Key performance indicators:
Economic growth: in the short run, an increase in real GDP, and in the long run, an increase in productive capacity, that is, in maximum output that the economy can produce
Unemployment: A situation where people are out of work but are willing and able to work
Labour force: The people who are employed and unemployed, that is, those who are economically inactive
Economically inactive: People of working ago who are neither employed nor unemployed
Inflation: A sustained rise in the price level; the percentage increase in the price level over a period of time.
Hyperinflation: an inflation rate above 50 per cent.
Deflation: A sustained fall in the general price.
Balance of payment: a record of money flows coming in and going out of a country.
Distributed income: Government will redistribute, and taxing the rich and providing state benefits for the poor → Stability
Promote economic stability: fluctuations in output, employment, and inflation → Long term growth potential in the economy.
Current trends:
UK: Economic growth by combining low unemployment and stable inflation → UK's AS curve is more elastic. Can improve by:
Better transport infrastructure
Higher economic activity rate
Better education
Higher productivity
More spending on research
Development and more innovation
Inflation rates fallen and stays low:
governments monetary policy
Strong pound
Competitions → push firms to keep cost and price low
Technology
Immigration of workers
Elastic: Responsive to a change in market conditions.
Inflation rate: The percentage increase in the price level over a period of time.
Objectives of government economic policy:
Economic growth:
Sustainable economic growth: Economic growth that can continue over time and does not endanger future generations' ability to expand productive capacity.
Trend growth: The expected increase in potential output over time. It is a measure of how fast the economy can grow without generating inflation.
Employment and unemployment
Full employment: A situation where those wanting and able to work can find employment at the going wage rate
Inflation: a low and consistent rate of inflation
Balance of payment:
Current account deficit: When more money is leaving the country than entering it, as a result of sales of its exports, income and current transfers from abroad being less imports and income and current transfers going abroad.
Economic stability: Unstable → Under perform in terms of economic growth.
Income redistribution: Taxing rich people and give benefits for the poor people.
GDP and real GDP
GDP: (Gross domestic product) The total output of goods and services produced in a country.
Real GDP: The contras output measured in constant prices and so adjusted for inflation.
Nominal GDP: output measured in current prices and so not adjusted for inflation
Calculate: Difference in output from last year to this year/Last year output x 100%
Measuring economic growth:
Percentage change in real GDP(change in a countrys output)
Production and productivity:
Labour productivity: Output per worker
Difficulties in interpreting changes in Real GDP:
Rise In population → rise in output.
Informal economy: Economic activity that is not recorded or registered with the authorities in order to avoid paying tax or complying with regulations, or because the activity is illegal.
Economy of scale: The advantage of producing on large scale, in the form of lower long-run average cost.
Measuring unemployment
Unemployment rate: The percentage of the labour force who are out of work:
Calculation: Th eUnemployed x 100% / labour force
Labour force survey: a measure of unemployment based on a survey using the ILO definition of unemployment.
International labour organisation(ILO) A member organisations of the United Nations that collects statistics on labour market conditions and seeks to improve working conditions.
Claimant count: A measure of unemployment that includes those received unemployment-related benefits.
Measuring inflation:
Consumer prices index: A measure of changes in the price of a representative basket of consumer goods and services. Differs from the retail prices index (RPI) in methodology and coverage.
Calc figures into index numbers: Actual figure(of product) x 100 / Base year figure
The CPI and other measured of inflation
Retail prices index(RPI): 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. Differs from the consumer prices index(CPI) in methodology and coverage.
The structure of the current account of the balance of payments
The current account: Trade of goods&services, (investment-)income and transfers of money.
The capital and financial accounts: movement of direct investment.
Net errors and omissions: info to ensure that the balance of payments does balance.
Causes of economic growth:
Increase in AD
A cut in income tax
A rise in consumer confidence
Increase in government spending or net investment
The causes of unemployment
Cyclical unemployment: Unemployment arising from a lack of aggregate demand.
Structural unemployment: unemployment caused by the dicline of certain industries and occupations due to changes in demand and supply.
Frictional unemployment: Short term unemployment occourinwhen workers are in-between jobs.
The causes of inflation:
Demand-pull inflation: increases in the price level caused by increases in AD
Cost-push inflation: Increases in the price level caused by increases in the cost of production.
The consequences of unemployment
Lost output
Lost tax revenue
Government spending on unemployment benefits
Pressure on other forms of government spending
Cost to the unemployed
Hysteresis(unemployed causing unemployment)
Long-term unemployment: Unemployment lasting for more than a year.
The benefits of unemployment
Give people time to a more rewarding job
Easier for firms that wants to expand
Reduce demand-pull and cost-push inflation
The consequences of inflation
Fall in the value of money
Menu costs: Cost of changing prices due to inflation
Shoeleather costs: Costs in term of the extra time and effort involved in reducing money holdings
Administrative costs
Inflationary noise: The distortion of price signals caused by inflation.
Random redistribution of income: Real intrest rate: nominal intrest rate – inflation rate.
Fiscal drag: Peoples income being dragged into higher tax bands as a result of tax brackets not being adjusted in line with inflation
Uncertainty
Inflation causing inflation
Loss of international competitiveness
The benefits of inflation:
Encourage firms to increase output
Psychologically, we feel better when out income increase even if this is mating with the prices.
Market operate more efficiently and reduce unemployment
Deflation:
Country's competitiveness will increase
Can lead to higher unemployment
The benefits of economic growth:
Def:
International Monetary Fund(IMF) An international organisation that helps co-ordinate the international monetary system.
Word Trade Organisation (WTO): An international organisation that promotes free international trade and rules on international trade disputes.
Determination of exchange rates:
Def:
Exchange rate: The price of one currency in terms of another currency or currencies.
Monetary Policy Committee (MPC) A committee of the Bank of England with responsibility for setting the interest rate in order to meet the governments inflation target.
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