Chapter 5(summary)

Chapter 5

Key performance indicators

To find out how well an economy is performing, there are certain indicators that economist examine. One of the most significant of these is economic growth. Actual economics growth is said to occur when an economy increases it’s output. Long run, economic growth takes place when the productive capacity of an economy increases.

When a county’s output increases, unemployment usually falls. An economy is doing well because of the low unemployment. Unemployment exists when people who are looking for jobs are without jobs. Some people aged between 16 and 65 are not in the labour force because, they are disabled, homemakers, retired or students. These people are said to be economically inactive.

Another indicators is inflation, it’s caused when the price level rises. Also If the price levels falls it’s called deflation.
Balance of payments. This is record of country’s transactions with the rest of the world.

Government Objectives

- Achieve economic growth
- Reduce Inflation
- Raise employment
- Reduce unemployment
- Balance of payment(international trade)
- Economic stability
- Income redistribution

GDP and real GDP

Economists first calculate what is called money or nominal GDP. For example GDP of country may rise from $800 billion in 2008 to $900 billion in 2009, it’s 12,5% increase. Nominal GDP has risen by 12.5%. To calculate the rise in the volume of output, the effects of changes in the price level are taken out by multiplying GDP by the base year index divided by the current year price index.

GDP figure*base year price index/current year price index.
So, if price index in 2008 was 100 and 105 in 2009, real GDP was:
$900 billion*100/105 = 857,14 billion
In real terms, GDP has risen by $57,14 billion/$800 billion*100%=7,14%

Measuring Unemployment

Economists measure number of people who are unemployed and find the unemployment rate. These are people that are jobless and seeking employment. It is calculated as:
The unemployment*100%/labour force.
In practice, it can be difficult to decide who is unemployed.

Measuring Inflation

There are numbers of measures of inflation. The main measure of inflation is the consumer prices index(CPI).
Another measure of inflation used in the UK is Retailed prices indes(RPI)

The causes of economic growth

In the short run, an economy with the spare capacity can cause economic growth, which increases aggregate demand. For example a fall in exchange rate may increase net exports and result in export-led growth.

There may also be consumption-led growth. Or a growth caused by investment.

Types of Unemployment

Cyclical: Unemployment arising from a lack of Aggregate demand.

Structural: Unemployment caused by the decline of some industries due to changes in demand and supply.

Frictional: Short term unemployment when workers are in-between jobs.

Types of Inflation

Demand-pull inflation: Rise in the price level caused by an increase in aggregate demand.

Cost-push inflation: Rise in the price level caused by increase in the costs of production.

Causes of deficit and surplus on the current account

A deficit on the current account occurs when government spending are higher than the revenue.
Which is more imports than exports.

A surplus on the current account occurs when country’s revenue from abroad is greater then the government spending. Mainly it means exports exceeds imports.

Hysteresis

It’s when unemployment causes problems. The longer people are out work, it will be more difficult for people to gain jobs.

The costs and benefits of economic growth

Economic growth may have costs. Economy is using all of it’s resources, and thus producing in it’s production possibility curve, the only way it may increase it’s output is to switch resources from making consumer goods to capital goods.

Most governments believe that benefits of economic growth exceeds the costs. The main benefit of economic growth is the rise of people’s standard living, and the rise in the real GDP. Economic growth reduces the level of poverty. Because the money coming from taxes can be used to help poor.

Exchange rates

It’s the price of the currency in the terms of another currencies.
The main factors which influence the demand for and supply of a currency and so it’s exchange rate.

- The demand for pound is likely to be high and supply is likely to be low if UK products are internationally competitive.
- Changes in income abroad influences the exchange rate.
- Rising incomes at home may have a downward pressure on the value of pound.
- Rise in UK interest rates, according to other countries interest rates, will be likely to increase demand for pounds.
- Pounds are also brought and sold by those who are wishing to undertake foreign direct investment(FDI).