2.1 Measures of economic performance

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2.1 Measures of economic performance by Mind Map: 2.1 Measures of economic performance

1. 2.1.1 Economic growth

1.1. Measure of economic growth

1.1.1. Economic growth = When there is a rise in GDP GDP (Gross Domestic Product) GDP = C + I + G + (X-M) =the total value of all goods and services produced in the domestic boundaries in a country in a given year. DOES NOT include the output of UK firms that are located abroad BUT include the output of foreign firms that are located in the UK Real GDP = takes into account of inflation by removing the effects of inflation Nominal GDP = include the effects of inflation Total GDP = Total value of output produced in the economy GDP per capita = The value of output produced per person in the economy -> total value of output/population Other national income measures GNI (Gross National Income)

1.2. The limitations of using GDP to compare living standards

1.2.1. Different in the distribution of income Two countries with similar GDPs per capita may have different distribution of income between the rice and the poor -> rise in inequality -> different living standard in the country

1.2.2. Difference in hours worked affects GDP figures

1.2.3. Home-produced services Large part of production in LEDC -> for subsistence purposes -> most output produced for personal consumption -> e.g. housewives -> if its included GDP would be much higher

1.2.4. Size of hidden economies Informal trade ('Black market') -> e.g. drug trade, prostitution Size of hidden economy in one country maybe larger than other countries not accounted in GDP figures

1.2.5. No indication of welfare other factors should be considered -> e.g. health, happiness, education -> Solution: HDI

1.2.6. The public sector Services that are provided by the govt. are free ->difficult to measure as they are not sold or bought -> e.g. public services

1.2.7. THEREFORE, national income are under-estimates -> they do not reflect the true value of national output produced in the UK

2. 2.1.2 Inflation

2.1. Inflation = sustained increase in the general price level which causes a decrease in the value of money

2.2. Deflation = sustained decrease in the general price level which causes an increase in the value of money

2.3. Disinflation = a fall in the rate of inflation (still positive inflation)

2.4. Measures of Inflation

2.4.1. Consumer Price Index (CPI) based on basket of consumer goods which are most frequently bought

2.4.2. Retail Price Index (RPI) also based on basket of consumer goods, but this includes housing costs and mortgage interest payments

2.4.3. CPIH Monitors changes in price level of consumer goods including housing costs and council tax

2.4.4. Steps in calculation of the CPI 1. Take a representative sample of most commonly bought goods and services (670) in a 'basket' of goods. 2. Find out the weight for each good (weight=expenditure / total expenditure) 3. Find the % change in price for each good (P2-P1/P1) x100 4. Find effect on index for each good (% change in price x weight) 5. Sum of all the effects on the index for all goods (sum of all the % change in price x weight)

2.4.5. The limitations of CPI Weights are based on the average spending of all G/S, not considering differences proportion spent in individual households Changes in quality of G/S are not taken into account ( due to advancement in technology , quality of G/S has improved) DOES NOT include housing costs -> not a true representation

2.5. Causes of inflation

2.5.1. Demand - pull inflation This usually occurs when resources are fully employed An increase in AD -> AD curve shifts to the right -> increase in Price Level (inflation) and increase in National Income This occurs when AD for G/S rises more rapidly than an economy's productivity capacity -> increase pressure on scarce resources The main triggers of Demand - pull inflation Lower interest rate -> borrowing more attractive, savings less attractive -> consumption increases -> AD increases Lower taxes/ more govt. spending -> more disposable income -> consumption increases A depreciation in the exchange rate -> imports more expensive, exports cheaper -> AD increases

2.5.2. Cost - push inflation A decrease in AS -> AS curve shifts to the left -> Price Level increases and National Income decreases This occurs when firms respond to rising costs of production by increasing price -> to protect profit margins Reason why production costs might rise Rise in price of raw materials because of an increase in commodity prices (e.g. oil, coal and agricultural products Rising Labour costs -> caused by an increase in wage -> unemployment is low -> skilled workers become scarce Expectations of inflation -> people ask for more pay to protect their real incomes Depreciation in the exchange rate -> imports more expensive -> price of raw materials in

2.5.3. Growth of the money supply If money supply (quantitive easing -> govt. buys assets or Bank of England buys bond) increases above the rate of increase in real output -> inflation If banks increase lending to customers-> money supply increase -> customers are likely to spend -> AD increases -> PL increases

2.6. Costs and benefits of inflation

2.6.1. Costs of high inflation International competitiveness (firms) -> high inflation -> deficit on the current account of the BOP -> m>x -> imports is more competitive -> loss of jobs -> lower growth Decrease in real value of savings (consumers) -> high inflation decreases the value of money -> savings will suffer as this money will not be able to purchase as much as before Wage - price spiral -> when price level increases, demand for higher wage increases -> workers try to maintain their living standards -> increase costs to firms -> so firms increase price to maintain profit margins Disruption in business planning (firms) -> uncertainty for firms -> unsure about future budgets and investment -> E.g. if they think costs are rising, they might reduce investment Economic growth and unemployment -> when price rises -> people spend less -> growth declines as output decreases -> unemployment rises as demand for labour falls

3. 2.1.4 Unemployment

3.1. Unemployment = number of people who are of working age but are not in work, who are actively seeking a job in the last 4 weeks and are ready to work in the next 4 weeks

3.2. Measures of unemployment

3.2.1. The claimant count counts the number of people claiming unemployment benefits e.g. JSA

3.2.2. ILO (International Labour Organisation) Based on a survey of 60,000 households. Individuals that are considered as unemployed must: - have been out of work for 4 weeks - be able and willing to start working in the next 2 weeks - over age of 16

3.2.3. Why is ILO a better measurement? Claimant count does not reflect the true value of unemployment -> not all unemployment will claim and some are deterred as they cannot prove that they are looking for works ILO includes all types of unemployment, and all who are not eligible for JSA

3.3. Under - employment

3.3.1. Under - employment = people who have jobs, but would prefer to work longer hours -> E.g. part-time or zero hours contracts

3.4. The significance of changes in the rates of:

3.4.1. Employment Increase in income -> increase consumption -> increase in AD -> economic growth Increase income -> government taxation revenue increases

3.4.2. Unemployment Firms: ^unemployment -> firms have larger supply of labour -> wages decreases -> decreases cots of production Firms: ^unemployment -> consumption decreases as they have less disposable income -> firms lose profits. However, inferior goods producer may benefit Government: ^unemployment -> spend more benefits -> opportunity costs as it could have spent elsewhere Government: receives less revenue from income tax due to less disposable income

3.4.3. Inactivity Inactivity = people who are not in work, but do not satisfies the criteria for ILO -> e.g. retired, children, disabled If the number of inactive increases -> size of labour force will decrease -> productive potential of economy decreases

3.5. Causes of Unemployment

3.5.1. Structural unemployment Occurs when there is a long-term decline in demand for G/S in an industry -> fewer jobs as demand for labour decreases Changes in the structure of the economic activity -> E.g. UK shift towards tertiary sector and away from primary and secondary -> periods of time when supply of labour > demand for labour -> workers that don't have transferable skills will remained unemployed in the long run Globalisation: e.g. manufacturing sector moves abroad to countries with lower labour costs -> worker trained for these jobs will become unemployed as industry has declined

3.5.2. Frictional unemployment The time between leaving a job and looking for another job To find a vacancy, apply for jobs e.g. graduating from uni

3.5.3. Seasonal unemployment unemployment caused by changes in demand for labour during peak and off-peak seasons E.g. skii instructors, X mas staffs

3.5.4. Cyclical unemployment occurs due to change in the stages of business cycle Recession: AD decreases -> ^cyclical BOOM: AD increases -> decrease in cyclical Increase in productivity each workers can produce a higher output -> fewer workers are needed to produce the same quantity -> unemployment^

3.5.5. Real wage inflexibility caused by the real wage rate being set above equilibrium wage causing supply of labour > demand for labour Labour market is in disequilibrium -> wage rate has been pushed up to W1 -> supply of labour > demand for labour as firms have less incentive to employ workers at a high wage rate -> divergence=unemployment due to increase in NMW

3.6. The significance of migration and skills for employment and unemployment

3.6.1. Migrants are usually of working age and contribute positively to economic growth -> *they are less likely to claim benefits as they don't qualify for govt. benefits ADVANTAGES They can fill skills gaps -> take up jobs that local don't want to do contribute to economic growth -> value of output increases increase in consumption DISADVANTAGES May results in lower wage rates as migrant increases supply of labour -> low-skilled workers maybe competed out of jobs as migrants are more well-motivated and are prepared to work for a lower wage rate -> ^unemployment of low-skilled

3.6.2. Skills required by firms are increasing in complexity over time -> Job Seekers will find the job markets very competitive as vacancies are filled by higher skilled workers Solution: Training and eduction to solve regional unemployment

3.7. The effects of unemployment

3.7.1. Consumers Consumption decreases due to lower incomes -> lowers standard of living

3.7.2. Firms Low income -> decrease in consumption -> firms will lowers price -> decrease in profits gained and decrease in revenue ADVANTAGE: increase in unemployment -> more choices and variety available workers needed

3.7.3. Workers suffer from loss of income during the time they are frictionally unemployed

3.7.4. Governments Increase in welfare spending + unemployment benefits -> taxation revenue decreases as they could have paid more income tax -> increase in tax charged to workers and consumers Spend on helping the unemployed to find jobs -> Job Centres

3.7.5. Society Unemployment affects national happiness -> e.g. despair, unhappy -> forces people to live their lives in a way they don't wish to-> decrease the standard of living which could lead to alcohol abuse, crime, mental health, crime and violence

4. 2.1.5 Balance of payments

4.1. Components of balance of payments

4.1.1. = A record of all financial transactions made between consumers, firms and the government between one country with other countries Exports = G/S sold to foreign countries -> positive in the blanca of payments -> inflow of money Imports= G/S bought from foreign countries -> negative -> outflow of money

4.1.2. 1. The current account (balance of trade)

4.1.3. 2. The capital account

4.1.4. 3. The financial account

4.2. Current account

4.2.1. Current account of the balance of payments 1. Trade in goods 2. Trade in services 3. International flows (PRIMARY INCOME) e.g. wages, dividends, profits, interest 4. Transfers (SECONDARY INCOME) e.g. contribution to EU budget, foreign aid

4.2.2. Deficits and surpluses Current account surplus -> X>M -> low transfers out of economy -> high international flows coming from abroad Current account deficit -> M>X -> High transfers out of economy -> low international flows coming from abroad UK has a surplus with services and deficit with goods MONEY IN/SELL -> EXPORTS MONEY OUT/BUY -> IMPORTS

4.2.3. Current account imbalances and other macroeconomic objectives Main macroeconomic objectives STABLE economic growth LOW unemployment LOW inflation (2%) BALANCE current account of the balance of payments Current account SURPLUS (X>M) RAPID economic growth -> X increases -> AD increases LOW unemployment -> X increases -> demand for labour increases HIGH inflation target because of an increase in AD causes PL to rise (inflation) POOR environmental quality -> due to increase in X -> more pollution INCREASE income INEQUALITY -> increase X -> rich who own FOPS get richer Govt. spending DECREASES -> low unemployment -> less spend on benefits -> increase taxation revenue -> govt. budget is in SURPLUS Current account DEFICIT (M>X) DECLINE in economic growth -> demand for X decrease -> AD decrease HIGH unemployment -> demand for X decrease -> demand for labour decrease DEFLATION -> due to decrease in AD -> PL decrease -> only useful if LOW deflation POSITIVE impact on the environment -> decrease in X -> less pollution INCREASE in income INEQUALITY -> because of increase in unemployment -> BUT depends on the govt. benefits to help the unemployed INCREASE in govt. spending -> increase in benefits for the unemployed -> reduce taxation revenue -> govt. budget is in DEFICIT

4.2.4. The interconnectedness through international trade International trade -> countries become more independent -> economic conditions in one country affect another country E.g. if the UK's main export market, e.g. EU faces a downturn -> consumers in the EU are less affordable -> demand for UK G/S will fall