Measures of Economic Performance Economic and Growth Inflation

Measures of Economic Performance Economic and Growth Inflation

Measures of Economic Performance Economic and Growth Inflation Unemployment Balance of Payments Non-Economic Measures

Social Investment Sustainability Taxation Quality of Life Economic Performance Macroeconomics: The study of the interrelationships between variables at the aggregate (whole economy) level Aggregate means total so we will look at things such as total unemployment in an economy, total spending

etc Examples of how the economy is monitored? Measures of Economic Performance Economic Measures:

Inflation Unemployment Growth (GDP) Balance of Payments Sustainable Growth Income Equality Non-Economic Measures:

Quality of Life Health Education What is Economic Growth? As Industry, Commerce and Governments invest in machinery and people, the

country can produce more Incomes rise, giving us more spending power Our increased spending encourages firms to produce more Hence the economy grows A simplified Circular Flow of Income FIRMS (suppliers of goods and services,

demanders of factor services) HOUSEHOLDS (demanders of goods and services, suppliers of factor services) fig (3) Factor demand

(2) Producer supply Factor services

P Goods P S PF 2 S

P2 P1 PF 1 D2 D2 D1 O

(4) Factor supply QF1 QF2 D1 O Q

Factor services Q1 Q2 Q Goods

fig (1) Consumer demand The Circular Flow of Income Withdrawals/Leakages net saving (S)

net taxes (T) import expenditure (M) Injections investment (I) government expenditure (G) export expenditure (X) The circular flow of income INJECTIONS Investment (I)

Factor payments Consumption of domestically produced goods and services (Cd) Export expenditure (X)

Government expenditure (G) BANKS, etc Net saving (S) GOV. ABROAD

Import Net expenditure (M) taxes (T) WITHDRAWALS fig Economic Growth (GDP) Gross Domestic Product:

The total value of all goods and services produced in the UK during one year Primary (agriculture), secondary (manufacturing) and tertiary sectors (services) Real versus nominal output Can be viewed as being national income, national output or aggregate demand (AD) These should all be the same as people spend what they earn and are paid for providing goods and services In 2012, the value of GDP for the UK was around

1.45 TRILLION pounds Economic Growth (GDP) Potential Growth the overall capacity of the economy (i.e. what the economy could produce if it used all its resources) Actual Growth the annual percentage increase in output Nominal Growth the growth in output not including any adjustment for price changes expressed as current prices (the price reigning at the time of the measurement)

Real Growth growth in GDP adjusted to take account of changes in the price level expressed as constant prices The Business Cycle Illustrates growth in actual and potential output Shows: fluctuations in actual growth the phases of the business cycle the upturn the slowdown

the boom the recession The Business Cycle Growth Potential Growth Actual Growth Boom/Overheating Growth/Upturn

Decline/slowdown Recession/Slump Time The Business Cycle Potential output National output Trend

output Actual output DEFINITION: O Time The business cycle is a phenomenon whereby

GDP fluctuates around its underlying trend, following a regular pattern UK performance What does the above diagram tell us? Achieving Economic Growth Some examples of how to increase growth:

Firms building new factories and using machinery (capital goods) Government or firms spending on education or training Spending on infrastructure Firms investing in RnD Inflation Definition: the sustained increase in the general price level over a period of time It measures the purchasing power of money

If Inflation rises this means prices are rising and so your purchasing power falls Calculating Inflation Now measured by the CPI Consumer Price Index CPI based on average price of a bundle of 700 goods and services measured at different points in time from a sample of 7000 households Each household completes a living costs and food survey Each good is weighted according to typical spending Inflation does not fall it slows down or speeds up!

A fall in the price level is termed deflation The RPI retail price index was used prior to the CPI RPI includes mortgage interest payments more relevant for UK? CPI more useful for international comparisons Recent UK Inflation What does the above diagram tell us? Real and Nominal Measurements We typically use money values to measure economic

output, using e.g. the prices of goods We must however be aware that prices of goods change over time A NOMINAL value is the value of an economic variable based on current prices A REAL value of an economic variable takes account of changing prices over time REAL = NOMINAL INFLATION So if I get a 5% pay rise, and CPI inflation is 2%, then my NOMINAL rise is 5% and my REAL rise is 3%.

Inflation Anticipated and Unanticipated inflation: affects the outcome of economic decision making if anticipated, changes in prices can be accommodated, if unanticipated can cause shocks and problems to arise Causes of Inflation Demand-Pull

Where an increase in demand causes firms to raise prices in order to take advantage and increase profits Causes an increase in AD (aggregate demand) Cost-Push Where an increases in costs is passed onto consumers forcing prices up to maintain profits (labour, raw materials, imported costs, etc.) Causes an increase in AS (aggregate supply)

Costs of Inflation 1. Menu costs the cost of having to change prices vending machines, labels, etc. 2. Wealth costs inflation affects those on fixed incomes and redirects wealth to those in strong bargaining positions or with physical assets 3. Planning costs businesses uncertain about future price changes may be reluctant to invest hits economic growth 4. Fall in Competitiveness inflation at a higher rate in the UK than elsewhere hits domestic

competitiveness and affects the balance of payments 5. Social Instability - At very high rates, confidence in the currency is eroded and production and exchange can be stifled can lead to food riots, looting and violence Hyper Inflation The following photographs help illustrate how money can become worthless when inflation gets out of control. Hyper Inflation Title: Money Kite. Date: 1922. Description: A boy with a kite made of banknotes in

Germany, during the depression when escalating inflation rendered much currency worthless. Copyright: Getty Images, available from Education Image Gallery (http://edina.ac.uk/eig/) Hyper Inflation Title: Overflowing Riches. Date: 1922. Description: A shopkeeper using a tea chest to store money which won't fit in the cash register during Germany's high inflation. Copyright: Getty Images, available from Education Image Gallery (http://edina.ac.uk/eig/) Hyper Inflation

Title: The Value Of Money Date: circa 1923 Description: Children using notes of money as building blocks during the 1923 German inflation crisis. Copyright: Getty Images, available from Education Image Gallery (http://edina.ac.uk/eig/) Zimbabwe more

recently $306 million Unemployment General definition: The number of people of working age who are without a job Two measures:

The Claimant Count those actively seeking work and claiming job seekers allowance ILO (International Labour Organisation) labour force survey the number of people available for work and actively seeking employment Differences in types Claimant Count

Claiming Job seekers allowance 18 to 65 years Have to prove that you are looking for work Stigma attached doesnt fully reflect unemployed ILO

Out of work for 4 weeks, ready to start in 2 Face to face interview then phone survey of 60,000 households 16 to 65 year olds Published every month out of date Recent Unemployment in UK What does the above diagram tell us? Types of Unemployment

Frictional Unemployment Short term unemployment where people become unemployed between jobs Demand Deficient/Cyclical Unemployment When in a recession there is very little demand for goods and services and as labour is derived unemployment increases Technological Unemployment caused where people are put out of work by changes in technology Seasonal Unemployment caused by the seasonal nature of some types of employment Real Wage or Classical Unemployment caused by wage rates being held above market clearing levels

Structural Unemployment Long term unemployment caused by changes to the structure of industry in the economy Costs of unemployment to the economy Lower tax revenues Higher benefit payments Social costs: crime, vandalism, family breakdowns and social welfare support, regional decay Opportunity cost of lost potential output

Costs of Unemployment to the individual De-skilling Loss of self-esteem Lower income reduced purchasing power and lower standard of living Effects on the family unit Increase in likelihood of stress related illnesses and mental breakdown

Potential benefits of unemployment Unemployment means that there is an excess supply of labour Downward pressure is put on wages Businesses gain by paying out less in wages Productivity may also rise as workers are scared of losing their jobs Balance of Payments Measures economic transactions between

UK residents and the rest of the world: Trade in goods Trade in services Income flows from investments Financial flows shares, loans Foreign aid Balance of Payments Current Account:

The trade in goods (exports/imports) The trade in services Income flows (profits/dividends/interest) Current transfers (grants/subsidies) Capital Account: Sale and purchase of capital assets and nonproduced or non-financial assets

Financial Account: Trade in financial assets Net Errors and Omissions UK balance of payments: 1999 ( millions) UK balance of payments:

1999 ( millions) UK balance of payments: 1999 ( millions) UK balance of payments: 1999 ( millions) UK balance of payments: 1999 ( millions)

UK balance of payments: 1999 ( millions) UK balance of payments: 1999 ( millions) UK balance of payments: 1999 ( millions) UK balance of payments: 1999 ( millions)

UK balance of payments: 1999 ( millions) UK balance of payments: 1999 ( millions) UK balance of payments: 1999 ( millions) UK balance of payments:

1999 ( millions) UK BOP Data What does the diagram tell us? Current position Facts and figures In 2011, the UKs current account deficit was 29.0 billion.

Latest figures show a rise in the trade deficit The rising goods trade deficit was largely a result of a fall in exports to countries outside the EU Despite the recession in the eurozone, exports to EU countries rose over the month, by 300m, to hit 13.1bn. Imports from the region fell by 200m. Causes of a Current Account Deficit Economic Growth

Recession abroad Producing goods which are not in demand Loss of competitiveness in manufacturing industry Inflation Lack of Investment Strong Currency When is a Current Account Deficit a problem Only a problem if the current account deficit is

unsustainable. Becomes a problem if unable to finance it via the capital account (financial flows, FDI) Leakage from the circular flow of income Could cause devaluation of the currency Which in turn may be inflationary May lead to interest rates rising Negative multiplier due to confidence falling If it is caused by structural imbalance Exchange Rates

The price of one currency in terms of another the amount of one currency that has to be given up to purchase another currency Exchange rates are determined by the demand and supply of a currency in foreign exchange markets To a lesser degree determined by the purchase of exports, and the purchase of imports Exchange Rates Floating Exchange Rates: Where the rate is determined by the interaction of

supply and demand of the currency with no intervention by government or other agencies in the market Dirty or Managed Floating: Where the exchange rate is allowed to float freely but intervention by governments or other agencies is carried out to manipulate the rate within some desired band Exchange Rates

Fixed Exchange Rates: Where the rate is fixed or pegged to another currency or asset (such as gold the Gold Standard) intervention may be necessary to maintain the rate or economic policies to influence the strength of economic growth Effect of Exchange rate on current account Strong Currency

Exports appear more expensive Imports appear cheaper Exports fall Imports rise Current Account worsens

Weak Currency Exports appear cheaper Imports appear more expensive Exports rise Imports fall

Current Account improves Non Economic measures: Social Investment Infrastructure roads, communication networks, bridges, railways, airports, ports Education schools, colleges and universities Hospitals/Health primary and secondary care, health education, disease and accident prevention, number of doctors per head, access to health care Water/Sanitation

Housing affordable and accessible housing to meet the needs of those in search of homes and employment Environment Sustainable Growth Pollution land, air, sea and noise Waste waste disposal and waste management Nature areas of outstanding beauty, national parks, wildlife, ecology, sites of special scientific interest

Land Use planning regulations, building regulations Taxation Tax Burden the amount of tax paid by the population direct and indirect taxation Incentives aimed at encouraging enterprise, business development and creativity Quality of Life

Material Wealth telephones, fridges, computers, cars, etc. Mental State Stress caused by employment, unemployment, travel, etc. Crime crime prevention, crime reduction, monitoring of crime and perceptions of crime

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