2.1 Measures of Economic Performance

• Economic growth occurs when there is a rise in the value of Gross Domestic Product (GDP)
• Real GDP is the value of GDP adjusted for inflation
• Nominal GDP is the value of GDP without being adjusted for inflation
• Total GDP is the combined monetary value of all goods and services produced within a country's borders during a specific time period
• GDP per capita is the value of total GDP divided by the population of the country
• Volume of GDP is GDP adjusted for inflation. It is the size of the basket of goods and the real level of GDP
• Value of GDP is the monetary value of GDP at prices of the day. It is the nominal figure and can be calculated by volume times current price level
• National income can also be measured by : Gross National Product (GNP) & Gross National Income (GNI)
• Economic growth is the rate of change of output, indicating an increase in the long term productive potential of the country, leading to more goods and services produced
• Gross Domestic Product (GDP) is the total value of goods and services produced in a country within a year, serving as an indicator of the standard of living
• GDP per capita grows when national output outpaces population growth, providing more goods and services per person
• Real GDP adjusts for inflation, while nominal GDP does not
• Gross National Income (GNI) includes net overseas interest payments and dividends, reflecting what a country earns from overseas investments
• Gross National Product (GNP) accounts for goods and services produced by citizens domestically and overseas
• Comparing economic growth over time and between countries requires considering real, per capita figures to ensure accurate comparisons
• Purchasing Power Parities (PPP) compare the cost of a typical basket of goods in different countries, providing a more accurate comparison of living standards
• National income statistics may be inaccurate due to inefficiencies in data collection, black market activities, and errors in calculating inflation rates
• Inequalities in income distribution, quality of goods and services, and differences in currencies can impact the accuracy of GDP comparisons
• National happiness is influenced by factors beyond income, such as health, life expectancy, and social relationships
• Inflation is the general increase in prices, while deflation is the fall of prices, and disinflation is a reduction in the rate of inflation
• Indices like the Retail Price Index (RPI) and Consumer Price Index (CPI) help convert nominal figures into real figures for comparisons
• • Prices are weighted based on how much is spent on each item
• Consumer Price Index (CPI):

  • Based on prices of 710 goods and services from 20,000 shops in 141 locations and online sites
  • Prices are updated monthly
  • Collectors visit the same retailers to monitor identical goods
  • New items added yearly, such as microwaveable rice and nail varnish
  • Some items are removed, like organic carrots
  • All prices combined using average household spending pattern to produce an overall price index
  • Average household spending determined through Living Costs and Food Survey, where 5,500 families keep diaries of spending over a fortnight
• Limitations of CPI:

  • Cannot account for every good sold in the country
  • Represents an average rate of inflation, not totally representative
  • Does not include housing prices
  • Difficult to make historical comparisons
  • Some argue all inflation indices overestimate inflation due to quality improvements in goods and services
• Retail Price Index (RPI):

  • Similar to CPI but includes housing costs like mortgage and council tax
  • CPI generally lower than RPI
  • RPI excludes top 4% of income earners and low-income pensioners
  • RPI no longer considered best method, national statistic status removed
• Causes of inflation:

  • Demand pull: Inflation caused by increase in aggregate demand
  • Cost push: Inflation caused by decrease in aggregate supply
  • Growth of money supply: Too much money in the economy leads to inflation
• Effects of inflation:

  • Consumers:
  • Decrease in living standards if incomes do not rise with inflation
  • Debtors benefit, creditors lose
  • Psychological effects on spending behavior
  • Firms:
  • Higher inflation makes British goods more expensive and less competitive
  • Deflation leads to postponed purchases and reduced business confidence
  • Difficulty in predicting inflation affects future planning and costs
• Governments:

  • Failure to adjust taxes with inflation affects real government revenue
  • Failure to adjust personal income tax allowances affects taxpayers
• Workers:

  • Lack of yearly pay rises in line with inflation leads to decreased living standards
  • Deflation may cause job losses
  • Indexation can help workers plan for inflation but may further increase inflation
• Unemployment:

  • Claimant Count: Number of people receiving benefits for being unemployed
  • International Labour Organisation and UK Labour Force Survey definitions of employment and unemployment
  • Economically active vs. workless
  • Underemployment: Part-time or zero-hour contracts, self-employed individuals not reflected in unemployment statistics
• Types of unemployment:

  • Frictional unemployment: Due to people moving between jobs, not a serious problem
• Significance of changes in activity:

  • Increases in inactivity decrease productive potential of the country
  • Decreases in inactivity may result in more unemployment if no jobs available
• Synoptic point:

  • Inflation has microeconomic impacts on individuals like firms, consumers, and workers, while the inflation figure itself is a macroeconomic concept
• Types of Unemployment:

  • Frictional unemployment:
  • People who are in the labour market or have left their previous job
  • May take time to locate and gain a job they are willing to accept
  • Short-term issue
  • Structural unemployment:
  • Long-term decline in demand in an industry leading to a reduction in employment
  • Caused by factors like increasing international competition or technology
  • Lack of geographical and occupational mobility can lead to prolonged unemployment
  • Different types include regional, sectoral, and technological unemployment
• • Seasonal unemployment:
  • Some employment is strongly seasonal in demand
  • Industries like tourism only require large numbers of workers at specific times
  • Little can be done to prevent this in a free market economy
  • Cyclical unemployment:
  • Due to a general lack of demand for goods and services within the country
  • Also known as Keynesian 'demand deficient' unemployment
  • Rises during recessions or economic slowdowns
• Real wage inflexibility:

  • Unemployment due to real wages being above their market clearing level
  • Excess supply of labour
  • Minimum wage risks creating unemployment in industries with severe international competition
  • Can also be caused by unemployed workers refusing low-paid jobs due to welfare benefits
• Migration and Skills:

  Migration:

  • Increase in net inward migration leads to increased jobs
  • Immigrant workers' spending creates jobs and total employment increases
  • Can lead to lower wages, especially for lower-paid, low-skilled jobs

  Skills:

  • Economies progress over time, requiring higher skills
  • Structural unemployment caused by a lack of, or wrong, skills
  • Government intervention may be necessary to address skills shortages
  • Migrant workers may fill these shortages if their skills match
• Impacts of Unemployment:

  Workers:

  • Loss of income leading to a decline in living standards
  • Stigma of unemployment can lead to stress, marital breakdown, and physical illness
  • Long-term unemployed may find it difficult to get another job due to skill loss
  • Lower job security and fear of redundancy

  Firms:

  • Decrease in demand for goods
  • Long-term unemployment can lead to loss of skills
  • Ability to offer low wages due to lack of job options

  Consumers:

  • Areas of high unemployment may have run-down shopping centers and limited choice
  • Unemployed consumers have less to spend
• • Firms may lower prices to increase demand
• Government:

  • Reduced income results in a fall in tax revenues and higher welfare spending
  • Increase in the budget deficit
  • May need to raise taxes or cut spending on public goods like healthcare and education