Measures of Economic Performance By Fatima Shakir

1. GDP

   Annotations:

   • Gross Domestic Product is a measure of national income, output, and expenditure in a particular country(within the countries borders)
   1. Production Approach

      Annotations:

      • The production approach is the market value of all final goods and services
      1. (O) output = (C) consumption + (I) investment
      2. The main problem with using this method of calculating GDP is that there is no 100% accurate way to calculate what is truly produced and services like babysitting have no way of being measured
   2. Income Method

      Annotations:

      • The income approach measures the annual income of all individuals in a country
      1. (Y) Income = (C) Consumption + (S) Saving
      2. The problem with the income approach is that in this method production is not included and there could be an increase in production without an increase in wage
   3. Expenditure Approach

      Annotations:

      • Measures all expenditure by individuals in one year
      1. GDP = (C) consumption + (I) investment + (G) government expenditure + ((x) exports - (I) imports)
      2. The problems with this method are,first, savings are not included in the equation – so savings accounts and stock investments are not accounted for. Also, deeply discounted and even free services from government, business, and nonprofit organizations are included. This presents a problem because the actual value of these services – not what is charged for them – is estimated. For this reason, the final GDP number is likely to be inaccurate. Lastly, some services are counted based on their costs, but that value can be substantially higher than is estimated or reported. For example, when a major infrastructure collapse happens, such as the result of 9/11 or the tornadoes in Alabama, medical and building costs go up. This creates a temporary increase in infrastructure costs, which increases the final GDP number. This skews the numbers by representing a spike – but not a growth curve that is sustainable.
2. GNP

   Annotations:

   • GNP = GDP + Net property income from abroad. This net income from abroad includes, dividends, interest and profit. GNP includes the value of all goods and services produced by nationals whether in the country or not.
3. GNI

   Annotations:

   •    ·         GNI is the sum of value added by all resident producers plus any product taxes (minus subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad

Annotations:

• Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly.

1. As a result of inflation, the purchasing power of a unit of currency falls. For example, if the inflation rate is 2%, then a pack of gum that costs $1 in a given year will cost $1.02 the next year. As goods and services require more money to purchase, the implicit value of that money falls. Monetarism theorizes that inflation is related to the money supply of an economy.
2. While excessive inflation and hyperinflation have negative economic consequences, deflation's negative consequences for the economy can be just as bad or worse. Consequently, policy makers since the end of the 20th century have attempted to keep inflation steady at 2% per year.
3. Deflation

   Annotations:

   • Deflation is a general decline in prices as a function of supply and demand for products, and the money used to buy them.
4. Causes of Inflation
   1. 1. Demand pull inflation: If the economy is at or close to full employment then an increase in AD leads to an increase in the price level. As firms reach full capacity, they respond by putting up prices, leading to inflation. Also, near full employment, workers can get higher wages which increases their spending power.

      Annotations:

      • AD can increase due to an increase in any of its components C+I+G+X-M We tend to get demand pull inflation, if economic growth is above the long run trend rate of growth. The long run trend rate of economic growth is the average sustainable rate of growth and is determined by the growth in productivity.
   2. 2. Cost Push Inflation: If there is an increase in the costs of firms, then firms will pass this on to consumers. There will be a shift to the left in the AS.

      Annotations:

      • Cost push inflation can be caused by many factors 1. Rising wages If trades unions can present a common front then they can bargain for higher wages. Rising wages are a key cause of cost push inflation because wages are the most significant cost for many firms. (higher wages may also contribute to rising demand) 2. Import prices One third of all goods are imported in the UK. If there is a devaluation then import prices will become more expensive leading to an increase in inflation. A devaluation / depreciation means the Pound is worth less, therefore we have to pay more to buy the same imported goods. 3. Raw Material Prices The best example is the price of oil, if the oil price increase by 20% then this will have a significant impact on most goods in the economy and this will lead to cost push inflation. E.g. in early 2008, there was a spike in the price of oil to over $150 causing a temporary rise in inflation. 4.    Profit Push Inflation When firms push up prices to get higher rates of inflation. This is more likely to occur during strong economic growth. 5.  Declining productivity If firms become less productive and allow costs to rise, this invariably leads to higher prices. 6. Higher taxes If the government put up taxes, such as VAT and Excise duty, this will lead to higher prices, and therefore CPI will increase. However, these tax rises are likely to be one-off increases. 
   3. 3.Rising house prices: Rising house prices do not directly cause inflation, but they can cause a positive wealth effect and encourage consumer led economic growth. This can indirectly cause demand pull inflation
   4. 4.Printing more money: If the Central Bank prints more money, you would expect to see a rise in inflation. This is because the money supply plays an important role in determining prices. If there is more money chasing the same amount of goods, then prices will rise. Hyperinflation is usually caused by an extreme increase in the money supply

1. Employment

   Annotations:

   • Categories of employment The LFS uses four categories of employment in the UK, which are: 1.Employees 2.The self-employed 3.Unpaid family workers 4.Participants in government-funded training schemes
2. Unemployment

   Annotations:

   • unemployed are those individuals of working age who are capable of work, and are actively looking for work, but who are not employed.
3. Costs of Unemployment
   1. 4.Opportunity cost: Unemployment represents an opportunity cost because there is a loss of output that workers could have produced had they been employed. The government also spends more on unemployment benefit; hence there is another opportunity cost. The money going on unemployment benefit could be spent on hospitals and schools.
   2. 3.Waste of resources: Resources not employed are left idle, and this is a waste to an economy – education and training costs are wasted when individuals who have received these benefits do not work.
   3. 2.Loss of revenue: The unemployed do not pay income tax, and pay less indirect tax as they spend less.
   4. 1.Erosion of human capital: Many skills are acquired at work, and being unemployed means can mean fewer new skills are acquired, and existing skills are lost.
   5. 5.Lower incomes: The unemployed have lower personal incomes and lower standards of living. In addition, the unemployed also experience relatively poor physical and mental health.
   6. 6.Externalities:There are further external costs associated with unemployment, such as increased crime, alcoholism and vandalism.

Annotations:

• Is the difference in total value between payments into and out of a country over a period.

1. The BOP figures tell us about how much is being spent by consumers and firms on imported goods and services, and how successful firms have been in exporting to other countries.
2. Inflows of foreign currency are counted as a positive entry (e.g. exports sold overseas)
3. Outflows of foreign currency are counted as a negative entry (e.g. imported goods and services)
4. Types of Accounts
   1. 1. Current account

      Annotations:

      • This is a record of all payments for trade in goods and services plus income flow it is divided into four parts: 1.Balance of trade in goods    (visibles) 2.Balance of trade in services (invisibles) e.g. tourism, insurance 3.Net income flows (wages and investment income) 4.Net current transfers(e.g. govt aid)
   2. 2. Financial account

      Annotations:

      • This is a record of all transactions for financial investment. It includes: 1.Net investment from abroad   (e.g. A UK firm buying a factory in Japan would be a debit item) 2.Net financial flows –   These are mainly short term monetary flows such as “hot money flows” to take advantage of exchange rate changes 3.Reserves(note the Financial Account used to be called the Capital Account)
   3. 3. Capital Account

      Annotations:

      • This refers to the transfer of funds associated with buying fixed assets such as land
5. Factors affecting balance of payments
   1. High rate of consumer spending on imports (during economic boom)
   2. Decline in international competitiveness making countries exports less competitive
   3. Overvalued exchange rates which makes exports relatively more expensive

1. Levels of real national income, spending, and output. National income, output, and spending are three key variables that indicate whether an economy is growing, or in recession. Like many other indicators, income, output, and spending can also be measured in per capita (per head) terms.
2. Growth in real national income.
3. Investment levels and the relationship between capital investment and national output.
4. Levels of savings and savings ratios.
5. Price levels and inflation.
6. Competitiveness of exports.
7. Levels and types of unemployment.
8. Employment levels and patterns of employment.
9. The productivity of labour, which influences other economic variables, including an economy's competitiveness in international markets.
10. Trade deficits and surpluses with specific countries or the rest of the world.
11. Debt levels with other countries.
12. The proportion of debt to national income.
13. The terms of trade of a country.
14. The purchasing power of a country's currency.
15. Wider measures of human development, including literacy rates and health care provision. Such measures are included in the Human Development Index (HDI).