4.2.1 – Measurement of Macroeconomic Performance


    Economics four main indicators to see how the economy is doing are:
    1. Rate of growth
    2. Rate of inflation
    3. Stable Balance of payments
    4. Level of unemployment

    Conflicts Between Objectives in Short Run cause a Trade-Off
    1. Inflation V Unemployment – when economy is reaching full capacity, the demand for workers
    increases causing a wage rise and this extra cost is passed on to consumers causing cost-pull inflation
    2. Economic Growth v Sustainability – new factories raises pollution levels and amount of waste. Theres
    an increase in natural resource usage. Ecosystems are damaged by industrialisation
    3. Economic Growth v Inflation – large price increases due to increase in demand causing high inflation.
    Trying to keep inflation low can restrict growth i.e. high interest rates discouraging investment
    4. Inflation v Balance of Payments – high inflation= high interest rates = more foreign investment into
    banks= stronger currency= Imports cheaper than exports= larger Budget and BoP deficit
    5. Economic Growth v Reduction in Wealth Inequality – Growth increase Inequality

    Measuring economic growth
    GDP is the measure of economic growth
    • Economic growth can be measured by the change in national output over time
    • National output is all goods and services produced by a country & measured in 2 ways:
    o volume – quantity of good and services produced
    o value – value of goods and services produced
    • National output= national expenditure=national income
    • Economic growth is the speed of national output
    o Positive growth = booms
    o Negative growth = recession
    o Economic depression = sustained economic downturn

    • Some GDP growth may be due to inflation
    o Nominal GDP = not adjusted for inflation
    o Real GDP = adjusted for inflation
    ▪ Calculations are on the right
    • GDP per capita indicates standard of living in a country
    GDP per Capita = Total GDP or GNI or GNP / Population Size
    • Higher GDP per capita means higher standard of living
    • Gross National Income= GDP + net income from abroad
    • Gross National Product = Total output of the citizens of a country

    Measuring inflation
    • Inflation – sustained rise in average price of goods and services over time due to a fall in the value of money
    • Inflation can be positive or negative
    o Inflation = rise in the average price of goods and services
    o Deflation = fall in average price
    o Disinflation = slowing down of inflation
    o Hyperinflation = rapid price rise and value of money falls
    Two measurements for Inflation:
    • RPI – retail price index (Two surveys used to calculate)
    o First survey – used to find what people spend proportion of income on used to work out relative weighting of
    each item
    o Second survey – measures change in price of 700 commonly used goods and services
    • The price changes are multiplied by the weightings and converted to index numbers
    • CPI – consumer price index
    o larger population is used for CPI
    o CPI tends to be lower than RPI
    • RPI excludes households in top 4% of incomes
    • CPI covers larger population excludes mortgage interest payments and council tax
    • Surveys can be inaccurate
    • Basket of goods in RPI change once a year so may miss short term changes
    RPI and CPI are important for Government Policies
    • They help determine wages and state benefits
    o Employers and trade unions use for wage negotiations
    o Government use to decide on increase in state pensions and welfare benefits
    o If UK CPI is higher than other countries they can sell it for more due to less price competition
    o Exports will fall and imports, made relatively cheaper by inflation, will increase
    Measuring unemployment
    • The level of unemployment is the number of people looking for a job but can’t find one
    • The rate of employment is the number of people out of work as a percentage of the labour force and used as a
    comparison between countries
    There are Two Ways of Measuring Employment:
    1. The Claimant Count- number of people claiming unemployment related benefits known as Jobseekers Allowance
    • Advantage –
    o the data is easy to obtain
    o updated monthly and no cost
    • Disadvantages –
    o Can be manipulated by government so seem smaller
    o excludes people looking for work but not eligible to claim JSA
    2. The Labour Force Survey- number of people claiming unemployment related benefits known as Jobseekers Allowance
    • Advantages –
    o Data is more accurate
    o internationally used measure
    • Disadvantages –
    o Less up to date
    o Expensive and may be unrepresentative of entire population
    Unemployment comes at a cost to economy
    • High rate of unemployment suggest economy is doing badly
    • Unemployment causes lower incomes and less spending causing firms to reduce prices making less profit
    • Unemployment means unused labour so fewer goods and services produced
    • Government had extra cost like welfare benefits so less tax is paid
    • More crime

    Measuring the Balance of Payments
    Balance of payments Refers to International Flows
    • It records
    o Flow of money out of country (payment for imports)
    o Flow of money into country ( payments for exports)
    • It’s the value of imports and exports calculated not volume
    • If price changes but volume remains the same then the value of exports and imports will change
    There are Four Sections to the Current Account
    • Records the international exchange of goods and services:
    o Trade in goods (visible goods like cars)
    o Trade in services (invisible goods like tourism, transport
    o International flows of income earned as salaries, interest, profit and dividends (interest from foreign country)
    o Transfers of money from one person or government to another country
    The Balance of Payments Isn’t Always Balanced
    • The flows of money into a country may not balance the flows of money out
    o Money in exceeds out = surplus
    o Money out exceeds in = shortage
    • Recently UK has deficit in balance of payments. Usually it has a surplus in invisible trade and large deficit in visible trade
    • Deficit isn’t a bad thing but shows competitiveness
    • Governments avoid long deficit



    Index Numbers
    • Index numbers make percentage change comparisons
    over time
    o The base year is set at 100
    o Numbers below shoes % decrease
    o Numbers above show % increase
    • We assign weight to each commodity relative to its importance and the index number computed from these weights is
    called a weighted index number
    Change in Price Levels using Index Numbers

    Purchasing Power Parity – compares Living Standard between countries
    • It’s difficult to use GDP, GNI and GNP as countries have different currencies so PPP is used
    • Purchasing power, it compares the quantity of the currency needed to purchase a given unit of a good, or basket of
    goods and services
    • High GDP means economic performance is strong and high GDP per capita means a high Standard of Living
    o The limitations of using GDP:
    ▪ Hidden economy – doesn’t appear in official figures
    ▪ Public spending – some governments provide more benefits
    ▪ Income inequality – larger income gap between rich and poor
    ▪ Hours of labour – some countries have longer working hours
    ▪ Statistical inaccuracies – large amounts of data
    ▪ Externalities



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