5 - Measures of Econ Performance

Causes of a current account deficit

- Currency is too strong relative to other countries. E.g. if pound buys many euros then exports of g&s from UK will be expensive while imports into the UK will be cheap. - High rate of inflation relative to other countries - High wage costs relative to other countries - High rate of economic growth in a country, higher incomes so more imports.

Causes of a current account surplus

- Currency is too weak relative to other countries e.g. if Yuan low against other countries then chinas exports relative cheap whereas imports in would be expensive. - Low rate of inflation relative to other countries - Low wage costs relative to other countries - Low rate of economic growth in a country. People have less income to buy imports from abroad. This creates a strong incentive for firms in the country to export.

Effects of increased unemployment on consumers

- Decrease in living standards - Loss of confidence leading to lower consumer spending - Danger of mental illness if unemployed for a long time - May result in lower house prices and a fall in personal wealth

Limitations of using GDP to compare living standards between countries.

- Difference in population: necessary to calculate GDP per capita. - Difference in rate of inflation: real GDPs must be compared. - How much of the output is self consumed so doesn't appear as GDP. - Methods of calculation and reliability of data may differ. - Type of spending by government: Warfare or Quality of Life? - Differences in income distribution. - Differences in exchange rates.

The limitations of CPI as a measure of the rate of inflation

- Doesn't include housing costs which is a major item of expenditure. - Some people don't have representative spending patterns so might experience cost of living rises by +/- the CPI. - Attempts are made to take account of changes in the quality or weight of foods but adjustments may be imprecise. - List of 700 items only changed annually so sudden changes in spending patterns not reflected in CPI. - Sampling issues e.g. providing accurate info on spending or no response

Effects of increased unemployment on firms

- Easier to recruit new employees - Less consumer spending so firms face falling sales, revenues and profits - Surplus labour in the economy so firms might be able to hold wages down and thus costs.

Relationship between current account imbalances and other macro objectives

- If a country has a persistent CA deficit then it might imply that the country's goods are uncompetitive which could cause increasing level of unemployment. - In turn, this may lead to a fall in the rate of economic growth. However, it may not be true if the deficit was caused by lower exports associated with a boom in the economy and high levels of consumer expenditure. - It could cause a fall in the country's exchange rate against other currencies. In turn, this would cause an increase in import prices which could be inflationary.

Effects of increased unemployment on government and society

- Increased spending on welfare benefits e.g. UC - Less revenue from income tax and indirect taxes - Opportunity cost of g&s that could've been produced by unemployed workers - Inequality may increase so more crime

Effects of increased unemployment on workers

- Loss of skills, no up to date training - Loss of income, welfare benefits rarely as generous as paid employment - Lower living standards as less income so quality of life falls - Long term unemployment may make it more difficult to get a job in the future

How is the CPI calculated?

1) Price survey undertaken by civil servants who collect data once a month about changes in the price of the 700 most commonly used goods and services. 2) Weights are assigned to each item the average household buys. It reflects the proportion of income spent on each item in the average shopping basket. 3) Price changes are multiplied by the weights to give a price index. The rate of inflation can then be measured by calculating the percentage change in the index. The CPI does NOT include house costs such as rent and mortgage.

Measures of unemployment

1. Claimant count This is based on claimants of unemployment related benefits, either from Jobseeker's Allowance or universal credit. 2. Labour force Survey Survey of a sample of households asking those aged between 16-65 whether they have been out of work over the last 4 weeks and if they are ready to start within 2 weeks. Used with international labour organization methods of measuring unemployment so allows for international comparison. It is a much broader measure as claimant count excludes those who are seeking employment.

5 types of unemployment

1. Cyclical (demand-deficient) Lack of spending in the economy/recession means that people are out of work. 2. Structural When industries are in decline and workers skills are becoming obsolete/out of date. 3. Frictional Where people are between jobs 4. Seasonal Where people are out of work for some periods of the year e.g. ski/surf 5. Classical (real wage inflexibility) Where there are problems with the supply-side of labour e.g. minimum wage too high and set above eq wage. Some economists argue that this is the cause of persistent unemployment in some countries.

Causes of demand-pull inflation

1. Decrease in interest rates 2. Rise in level of business and consumer confidence 3. Increase in government spending 4. Exports rising to relative imports 5. Depreciation of the exchange rate (increased demand for x and reduced demand for m).

The three causes of inflation

1. Demand-pull inflation Occurs when AD in the economy increases at a faster rate than AS. More people buying the same amount of goods means a price rise. 2. Cost-push inflation Occurs when AS decreases as total COPs increase. More general increase in costs across economy as well. 3. Growth of Money supply Some monetarists argue that the sole cause of inflation is increases in the money supply. This is associated with an increased in AD in the economy.

Significance of a decrease in the unemployment rate

1. Falling government so pending on JSA, UC and other out of work benefits. 2. Increased employment which is good as those who are out of the job market for long can become increasingly unemployable. 3. Job market becomes less flexible with fewer workers to choose from.

Distinctions of underemployment

1. Includes individuals who are seeking or available for additional work 2. Office for National Statistics measures underemployment as all those workers wanting to work more hours than they currently do and who are available to start in two weeks. May also be someone who is overqualified for the job they are doing.

Significance of a increase in the employment rate

1. Increased GDP - As output in the economy likely to increase. 2. Increased revenues and profits for firms. 3. Increased incomes - Thus increase in standard of living for households. 4. Improved skills (Human Cap) of workers 5. Higher government taxation revenue

Causes of cost-push inflation

1. Rise in oil/raw material prices 2. Fall in XR, imports more expensive 3. Rise in taxes on businesses 4. Increase in the minimum wage 5. Increased regulations that increase costs (env, health, safety)

Distinction between value and volume measures of GDP

1. The volume of output measures the number/amount of goods produced. 2. The value of output measures the amount of goods x the price at which they are sold. Therefore, an increase in the volume of output does not always mean that there is an increase in the value of output. If prices are falling, value might fall even when volume increases.

Distinctions of unemployment

1. Unemployment rate = the number of unemployed people as a percentage of the labour force. 2. The labour force (economically active population) consists of the unemployed plus those in paid or self-employment. 3. Unemployment can be measured as a level/percentage. 4. Unemployment is not a static concept as each week some employed/some redundant.

What is a Jobseeker's Allowance?

A JSA is paid to people who are willing and able to work but are not currently in employment. Econ growth = Less JSA as more manage to find work

Real incomes & Happiness instead of GDP

As there are some limitations of GDP as a measure of living standards, some try to measure national happiness. Subjective happiness is a measure of how people feel about themselves. - Research suggests that there s a positive relationship between income and happiness up to a certain level of income. - After incomes increase beyond that level, marginal gains in happiness fall (easterlin paradox).

Current account deficits vs surplus

CA surplus implies that a country's current account is positive, so combined value of net trade balance, the net primary balance and the net secondary balance is positive. CA deficit implies that country's current account is negative so combined value of net trade balance, net primary balance and net secondary balance is negative.

Measuring Potential/Econ Growth Using GDP

Economic growth is a measure of an increase in real GDP. This is referred to as actual economic growth. GDP is the total amount of goods and services produced in a country in 1 year. - Potential economic growth is a measure of the increase in the productive capacity of an economy , It can be shown by a movement outwards of the PPF. - A recession occurs when an economy suffers two consecutive quarters of negative economic growth. - If a country is in a recession, there is less spending, income and output. Likely to lead to a closure of firms, causing increased unemployment and a fall in living standards.

Significance of changes in the inactivity rate

Economically inactive population measures those without a job but who are not classified as unemployed. It includes those in full time education, parents looking after family at home and those who are retired or sick. If there is an increase in the inactivity rate then: 1. Productive capacity of the country may fall. 2. May be more claims of state benefits. 3. Dependency ratio will increase (the number of inactive people that active and employed people are supporting). However, if inactivity rate increases due to more people in higher education then this is likely to result in an increase in the skills of the future workforce.

Effects of inflation on firms

Fall in exports: - If UK rate of inflation higher than trading partners, its international competitiveness will fall. - Firm's exports become relatively expensive in foreign markets and imports from abroad seem cheap. Tends to worsen balance of trade. Uncertainty: A high rate of inflation might make it more difficult for firms to set budget which may result in a fall in investment. Lower profits: Cost push inflation likely to cause a decrease in profits and thus lower investment. However, some inflation is desirable because it enables firms to increase revenues, thus profits could increase especially if there is demand pull inflation which may encourage them to invest. Impact on monetary policy: High inflation rates may chase MPCommittee to increase interest rates which has damaging effect of reducing investment.

Effect of inflation on the government

Fall in real value of the national debt: Inflation would reduce the value of debt owed by the government thus less of a burden. Increased inequality: Inflation might make it more difficult to reduce income inequality because those on fixed incomes will see a fall in real value of their incomes. Deterioration on balance of trade: If inflation causes fall in the country's international competitiveness, its exports are likely to gall and imports increase, thus deterioration in trade balance.

Distinction between total and per capita measures of GDP

For GDP to be meaningful as a measure of living standards, population needs to be taken into account.

Comparison of rates of growth between countries and over time.

GDP data is used to compare the standard of living over time and between countries. The standard of living refers to more than just income but also the quality of life which includes housing, health the environment and safety.

Real GDP Definition

GDP where inflation has been taken into account. Sometimes referred to as constant prices. If inflation is left in they figures, they are known as nomial/current.

Distinction between GDP and GNI

GNI measures income received by a country both domestically (GDP) and via net incomes from overseas. GNI = GDP + Profits from companies operating abroad and income from nationals living in foreign countries - profits from foreign owned companies and income earned from foreign nationals living in the country that goes abroad. GNI may be much lower than GDP if much of the income from a country's production flows to foreign people or firms.

Significance of skills for employment

Highly skilled workforce is likely to have the following impacts: - Workforce more productive so helping to increase the rate of economic growth. - Earnings of highly skilled workers are likely to be higher than those of unskilled. - Highly skilled workers less likely to be unemployed and have more stable and secure employment. - Income inequality and poverty Linley to be lower.

Inflation, Deflation vs Disinflation

Inflation: Inflation is the sustained rise in the general price level. Deflation: Deflation is a sustained fall in the general price level. It is often a sign a stagnation. Disinflation: A fall in the rate at which the general price level is rising.

Level of Employment / Rate Definitions

Level of Employment: The number of people in work. The Employment Rate: Number of people in work as a percentage of the working age population.

The interconectedness of economies through international trade

Means they rely on each other through global supply chains. Interdependence may be beneficial because it reduces costs and thus prices and promotes cooperation between countries. It can also result in the establishment of trade blocs that become very powerful which leaves some developing countries unable to trade fairly.

Significance of migration for an economy

Migration refers to immigration and emigration. - If immigrants come to fill a candies then there is an increase in employment. - If they come looking for work and don't find it or displace others from work then unemployment may increase. - Migration has implications for public finances if the migrants find work then they will be paying taxes. - If immigrants come to a country to earn money to send home as remittances then this will adversely agent the CA of the BOP in the SR.

Define and give reasons for migration

Migration refers to the movement of people from one country to another. It is immigration, emigration and the overall balance between the two in a country. - Employment - Higher income - Better life and subjective happiness - Escape conflict - To avoid high tax liabilities - Remittances

Nominal vs Real GDP

Nominal GDP is the money value of all goods and services produced by a country in 1 year. Real GDP is the nominal GDP adjusted for inflation. Thus using this means that it is possible to measure changes in the volume of output over time.

Balance of Payments & Its components

The balance of payments is a record of international payments over the course of a year. The Current Account: Records payments for transactions between countries in the present year. 1. Trade in goods balance (x-m) + 2. Trade in services balance (x-m) = Balance of Trade +++++ The primary balance (investment income): earnings of foreign investments (interest, profits and dividends) - payments made to foreigners + The secondary balance (current transfers): relates to transfers in the form of money or of g&s e.g. taxes, social security contributions and foreign aid. = Current account Current account is essentially BOT + PB + SB The Capital and Financial Accounts: Relate to investments and speculation.

What is the CPI - Key features

The consumer price index is a weighted average of items on which people spend their money. Key features: - Rate of inflation is measured in the UK by changes in the CPI and is used for inflation targeting. - Used to make international comparisons of the rate of inflation. - It is an index number, so is a number shown as a percentage relative to the base year (100). Inflation is usually shown on a year to year basis so must be calculated with a percentage change. Retail Price Index includes interest payments on mortgages but not as reliable as the CPI for international comparisons. As a result, this legacy measure of the rate of inflation may be discontinued.

Effects of inflation on consumers

Those on fixed incomes: Inflation implies that their incomes would fall in real terms Those with savings: If rate of inflation higher than interest rate on saving, real value of savings will decrease. Those with loans or mortgages: If rate of inflation higher than interest rate on loans, real value of these loans will fall, making them more manageable.

What are purchasing power parities?

When values of income are expressed at PPP, it means that the exchange rate used is the one where the same basket of goods in the country could be bought anywhere at this rate of currency exchange. Thus GDP at PPP eliminates price differences between countries and allows us to see if a currency is over/undervalued. - Used to compare GDP in different countries and take into account the cost of a basket of goods that could be bought in each of the countries being compared. The PPP exchange rate is the rate the equalizes the purchasing power of different currencies by eliminating differences in prices between countries.