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measured of economic performance
economic growth
measuring economic growth using GDP:
it is a measure in real GDP. referred to as actual economic growth
GDP is the total amount of goods and services produced in a country in 1 year
a recession occurs when an economy suffers 2 consecutive quarters of negative economic growth- a recession leads to less spending, income and output which leads to closure of firms, increased unemployment and fall in living stadards
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.
GDP per capita is calculated by dividing total GDP by the countries population
the volume of output measures the number/ amount of goods produced
the value of output measures the amount of goods produced multiplied by the price at which they're sold
gross national income measures income received by a country both domestically and via net incomes from overseas
GNI= GDP + profits from companies operating abroad and income earned from nationals living in foreign countries.
purchasing power parities are used to compare GDP in different countries, and take into account the cost of a basket of good that could be bought in each of the counties being compared.
limitation of using GDP to compare living standards between countries/ overtime:
two countries might have the same GDP but living standards might be significantly different
this is because it does not take into account differences in population, in rates of inflation, in income distribution or types of spending by the government.
national happiness
given some of the limitations of GDP as a measure of living standards, several countries try to measure national happiness
uk national well being is where the uk government undertakes regular surveys of personal well being that makes estimates of overall satisfaction with life. surveys attempt to measure subjective happiness
research suggests there is a positive relationship between income and happiness up to a certain level of income. once incomes increase beyond this level, marginal gains in happiness begin to fall. this is referred to as the easterlin paradox.
a policy implication of this is that governments need to focus not only on economic growth but also on other objectives like income equality and a clean environment
inflation
inflation is a sustained rise in the general price level.
deflation is a sustained fall in the general price level
disinflation is a fall in the rate at which the general price level is rising
the price level is the consumer price index (CPI) which is a weighted average of items on which people spend their money
key features include:
rate of inflation is measured by changes in the CPI, this measure is used for inflation targets.
also used to make international comparisons of the rate of inflation.
CPI is an index number
how its calculated:
the living costs and food survey collects info from a sample of about 7000 households in UK.
a price survey is undertaken by civil servants who collect data once a month about changes in the price of the 700 most commonly used goods and services.
weights are assigned to each product which represent the proportion of income spent on each item.
the price changes are multiplied by the weights to give a price index
the CPI does not include housing costs, such as rent payments and mortgage interest repayments
limitations of CPI include:
does not include housing costs which are a significant item of expenditure
some people do not have representative spending patterns
list of 700 items are only changed once a year so sudden changes in spending patterns are not reflected in the CPI.
there are compliance issues
the retail price index (RPI) does include interest payments on mortgages, but is not as reliable as the CPI for international comparison
causes of inflation
demand pull- occurs when AD in the economy rises as a faster rate than AS
causes include decrease in interest rates, rise in the level of business and consumer confidence, increase in government spending, exports rising relative to imports, depreciation of exchange rate (increase demand for exports and reduce demand for imports)
cost push- occurs when AS decreases (eg the total costs of production increase
causes include rise in raw material prices, fall in exchange rate (making imports more expensive), rise in taxes on businesses, increase in minimum wage, increased regulations
some monetarists argue that the sole cause of inflation is increases in the money supply, this is associated with an increase in AD in the economy.
effects of inflation
on consumers:
for those on fixed incomes, inflation implies that their incomes would fall in real terms
for those with savings, if the rate of inflation is higher than the interest rate on savings then the real value of savings will decrease
for those with loans or mortgages, same as above and it would make them more manageable for consumers
on firms:
fall in exports, if inflation is high then uks international competitiveness will fall, a firms exports become more expensive and imports become cheaper, this worsens trade balance
leads to uncertainty, can lead to fall in investments
lower profits, result in lower investments
impact on monetary policy, high inflation could cause high interest rates and can have damaging effects on firms eg investments decrease as cost of borrowing increases
on gov:
fall in the real value of the national debt, therefore becomes less of a burden
increased inequality
deterioration in the balance of trade
on workers:
if inflation is rising faster then wages, workers become worse off. however if wages rise faster then real income rises
unemployment, there is a short run trade off between inflation and unemployment
employment and unemployment
measures of unemployment
the claimant count is based on claimants of unemployment-related benefits either from jobseeker allowance (paid to people who are willing and able to work but are not currently in employment) or universal credit.
the international labour organization and the UK labour force survey:
the labour force survey is a survey of a sample of households where it asks people aged between 16 and 65 whether they have been out of work for the last 4 weeks and if they are ready to start work in 2 weeks.
the LFS uses standard international labour organisation methods of measuring unemployment
unemployment is the number of unemployed people as a percentage of the labour force. the labour force consists of those aged 16 and over who are either employed or unemployed.
underemployment includes individuals who are seeking or available for additional work
the ONS measures unemployment as all those workers wanting to work more hours than they currently do and are available to start within 2 weeks
benefits of an increase in the employment rate include:
increased GDP
increased revenues and profits
increased incomes
improved skills
higher gov tax revenues
significance in the decrease of the unemployment rate include:
falling gov spending on out-of-work benefits like JSA
increased employment which is a benefit
the job market becomes less flexible (fewer workers for employers to choose from)
significance of an increase in the inactivity rate:
economically inactive refers to people not in education, employment or training and who are not actively seeking work
the productive capacity of the country will fall
there may be more claims on state benefit
the dependency ratio will increase
types of unemployment
cyclical (demand deficient): lack of spending in the economy/ recession means that people are out of work. you expect this type of unemployment in a recession
structural: industries are in decline and workers skills are becoming obsolete
frictional: where people are between jobs
seasonal: where people are out of work for some periods of the year
classical or real wage inflexibility: where there are problems with the supply side of labour.
significance of skills for employment and unemployment:
the workforce is more productive so helps increase the countries rate of economic growth
highly skilled workers are less likely to be unemployed, and have more stable and secure employment
significance of migration for employment and unemployment
reasons why people migrate:
employment
to earn a higher income
for a better life
to study abroad
to join other family members
significance of migration for employment and unemployment
reasons why people migrate:
employment
to earn a higher income
for a better life
to study abroad
to join other family members
how it effects unemployment rates depending on the reason for migration:
if immigrants come to fill vacancies then decreases unemployment
if immigrants don't find work or displace others them unemployment mau remain unchanged
if migrants find work they will pay taxes
if migrants come to a country to earn money to send home to their families this will affect current account of balance of payments