What is Macroeconomics?
Involves the study of the whole economy at aggregate level
What are the 4 main objectives of government macroeconomic policy?
economic growth - increasing the amount of goods and services at a sustainable rate (2%)
Full employment - target of low unemployment is 4%
Limit inflation- 2%
Satisfactory balance of payments- imports/exports
What does GDP mean?
Gross domestic produce is the sum of all goods and services produced in the economy over a period of time e.g a year
What does real GDP mean?
A measure of all goods and services produced in an economy adjusted to inflation
What is nominal GDP?
GDP measured at the current market prices, not adjusted to inflation
What is GDP an indicator of?
Economic growth
What are the three ways of calculating GDP?
National Expenditure/AD = the revenue of all products sold
National Output = value added to each item at different sectors of production
National Income = amount of money taken in revenue across the economy
What does GDP per capita mean?
measure of living standards and is the GDP figure per person
What can GDP per capita be used to indicate?
used to indicate a country’s standard of living
the higher the GDP per capita, the higher the standard of living
What is the equation used to show GDP Per Capita?
Total GDP/ Population size
What other indicators can be used to indicate the standard of living in a country?
GNI - Gross national income - the GDP plus net income from abroad
GNP- Gross national product - total output of the citizens of a country whether or not they’re residents
What is PPP Exchange Rate and what is it used for?
PPP- Purchasing power parity, rate at which the currency of one country would have to be converted into that of another country to buy the same amount of goods and services in each country, eliminates differences in price levels
Used to show LS by showing the true worth of the two currencies when comparing LS in two countries
What does a high GDP and a high GDP per capita show?
GDP = economic growth
GDP Per Capita = country’s standard of living
What are the limitations of GDP and GDP per capita to make comparisons between countries?
extent of the hidden economy - economic activity that doesn’t appear in official figures
Income inequality between different countries
Public spending - some governments provide more benefits (unemployment benefits)
Number of hours workers have to work per week, working conditions etc
What does unemployment mean?
number of people actively seeking for a job but are unable to obtain one
What are the two ways of measuring unemployment?
claimant count - method of calculating unemployment according to the number of people claiming Jobseeker’s Allowance
Labour force survey - quarterly sample survey that provides info on UK labour market and market status
What does a high level of unemployment mean?
poor economic growth
lower incomes due to less spending
Lower rates of consumer confidence
What are the advantages and disadvantages of the claimant count?
A =
data is easy to obtain, there’s no cost in collecting the data
Updated monthly so it’s always current
D =
Can be manipulated by the government to make it seem smaller
Excludes those people who are looking for work but aren’t able to claim JSA
What are the advantages and disadvantages of the LFS?
A =
more accurate than CC
Internationally agreed measure for unemployment so easier to make comparisons with other countries
D=
less up to date than CC
Expensive to collect and put together the data
Sample may be unrepresentative of the population as a whole
What are macroeconomic indicators?
provide info from recent performance for judging the success or failure of a particular gov policy
What are some examples of macroeconomic indicators?
real GDP
real GDP Per capita
CPI
RPI
Measures of unemployment
Productivity
Balance of payments on the current account
What are lead indicators?
provide info about the future state of the economy
Provides info about consumer confidence
Examples include statistics on the number of house building starts
What is a lag indicator?
provide info about the past and current economic performance and the extent to which policy objectives have been achieved
Examples include data on GDP, current employment/unemployment
What is inflation?
persistent rise in the average price level
What does deflation mean?
continuing tendency for the average price level to fall
What does disinflation mean?
rate of inflation falling at a positive rate
What does indexation mean?
automatic adjustment of items to changes in the price level through the use of a price index
What are the two main measures of calculating inflation?
CPI - consumer prices index - official measure used to calculate the rate of consumer price inflation.
Calculates the average price increase of a basket of 700 goods/services
Retail Price index - measure used to calculate the rate of consumer price inflation
Expand on the RPI
1- a survey of around 6000 households( Living Costs and Food Survey.)
used to find out what people spend their money on, e.g. petrol. The survey also shows what proportion of income is spent on these items.
used to work out the weighting of each item — for example, if 20% is spent on transport, then a 20% weighting will be given to transport
2 - survey is based on prices — measures the changes in price of 700 of the most commonly used goods and services (the ‘basket of goods’).
items chose based on Living Costs and Food Survey (changes over time)
ensures that the basket always reflects what the average household might spend its money on.
price changes(2) X weighting(1)
converted to an index number
Expand on the CPI; (tends to be little lower than RPI)
1) Some items are excluded from the CPI:
• Mortgage interest payments
• Council tax
2) A slightly different formula is used to calculate the CPI.
3) A larger sample of the population is used for the CPI.
What are the limitations of CPI and RPI?
The RPI excludes all households in the top 4% of incomes. The CPI doesn’t include mortgage interest payments or council tax.
The information given by households in the Living Costs and Food Survey can be inaccurate.
The basket of goods only changes once a year — so it might miss some short-term changes in spending habits.
How are the CPI and RPI important for government policy?
used to help determine wages and state benefits.
Employers and trade unions use them as a starting point in wage negotiations.
government uses them to decide on increases in state pensions, and other welfare benefits.
used to measure changes in the UK’s international competitiveness.
If the rate of inflation is higher in the UK than in the other countries it trades with, then UK goods become less price competitive, as they’ll cost more for other countries to buy.
So — exports will fall, and imports, which will be made relatively cheaper by domestic inflation, will increase.
What is meant by weighting in the CPI?
Importance attached to certain items in the basket
What does a surplus on the balance of payments mean?
sell more exports than we buy in
Exports > imports
Deficit is the opposite
Why is a deficit on the balance of paying not necessarily negative?
provides consumers with a wider choice of goods
Cheaper/ higher quality imports/ raw materials
Reduces costs
What is a trade off?
not able to meet all objectives but setting an acceptable combination (2% inflation and 4% unemployment)
What are some examples of main policy conflicts?
between policy of FE and SFBOP
Achieving FE and controlling inflation
Increasing economic wealth and ensuring it’s equally spread
High LS now and in the future
What is an index number?
a number used in an index (CPI) to enable accurate comparisons over time to be made
What is the importance of an index number?
Index numbers are a useful way of expressing economic date time series and comparing / contrasting information
An index number is a figure reflecting price or quantity compared with a base value
The base value always has an Index number of 100
The index number is then expressed as 100 times the ratio to the base value
What are index number useful for?
making comparisons over time
The index number for the base year is 100
A 3% rise would mean the index number rose to 103 in Y2
What is the equation for an index number?
Number in current year/ Number in base year X 100
What is a base year?
year in which a series of data begins to be calculated
Year against the performance of an index is measured
What is national income data used for?
to assess the overall economic performance of a country
What are the uses of NI?
GOVERNMENT DECISIONS - National Income helps Governments make decisions regarding fiscal, monetary and supply side policies.
TAX RETURNS- Estimate the tax returns that are expected.
LIVING STANDARDS - National Income helps Governments measure the standard of living within an economy.
How is income inequality measured?
Through the use of a Lorenz curve and the gini coefficient
What is this?
Used to show income inequality
What is the gini coefficient?
What is the HDI?
Used measure and rank countries’ levels of social and economic development.
combines indicators in three equally weighted sections:
Health (as measured by life expectancy).
Education (as measured by average and expected years in school).
Standard of living (as measured by real GNI per capita, using the principle of purchasing power parity, PPP).
The HDI is used in different ways. Expand on this.
used to measure changes in development levels over time in a country.
used to compare the levels of development between countries.
Countries are ranked in order with country number 1 being the highest
Above 0.8 indicates a high level of human development.
Between 0.8 and 0.5 suggests a medium level of human development.
Below 0.5 shows a low level of human development.
What are the critics of the HDI?
long life expectancy is not the same as a high quality of life
Measuring the average number of years people spend in school doesn’t measure the quality of teaching or how well people learn what they’re taught.
Using GNI-per-capita figures can lead to inaccurate comparisons — for example, GNI per capita doesn’t include the hidden economy, and this tends to make up a larger proportion of the economy in less developed countries.
The HDI figure alone doesn’t measure the extent of inequality in a country — a country with a satisfactory HDI rank might have a few very wealthy people and a large number of very poor people.