The measurement of macroeconomic performance

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What are the four main macroeconomic indicators?
Economic growth, inflation, unemployment and balance of payments
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How is economic growth measured?
Change in GDP (National output) over time or total amount of national expenditure or total amount of national income in a year
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Booms
Long periods of high economic growth
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Recession
Negative economic growth for two consecutive quarters
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Slump
A long recession
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Economic depression
Sustained economic downturn which lasts for a long period of time
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How is economic growth measured? (formula)
(Change in GDP/Original GDP) * 100 = Percentage change
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Nominal GDP
Hasn't been adjusted for inflation
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Real GDP
Has been adjusted for inflation
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GDI per Capita
Total GDP/Population size - can be used to give an indication of a country's standard of living
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GNI
GDP + net income from abroad
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GNP
Total output of the citizens of a country
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Problem with using GDP per capita to compare living standards?
Exchange rate might not reflect the true worth of the two currencies
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Purchasing Power Parity (PPP)
Real value of an amount of money in term of what you can actually buy with it, adjusting the GDP per capita to take into account the differences in purchasing power - more accurate and easier
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Things that GDP and GDP per capita might not take into account
Hidden economy, Public spending, Income inequality, hours workers work per week, working conditions, level of damage to environment and different spending needs
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Index numbers are useful for......
Making comparisons over a period of time
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Base year
The first year - index number always set at 100
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Inflation
The sustained rise in the average price of goods and services over a period of time - fall in the value of money
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Deflation
Average price is falling
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Hyperinflation
Prices rise extremely quickly and money rapidly loses its value
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Disinflation
The rate of inflation is slowing down
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What are the two main measurements used for inflation?
Retail price index (RPI) and Consumer price index (CPI)
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Retail price index (RPI)
Living costs and food survey - what people spend their money on/proportion of income spent, Basket of goods - Changes in price of commonly used goods,reflects what the average household might spend its money on
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How do you calculate RPI?
Price changes in the basket of goods survey is multiplied by the weightings from the living costs and food survey, then converted into index, inflation is % change on index number over time
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Consumer price index (CPI)
Similar to RPI but excludes mortgage interest payments and council tax, slightly different formula used and tends to be lower than RPI, uses a larger sample of the population
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What is the official measure of inflation in the UK?
CPI - many other countries also use CPI thus making it good for international comparisons
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Limitation on CPI and RPI
RPI excludes all households in the top 4% of incomes, CPI doesn't include mortgage interest payments or council tax, Living costs and food surveys can be inaccurate, basket of goods only change once a year
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Why are RPI and CPI figures important for government policy?
Used to help determine wages and state benefits, also used to measure changes in UK's international competitiveness
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Level of unemployment
Number of people who are looking for a job but cannot find one
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Rate of unemployment
Number of people out of work as a percentage of the labour force - used when comparing internationally (different population sizes)
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What are the two ways of measuring unemployment?
The Claimant Count and The Labour Force Survey
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The Claimant Count
Number of people claiming unemployment-related benefits, advantages - easy to obtain, no cost, updated monthly, disadvantages - manipulated by the government to make it seem smaller, excludes ppl looking for work but not eligible to claim JSA
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The Labour Force Survey
Asks people who aren't working if they are actively seeking work, advantages - more accurate, used internationally thus comparisons, disadvantages - less up to date, expensive and may be unrepresentative of the whole population
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Why might governments want to keep track of unemployment figures?
Suggests an economy is doing badly, lead to lower incomes/spending, companies will make less profit, unused labour - fewer goods and services can be produced, gov has extra costs (Welfare benefits) and less revenue because less tax is paid
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The balance of payments refers to.....
International Flows of money - value of imports and exports
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The current account
Trade in goods, Trade in services, International flows of income, Transfers of money
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Surplus in the BOP
Import > Exports
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Deficit in the BOP
Exports > Imports
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Recent state of UK's BOP
Has had a deficit for over 20 years, surplus in trade in services and large deficit in trade in goods - sign that country is uncompetitive
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Measuring the economic development of a country means.....
Trying to work out the level of social and human welfare (quality of life) - important when comparing the economies of two very different countries
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Ways to measure economic development
HDI,GPI, % adult male labour in agriculture, no mobiles per 1000 of population, levels of disease/malnutrition/political and social freedom/environmental sustainability, Access to clean water, Energy consumption per head
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Human development index (HDI)
Developed by UN to measure levels of social and eco development, includes social indicators - Health, Education, Standard of living - International standard and easy to collect
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Criticism of Human development index
Long life expectancy not same as a high quality of life, avg number of years in school doesn't measure quality of teaching or how well ppl learn, GNI per capita figures can lead to inaccurate comparisons (hidden economy), extent of inequality
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Genuine Progress indicator
Impact of economic growth on the environment as well as various social factors, takes GDP into account but also measures negative effects of growth, also tries to measure quality of life
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'Happiness economics'
Tries to measure subjective well-being using psychological surveys, ONS measures health, relationships, education ad finances along with those peoples own assessment of their well being
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Easterlin Paradox
Increases in GDP are not always associated with increases in people's happiness levels
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Full employment
The number of people wishing to work = the number of workers whom employers wish to hire
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Economic growth
The rate of increase in the potential output of an economy
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UK's LR trend of economic growth
2.5%
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UK's unemployment rate goal
3%
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UK's inflation rate goal
2%+-1%
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UK's BOP goal
Near to equilibrium - sustainably finance the current account, which is important for long term growth
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Other macroeconomic objectives for the government
Balanced government budget - national debt does not escalate, allows gov to borrow cheaply in future. Greater income quality - distributed equitably, fairer society
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Economic growth vs Inflation
Growing economy likely to experience inflationary pressures - positive output gap and AD increases faster than AS
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Economic growth vs the current account
Growth leads to high consumer spending - UK has high MPM - Worsens current account deficit
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Economic growth vs the government budget deficit
Reducing a budget deficit requires less expenditure and more tax revenue - a fall in AD - less economic growth
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Economic growth vs the environment
High rates of economic growth - negative externalities - pollution and the usage of non-renewable resources
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Unemployment vs inflation
SR, Trade off between unemployment and inflation (Phillips curve) - Growth rises - Unemployment falls - wages rise - consumer spending rises - inflation > supply side policies can limit structural unemployment
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Measures of productivity
Output per worker per period of time - how efficient production is
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The balance of payments is made up of
The current account, the capital account and the official financing account
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Other cards in this set

Card 2

Front

Change in GDP (National output) over time or total amount of national expenditure or total amount of national income in a year

Back

How is economic growth measured?

Card 3

Front

Long periods of high economic growth

Back

Preview of the back of card 3

Card 4

Front

Negative economic growth for two consecutive quarters

Back

Preview of the back of card 4

Card 5

Front

A long recession

Back

Preview of the back of card 5
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