Flashcards · H060 · Topic 4

Economic policy objectives and indicators of macroeconomic performance flashcards

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Economic growth, and nominal vs real GDP: Growth: more output over time, shown by the percentage rise in real GDP. Nominal GDP: output at the prices of the time. Real GDP: output at constant (base-year) prices.
Nominal GDP 2,200 (index 100) then 2,310 (index 104). Real growth?: Real GDP in year 2 = 2,310 ÷ 104 × 100 = 2,221.15. Real growth = 21.15 ÷ 2,200 = 0.96%, although nominal growth was 5.0%.
Actual vs potential growth: Actual: a rise in actual output, using spare capacity. Potential: a rise in capacity (LRAS or the PPF shifts outwards).
Recession: A fall in real output; commonly two quarters in a row of falling real GDP. A slowdown (slower-rising output) is not a recession.
Sustained vs sustainable growth: Sustained: continues over a long period without being cut short by instability. Sustainable: does not damage the environment or deplete resources future generations need.
Primary, secondary and tertiary sectors: Primary: extracting or harvesting natural resources. Secondary: manufacturing and construction. Tertiary: services.

Unemployed vs economically inactive: Unemployed: without a job, actively seeking work and available to start. Inactive: outside the labour force, neither in a job nor searching (students, carers, retired people).
Population 16+ 30.0m, employed 19.2m, unemployed 0.8m. Unemployment rate?: Labour force = 19.2 + 0.8 = 20.0m. Unemployment rate = 0.8 ÷ 20.0 × 100 = 4.0%.
LFS vs claimant count: LFS: a survey using the ILO definition (without work, available and looking). Claimant count: those claiming unemployment-related benefits, from benefit records.
Cyclical vs structural vs frictional unemployment: Cyclical: too little demand in a downturn. Structural: a mismatch of skills or location after the economy's structure changes. Frictional: between jobs while searching.
Full employment vs zero unemployment: Full employment: everyone who wants and is able to work at the going wage can find work; frictional and voluntary unemployment still remain.

Inflation, deflation and disinflation: Inflation: a continuing rise in prices across the economy. Deflation: a continuing fall in average prices. Disinflation: the rate of inflation slows, but prices still rise.
Index vs inflation rate: An index of 108 says prices are 8% above the base year. The inflation rate compares two index values: (new − old) ÷ old × 100.
Demand-pull vs cost-push inflation: Demand-pull: AD shifts right, raising output as well as prices. Cost-push: SRAS shifts left, lowering output while prices rise.
CPI vs RPI: Different averaging methods, different treatment of housing costs (RPI includes mortgage interest payments) and slightly different household coverage.
Why aim for low and stable inflation rather than zero?: A little inflation lets real wages adjust without cutting money pay and keeps the economy away from the risks of deflation.
Consequences of high inflation: Lower real value of savings and fixed incomes, menu and shoe-leather costs, uncertainty that deters investment, and loss of international competitiveness.

Level vs rate of change vs trend: Level: where a series stands at one date. Rate of change: the percentage change from one period to the next. Trend: the general direction over several years.
Unemployment rises from 5.0% to 7.0% of the labour force. Is that a 2% rise?: No: it is a rise of 2.0 percentage points. With the same labour force, the number unemployed has risen by 40% (from 1.2m to 1.68m of 24.0m).
A real GDP index rises from 100 to 121.6 over 8 years. Average annual growth?: Compound: 1.216^(1/8) − 1 = 2.47% a year. A simple average (21.6 ÷ 8 = 2.7%) overstates it.
Real GDP is 200, then 214, then 207. Growth each year?: Year 2: (214 − 200) ÷ 200 = 7.0%. Year 3: (207 − 214) ÷ 214 = −3.27%. Output is still 3.5% above the start.
UK trends to recall: 2008–09 and 2021 onwards: 2008–09: deep recession after the financial crisis; Bank Rate cut to 0.5% in March 2009. 2021 onwards: inflation surge (CPI peaked at 11.1% in October 2022); Bank Rate raised to 5.25% by August 2023.
Comparing the UK with other economies: what to check: Same year, definition and unit; totals or per head; how far starting levels differ; one year or an average; and what the indicator leaves out (distribution, job quality, environment).