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Indicators of economic performance


a. Inflation a sustained rise in the general level of prices. i. RPI Retail Price Index. A sample of the population records their expenditure. An index of weighted goods is based upon their spending. The changes in the price of the basket of goods show how the price levels are changing over time. ii. RPIX = RPI mortgage repayments, because mortgage repayments can have distorting effects on the RPI. iii. CPI = RPIX with less weight on housing costs. Is therefore less than RPIX. Complies with EU guidelines so the best European measure. b. Unemployment the macroeconomic problem of wasted scarce resources labour i. Claimant count all those out of work and able to claim benefits ii. ILO International Labour Organisation, based on the LFS (Labour Force Survey). Unemployed are those who are available for work and have looked for work in the last month. ILO is better for international comparisons but is costly. Also is an underestimation because is doesnt includes part-time workers c. Balance of payments record of financial transactions between UK and other countries. Split into different components: i. Current account This is an indication of competitiveness of UK goods and services. Trade in goods balance (exported goods imported goods) + Trade in services balance (exported services imported services) +Net income flows (interest, profits & dividends earned abroad interest, profits & dividends paid to foreign holders of UK assets) + Net current transfers (UK contribution to EU budget) ii. Capital and financial account. Both show long term capital flows. Includes: foreign direct investment, short term capital flows (hot money) investments in shares and changes in gold & foreign currency reserves. d. Economic Growth measured by changes in REAL GDP per head e. Gross Domestic Product, Gross National Product & National Income GDP, GNP and NI refer to the value of goods and services produced by an economy. GDP can also be viewed as the total income of everyone in the economy or as the total expenditure on the economys output of goods and services. i. GDP at market prices = Consumers expenditure (C) + Public authorities expenditure (G) + Value of physical increase in stocks, gross domestic fixed capital formulation (I) + Exports (X) Imports (M) ii. GDP at market prices = GDP at market prices + Subsidies Indirect taxes iii. GNP = GDP at market prices + net property income from abroad iv. National income = GNP depreciation. GDP statistics are used to compare standards of living between countries, to build models of the economy and to forecast changes in the economy Real GDP is better than Nominal GDP because real GDP is the value of goods and services at constant prices Using GDP statistics to compare standards of living and national income have serious limitations such as: population size and age distribution (therefore GDP per head is better) Income distribution (GDP would only work if income distributions were equal in all countries, because if Japans and Brazils GDP were the same, then you would assume that the standards of living are equal, even though Brazils income distribution is much more uneven than Japans.) Externalities (these may affect standards of living) Quality of life & Exchange rates

Policy instruments

Supply-side Policies A range of policies aimed at enhancing the performance of an economy by strengthening market forces and increasing economic incentives Supply-side Policies in Labour Markets make labour market more competitive Education and training increase the number of those able to do work and improve the skills of those currently in work. Lower income tax Increase the incentive to work, more net-income. Lowering benefits gives those on benefits a higher incentive to work Reducing trade union power makes the labour force more competitive Supply-side Policies in the Product Market increase competition and efficiency in the market Privatisation this will increase or create competition within industries Deregulation this involves opening markets to greater competition. It invites more competitors which in turn drives down prices Free trade this will increase efficiency through the increase in competition and will keep costs low. Problems of Supply-side Policies (Evaluation points) They can be effective in the long run but take a long time to implement, with no immediate benefits (especially education- can be decades) Policies might also be morally incorrect and lead to a more unequal distribution of income (cutting benefits is harsh on those who are disabled) Demand-side Policies a range of policies designed to influence the level of aggregate Only work in the opinion of Supply-side economists i.e. a cut in income demand. tax might not lead some to work more. Fiscal policy Changes in public expenditure to influence level of AD.

Changing tax levels increasing tax = lower disposable income less AD, decreasing tax = more disposable income more AD Changing Government spending higher Gov. spending = more AD (by multiplier), lower Gov. spending = less AD ( by negative multiplier) Problems of Fiscal policy Fiscal policy takes a long time to implement (taxes have to wait until the annual budget, building a new hospital for example may take years). Also, the effect of fiscal policy is entirely dependant upon the multiplier effect, and also consumer and business confidence. Monetary policy Controlling money variables such as the rate of interest and the money supply, to influence Aggregate Demand. The rate of interest is inversely proportional to Aggregate demand (ceteris paribus) as interest rates go up, aggregate demand goes down. This is for a number of reasons. Consumer Durables Many consumers buy these on credit. When interest rates are high, repayments will be higher so less are purchased. Housing Market Houses are bought on a mortgage so when interest rates are high, repayments are also. Savings rates High interest rates increase the MPS it is more attractive to save, less attractive to spend.

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