4.2.1.1
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
4.2.1.2
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
Limitations
• 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
4.2.1.3
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
4.2.1.4
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