100
55
What is the formula for the activity/participation rate?
(Active population / working age population) x 100
56
What is the activity/participation rate
the number of economically active people as a percentage of the working age population.
57
What are the 2 ways to measure unemployment?
1) ILO labour force survey 2) Claimant Count
58
Explain how the ILO Labour force survey is measured?
- 80,000 households are interviewed and then surveyed on the phone every quarter to ask whether they are unemployed. - In this survey, someone is considered as unemployed if they have been out of work for 4 weeks or more and are ready to start within the next 2 weeks and actively looking for work.
59
What does the ILO stand for?
International Labour Organisation
60
What does the Claimant Count measure?
It measures how many people are claiming unemployment benefits.
61
What is one limitation of the ILO Labour force survey
- The Labour Force Survey asks 80,000 households out of 27 million in the UK. - It is therefore possible that the sample used is not representative, which means that this method can lack accuracy.
62
What is one limitation of the claimant count?
- The Claimant Count does not include people who are unemployed but do not claim unemployment related benefits. - This includes people who are embarrassed to claim benefits or who have partner who is a high earner. - This means that it underestimates the actual level of unemployment.
63
What is underemployment?
when workers are employed but working fewer hours than they want to or underusing their skills.
64
What are the 5 types of unemployment?
1) real wage or classical unemployment 2) structural unemployment 3) cyclical or demand deficient unemployment 4) frictional unemployment 5) seasonal unemployment
65
What is real wage or classical unemployment?
When the wage is above the equilibrium wage which creates an excess supply of labour also known as unemployment.
66
What are the 2 causes of real wage or classical unemployment?
1) The government may have set a national minimum wage 2) The power of trade unions can push wages above the equilibrium.
67
What is demand-deficient or cyclical unemployment?
It occurs when there is not enough demand in the economy. This causes firms to reduce their derived demand for labour, creating unemployment.
68
What is structural unemployment?
occurs when the structure of the economy changes and jobs shift from one sector to another.
69
What is occupational immobility of labour?
when workers can’t move between different jobs because they lack the skills needed.
70
What 2 factors cause structural unemployment?
1) Occupational immobility of labour 2) Geographical immobility of labour
71
What 3 things can the government do to intervene and tackle occupation immobility of labour?
1) education 2) training 3) apprenticeships schemes
72
What is geographical immobility of labour?
When workers can’t move between different jobs because they can’t move to a different location.
73
What 2 things can the government do to intervene and tackle geographical immobility of labour?
1) relocation subsidies 2) transport improvements
74
What is frictional unemployment?
When people are temporarily unemployed while searching for a new job.
75
What is seasonal unemployment?
Occurs when people are unemployed during certain seasons.
76
What is direct tax?
A tax paid directly to the government such as corporation tax or income tax.
77
What is indirect tax?
A tax paid by a producer when goods and services are purchased.
78
What is income tax?
A tax which is paid directly by workers as a percentage of their income.
79
What is corporation tax?
A tax which is paid directly by firms as a percentage of their profits.
80
What is specific tax?
A fixed amount of tax paid on each unit sold.
81
What is ad valorem tax?
A tax charged as a percentage of the price of a good such as VAT.
82
What is a budget (fiscal) deficit?
When government spending is more than tax revenue.
83
What is a budget surplus?
When government spending is less than tax revenue.
84
What is a balanced budget?
When government spending is equal to tax revenue.
85
What is national debt?
The total debt built up by government borrowing over time.
86
What is a government bond?
A method that the government uses to borrow money.
87
How does a government bond work?
They sell a bond to an investor and pay it back at a later date with interest.
88
What is economic inequality?
The difference in living standards between the rich and poor.
89
What are the 7 macroeconomic objectives?
1) Inflation rate of 2% (±1%) 2) Economic growth 3) Full employment 4) A current account equilibrium 5) A balanced budget 6) Reduced inequality 7) Environmental sustainability

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