Indicators of economic performance:
• Low unemployment
• Inflation
• Balance of payments
• Distribution of income
Objectives of government economic policy:
1) Sustainable economic growth, that is economic growth which can continue over time
2) Full employment
3) Low and stable inflation
GDP
Real GDP which is GDP after adjusted for Inflation equals: Nominal GDP x base year price index / current year price index
Difficulties in interpreting changes in Real GDP:
• Distribution of income
• Purchasing Power Parity
• Home production
• Existence of informal economy
Measuring unemployment
The unemployed x 100% / labour force
Two measures in the UK:
Labour Force Survey – a measure of unemployment based on a survey
Claimant Count- a measure of unemployment that includes those receiving unemployment – related benefits.
Measuring inflation
Consumer Price Index - a measure of changes in the price of a representative basket of consumer goods and services.
How to calculate:
1. Choose a base date
2. Collect price data for that date
3. Calculate the average
4. Express the average for the base date as a number of 100
5. Compare other dates to the base date to make a price index and compare price changes
Difficulties:
- Content of the basket of goods
- Weightening
Retail Price Index – measure of inflation that is used for adjusting pensions and other benefits to take account of changes in inflation and frequently used in wage negotiations
Differences:
- CPI includes housing costs ( mortgage, interests, council tax), foreign students’ fees, stockbrokers charges
- CPI excludes road fund license and TV license
- In CPI weights based on spending by all private households, foreign visitors, while RPI weights based on expenditure by private households only, excluding highest income households, pensioners
Structure of current account of the balance of payments
Trade in goods = visible balance – records earnings from exports, expenditure on imprts
Trade in services = invisible balance – includes all the services
Income - investment income
Transfers – transfer of money made and received by the government and individuals
Causes of unemployment
Cyclical unemployment – arising from a lack of AD
Structural unemployment – caused by the decline of certain industries and occupations due to changes in demand and supply
Frictional unemployment – short term unemployment occurring when workers are in between jobs
Causes of inflation
Demand pull – caused by increase in AD
Cost push – caused by increase in the cost of production
Causes of current account deficit
- Country’s residents spend more on goods and services from abroad than overseas residents spent on the country’s products
- A net outflow of investment
How to reduce deficit:
- Use import controls : tariffs, quotas, administration restrictions
- Devalue currency
- Deflation -> decrease demand for Imports
Consequences of unemployment:
- Lost output
- Lost tax revenue
- Government spending on unemployment benefits
- Pressure on other forms of government spending
- Hysteresis – unemployment causing unemployment
Consequences of inflation:
- Menu costs – costs of changing priced due to inflation
- Shoeleather costs – costs in terms of the extra time and effort involved in reducing money holdings
- Inflationary noise – the distortion of price signals caused by inflation
- Random redistribution of income
- Fiscal drag -> higher taxes
- Administrative costs
- Uncertainty
- Inflation causing inflation
• Low unemployment
• Inflation
• Balance of payments
• Distribution of income
Objectives of government economic policy:
1) Sustainable economic growth, that is economic growth which can continue over time
2) Full employment
3) Low and stable inflation
GDP
Real GDP which is GDP after adjusted for Inflation equals: Nominal GDP x base year price index / current year price index
Difficulties in interpreting changes in Real GDP:
• Distribution of income
• Purchasing Power Parity
• Home production
• Existence of informal economy
Measuring unemployment
The unemployed x 100% / labour force
Two measures in the UK:
Labour Force Survey – a measure of unemployment based on a survey
Claimant Count- a measure of unemployment that includes those receiving unemployment – related benefits.
Measuring inflation
Consumer Price Index - a measure of changes in the price of a representative basket of consumer goods and services.
How to calculate:
1. Choose a base date
2. Collect price data for that date
3. Calculate the average
4. Express the average for the base date as a number of 100
5. Compare other dates to the base date to make a price index and compare price changes
Difficulties:
- Content of the basket of goods
- Weightening
Retail Price Index – measure of inflation that is used for adjusting pensions and other benefits to take account of changes in inflation and frequently used in wage negotiations
Differences:
- CPI includes housing costs ( mortgage, interests, council tax), foreign students’ fees, stockbrokers charges
- CPI excludes road fund license and TV license
- In CPI weights based on spending by all private households, foreign visitors, while RPI weights based on expenditure by private households only, excluding highest income households, pensioners
Structure of current account of the balance of payments
Trade in goods = visible balance – records earnings from exports, expenditure on imprts
Trade in services = invisible balance – includes all the services
Income - investment income
Transfers – transfer of money made and received by the government and individuals
Causes of unemployment
Cyclical unemployment – arising from a lack of AD
Structural unemployment – caused by the decline of certain industries and occupations due to changes in demand and supply
Frictional unemployment – short term unemployment occurring when workers are in between jobs
Causes of inflation
Demand pull – caused by increase in AD
Cost push – caused by increase in the cost of production
Causes of current account deficit
- Country’s residents spend more on goods and services from abroad than overseas residents spent on the country’s products
- A net outflow of investment
How to reduce deficit:
- Use import controls : tariffs, quotas, administration restrictions
- Devalue currency
- Deflation -> decrease demand for Imports
Consequences of unemployment:
- Lost output
- Lost tax revenue
- Government spending on unemployment benefits
- Pressure on other forms of government spending
- Hysteresis – unemployment causing unemployment
Consequences of inflation:
- Menu costs – costs of changing priced due to inflation
- Shoeleather costs – costs in terms of the extra time and effort involved in reducing money holdings
- Inflationary noise – the distortion of price signals caused by inflation
- Random redistribution of income
- Fiscal drag -> higher taxes
- Administrative costs
- Uncertainty
- Inflation causing inflation
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