Download The measurement of macroeconomic performance

The measurement of
macroeconomic performance
By Oliver, Jack and Max
The meaning of macroeconomic
performance
Macroeconomics considers the economy as a whole. The total quantities of goods
and services produced by all firms in the economy. We are now looking at the total
demand of a given country such as the UK.
We refer to total demand as aggregate demand and total supply as aggregate supply.
Aggregate Demand – total demand in the economy made up of consumption,
investment, government expenditure and net exports.
C + I + G + (X-M)
Aggregate Supply – the total value of goods and services supplied in the economy.
Indicators of Performance
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Jobs – if more people have jobs, the economy is performing better.
Prices – if prices are higher, better chance of price stability.
Trade – is the country trading well with other countries?
Efficiency – higher productivity = better performance
The Environment – many economists now focus on whether an expanding
economy is sustainable in terms of its environmental impact.
GDP (Gross Domestic Product) is the total value of good and services produced in the
economy.
Employment and Unemployment
Unemployment has a huge opportunity cost in that it represents a waste of scarce resources as
output lost can never be recovered. It has negative effects on the unemployed themselves,
their families, the locality and the wider economy as a whole:
 Unemployment has adverse effects on the individuals who are likely to suffer a fall in their
confidence levels as well as their income, which is magnified by the length of time for which
they are unemployed.
 The situation for the family of those unemployed is also bad, because as their standards of
living is likely to fall and purchases that were once taken for granted are now affordable.
 Areas suffering from high levels of unemployment are likely to be run down with shops
shutting down and crime rates increasing. These adverse effects create negative externalities
that impose a burden on society.
The 10 largest economies of the World
- 2012
$1 US Dollar
£0.62 Sterling
The Economic Cycle
GDP – Gross Domestic Product
Nominal GDP – GDP/income/output figures not adjusted for inflation.
Real GDP – GDP/income/output figures adjusted for inflation.
The value of GDP is usually stated in monetary terms though sometimes
you may read that it has increased by say 2 percent.
The UK’s GDP is about £1 billion, this is a nominal figure. If this figure
were to be compared to a previous year that had a real GDP figure, it would
have to be adjusted so that inflation was taken into account.
The UK’s past economic performance
The Retail Price Index
This is the main domestic measure of inflation in the UK. It
measures the change from month to month in the prices of
goods and services consumed by most households.
This is a weighted price index which is used to measure the
rate of inflation, usually over a year.
Weighting – where a commodity is given a price index
proportional to its importance in the general pattern of
consumer spending.
Macroeconomic Performance
By Charles, Chris and
Luis
What is it?
• Macroeconomic performance is defined as an assessment
of how well a country is doing in reaching its objectives of
government policy
• Macroeconomic Polices can Include:
-Jobs (How high is unemployment? Is the economy creating jobs?)
-Prices (Are prices stable? Is there inflation or deflation?)
-Trade (How well is the economy trading with other nations?)
-Growth (Sustained Growth? Is GDP rising or falling?)
-Efficiency (Productivity of firms? Can more goods be produced for lower
cost?)
-Public services (Have benefits of growth been used for provision of govt
services?)
-The Environment (Effects of economy on nature? Is growth sustainable?)
Sectors of the Macro-Economy
• Households: Receive income from their jobs and from their investments
and then buy the output of firms.
• Firms: Businesses hire land, labour and capital inputs to produce goods
and services for which they pay wages and rent etc. Firms receive payment
from consumers and profitable businesses and may choose to invest a
percentage in new producer goods.
• Government: Collect direct and indirect taxes to fund spending on public
services like education, healthcare and defence.
• International sector: The UK buys imports and overseas businesses and
consumers buy UK products- exports. Millions of jobs depend on the UK
remaining competitive in overseas markets.
The UK Economy
• The UK has the second largest
economy in the EU.
• The UK is ranked in the in the
top 15 nations in terms of per
capita income.
• Over a quarter of the UK’s GDP
comes from exports however
the UK has more imports than
exports and so runs an annual
trade deficit
How the Olympics Effected the UK
Economy
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The Office for National Statistics said that Olympic ticket sales had added 0.2
percentage points to the figures.
The economy had been in recession for the previous nine months and has still not
recovered the levels of output seen before the financial crisis in 2008.
The GDP figures second quarter had an extra public holiday as part of the
Diamond Jubilee celebrations in June, as well as unusually bad weather, which
reduced growth.
Key Terms
• Economic Cycle- Variations in the annual rate of growth of an
economy over time
• Forecast- A prediction made about the likely future performance of an
economy
• GDP- Gross Domestic Product, the monetary value of goods and
services produced within the geographical boundaries of a nation
• Recession- A period of at least 6 months when and economy suffers a
fall in output
• Target- An objective of government policy e.g lower inflation
• Sustainable Growth- The rate of growth “which meets the needs of
the present without compromising the ability of future generations to
meet their own needs”
Macro economics is studying the economy as a
whole, and how decisions made by one
economy can effect the relationships and
interconnections between one country and
another.
• Topics: inflation, economic growth, changes in employment,
trade performance, success of govt economic policies.
• GDP – total value of goods and services produced within one
economy
‘real GDP’ takes into account price changes within the UK
• Recession – a period of at least 2/4 of the year when a economy
suffers a fall in output & loss made.
• Economic growth - % change in real GDP
• Inflation – % change increase in prices annually
• Sustainable growth – the rate of growth of an economy without
reducing future welfare of consumers.
• Second largest economy in the European
union
• Second largest exporter of services in the
world
• Over a quarter of GDP comes from exports
• Imports>exports = annual trade deficit
Measure of a negative balance of trade
showing an outflow of domestic currency
to foreign markets
1) Households – Income from jobs (offering
services) .Use money to buy output.
2) Firms – use the factors of production to produce goods and services
3) Government – collect taxes = (T) to use for spending on improving
the economies performance, and publics social welfare.
4) International sector –
UK buys overseas goods and services = imports = (M)
Consumers overseas buy UK’s goods and services = Exports = (X)
• How well a country is meeting its objectives
that are set by the government
• Policies set by govt – aims to improve the
‘real’ living standards of the public
This takes into account rising
prices
Jobs
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Unemployment
Occupational mobility of jobs
Does supply labour = demand for labour?
Prices
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Price stability
Avoiding deflation
Inflation between 1-3% per year
Trade
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What is the balance between trade of our economy with others?
Growth
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Is there growth short term?
Sustainability of future growth
Effects of future growth on environment
Efficiency
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Efficiency of factors of production
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Levels of productivity within the UK economy
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Is the UK’s PPF shifting outwards?
Public services
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Has growth benefitted social welfare
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Improved the provision of public services?
Environment
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Effects of activity on natural environment
Is this growth sustainable for our environment?
How will it continue to impact it?
• Demand pull : where demand rises faster than
the supply of a product causing prices to rise.
• Cost push: where rises in cost of production
causes a rise in price of the products as it is
harder to supply them for the same profit as
before.
o Frictional Unemployment – where people become unemployed between jobs
o Demand Deficient Unemployment – labour= derived demand, so the reduction is
demand causes less labour to be needed
o Technological Unemployment – where people lose work by being replaced with
technology, meaning they are no longer needed.
o Seasonal Unemployment – caused by the seasonal demand fluctuations for certain
jobs
o Real Wage or Classical Unemployment – caused by wage rates being held above
market clearing levels, causing excess supply of labour
o Structural Unemployment – when the workers don't have the right skills needed to
get a job, and specialise in areas where they are no longer needed due to changes
in industries.
• Stable low inflation with prices rising at a rate within the target range of
1.5% - 2.5% per year
• Sustainable growth –to make sure that we are looking at the long term
solutions best for the economy not ‘quick fixes’.
• Higher levels of investment into Human capital to increase productivity - to
improve international competitiveness
• High employment - the government wants to achieve full-employment
• Rising living standards and a fall in relative poverty = EQUITY
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Sound government finances (including control over government borrowing
and the national debt)
• One countries economic events/policies &
shocks will effect another economy as we are
interconnected.
• E.g.: recession in UK effected global trade &
prices
When prices remain low in fluctuations, and
jobs are constant. This is often the main aim
of all the policies studied in
macroeconomics.
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Reduces business uncertainty
Improves confidence in investment
Source of economic growth
Increase living standards
The national output is constant with little fluctuations in output
annually, this tracks the rate of growth in GDP.
Recovery: upturn in a economic cycle when GDP
recovers from a low point.
Potential growth:
the total capacity of the
economy & what the
economy could produce
if it used all its resources
efficiently.
The Measurement of
Macroeconomic Performance
Colin Dean, Alex Williamson + Jordan Buckle
Meaning
Macroeconomics talks about how well the
country is doing in relation with its
objectives, in increasing the economic
welfare.
Although it isn’t just about the
living standards of the country,
we also have to take into
consideration the growth of the
GDP in relation to the jobs
available, price stability, how
trade performs against other
countries, growth, efficiency,
public services and the
enviornment
4 Ways To Assess Performance
• Economic growth - Is capacity to produce goods growing over time?
Within our economy has the amount of goods produced or the
ability to produce more goods increased, this is based on the firms
(our economy’s) performance.
• Full employment – Is the economy efficient? Does the firms within
the economy produce as much as they can with their resources?
Are they producing on the ppf curve?
• Are the prices stable? Does the prices within the economy fluctuate
greatly or is their stability within the markets?
• Living within our means?
• The policy of the government is to ensure suitable outcomes of
each of the four areas.
• Is the UK economy faster/greater than other countries? Compare
our gdp to those of other countries to see the more dominant
countries.
Employment & Unemployment
• Employment is when labour is actively engaged in
productive activity. Unemployment is the
opposite.
• Employment rates indicate how the economy is
performing.
• Low unemployment indicates good national
economic performance.
• Immigrants reduce supply constraints of labour
and ‘tightness’ of labour markets as firms can
obtain labour easily.
Negative Impacts of Unemployment.
• Fall in confidence as well as income, this is
worsened as time goes by.
• Like to be depressed and turn to alcoholism
and may lead to domestic violence.
• The standard of living is poor.
• Often live in run down areas.
• Tax may increase for the unemployed.
• Unemployment causes a negative output gap.
This also represents a huge opportunity cost.
This is shown through a waste of scarce
resources as output lost can never be
recovered.
Inflation
• Inflation is the persistant increase in the level of
prices overtime. For example, in 1974, Jeans
could have been £3.50 and now the same quality
of jeans cost £30.
• Inflation pressure is when the positive output gap
is present – Actual Growth > Trend Growth.
• Rapid inflation could have negative impacts on
consumers, workers as firms react to it with
increased pricing.
International Competitiveness
• If factories are inefficient, firms will sell at
higher prices and will not sell abroad as
economies of other countries will be more
efficient and sell at lower prices.
• In order for firms to make income, they must
sell their goods to other countries as exports.
If their prices are high then they will not sell
and won’t earn any money.
Indicators of Macroeconomic
Performance
• Economic indicators are economic statistics
that provide information about the
expansions and contractions of business
cycles.
• They help indicate the likely future directions
of the economy.
GDP (Gross Domestic Product)
• Value of GDP is stated in monetary terms. UK’s
GDP is around £1,300bn . This is a nomial
figure (GDP/Income/Output figures not
adjusted for inflation).
• If next year, GDP has increased by £200m, we
don’t know if this shows real output or
whether real output is only £50m and price
increases is the £150m of the £200m. (Real
output – output figures adjusted for inflation.
GDP continued...
• May also see figure GNP (Gross National
Product). This includes income that UK
residents may receive from abroad minus the
amount that is paid out of our economy of our
economy to people overseas.
• GDP is divided by the population to obtain
GDP per head or GDP per capita. (GDP per
capita – GDP divided by population – a
measure of living standards.)
Macro-Economic Performance
• Macroeconomics considers the performance of the economy as a whole.
Many macroeconomic issues appear in the press and on the evening news
on a daily basis. When we study macroeconomics we are looking at topics
such as economic growth; inflation; changes in employment and
unemployment, our trade performance with other countries (i.e. the
balance of payments) the relative success or failure of government
economic policies and the decisions made by the Bank of England.
• Economic Growth - trends in national output and living standards
Unemployment - the causes and consequences of unemployment and the
reasons for the changing structure of the work force
Inflation - the economics of price inflation - who loses and who gains and
what can we do about inflation?
International trade - does the UK pay its way in trading with other countries?
Interest rates - should interest rates rise or fall? How do changes in interest
rates affect consumers and businesses in the economy
The measurement of macroeconomic performance
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National income measures the monetary value of the flow of output of goods and services produced in an
economy over a period of time.
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Measuring the level and rate of growth of national income (Y) is important for seeing:
The rate of economic growth
Changes to average living standards
Changes to the distribution of income between groups within the population
There is a graph that shows the macro-economic performance:
The economic cycle
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There are two type of economic cycle ; Boom and Recession.
Boom cycle
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A boom occurs when real national output is rising at a rate faster than the trend
rate of growth. Some of the characteristics of a boom include:
A fast growth of consumption helped by rising real incomes, strong confidence
and a surge in house prices and other forms of personal wealth
A pick up in the demand for capital goods as businesses invest in extra capacity to
meet rising demand and to make higher profits
More jobs and falling unemployment and higher real wages for people in work
High demand for imports which may cause the economy to run a larger trade
deficit because it cannot supply all of the goods and services that consumers are
buying
Government tax revenues will be rising as people earn and spend more and
companies are making larger profits – this gives the government money to
increase spending in priority areas such as education, the environment, health and
transport
An increase in inflationary pressures if the economy overheats and has a positive
output gap.
Recession
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There are many symptoms of a recession – here is a selection of key indicators:
A fall in purchases of components and raw materials from supply-chain businesses
Rising unemployment and fewer job vacancies
A rise in the number of business failures including high profile names such as
Woolworths
A decline in consumer and business confidence
A contraction in consumer spending & a rise in the percentage of income saved
A drop in the value of exports and imports of goods and services
Deep price discounts offered by businesses in a bid to sell excess stocks
Heavy de-stocking as businesses look to cut unsold stocks when demand is weak
Government tax revenues are falling and welfare spending is rising
The budget (fiscal) deficit is rising quickly
Inflation
• What is inflation?
• Inflation is a sustained increase in the cost of living or the average /
general price level leading to a fall in the purchasing power of money.
• The opposite of inflation is deflation which is a decrease in the cost of
living or average price level.
Unemployment and Employment
Both employment and unemployment are effected by the economic cycle and the levels of employment are an
important indicator of how an economy performs as it shows whether or not the economy is capable of
producing jobs for its labour force.
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Unemployment has adverse effects on the individuals who are likely to suffer a fall in their confidence
levels as well as their income, which is magnified by the length of time for which they are employed.
Studies have shown that the unemployed are more likely to suffer from depression, alcoholism, domestic
violence and family breakdowns then those with jobs. The economic consequence of this may be
increased by government expenditure on social services with its attendant opportunity cost.
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The situation for the family for those unemployed is also pretty dire, as their standard of living is likely to
fall and purchases that will once taken for granted are now unaffordable.
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Areas suffering from high levels of unemployment are likely to be run down with shops shutting down and
crime rates rising. These adverse effects create negative externalities that impose a burden on society.
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Government income from tax will be falling while benefit expenditure will be increasing and tax on the
employed may need to rise to cover benefits to the unemployed.