Download Measures of Economic Performance

Measures of Economic
Performance
Economic
and
Growth
Inflation
Unemployment
Balance of Payments
Non-Economic Measures
Social Investment
Sustainability
Taxation
Quality of Life
Economic Performance
Macroeconomics:
– The study of the interrelationships between variables
at the aggregate (whole economy) level
Aggregate means total – so we will look at things such
as total unemployment in an economy, total spending
etc
Examples of how the economy is monitored?
Measures of Economic Performance
Economic Measures:
–
–
–
–
–
–
Inflation
Unemployment
Growth (GDP)
Balance of Payments
Sustainable Growth
Income Equality
Non-Economic Measures:
– Quality of Life
– Health
– Education
What is Economic Growth?
As Industry, Commerce and Governments
invest in machinery and people, the
country can produce more
Incomes rise, giving us more spending
power
Our increased spending encourages firms
to produce more
Hence the economy grows
A simplified Circular Flow of
Income
FIRMS
(suppliers of goods and services,
demanders of factor services)
HOUSEHOLDS
(demanders of goods and services,
suppliers of factor services)
fig
(3)
Factor
demand
£
(2)
Producer
supply
£
Factor
services
P
Goods
P
S
S
PF2
P2
P1
PF1
D2
D2
D1
O
QF1QF2
D1
O
Q
Factor
services
(4)
Factor
supply
£
Q1 Q 2
Q
Goods
fig
£
(1)
Consumer
demand
The Circular Flow of Income
Withdrawals/Leakages
– net saving (S)
– net taxes (T)
– import expenditure (M)
Injections
– investment (I)
– government expenditure (G)
– export expenditure (X)
The circular flow of income
INJECTIONS
Export
expenditure (X)
Investment (I)
Factor
payments
Consumption of
domestically
produced goods
and services (Cd)
Government
expenditure (G)
BANKS, etc
Net
saving (S)
GOV.
ABROAD
Import
Net
expenditure (M)
taxes (T)
WITHDRAWALS
fig
Economic Growth (GDP)
Gross Domestic Product:
– The total value of all goods and services produced in
the UK during one year
– Primary (agriculture), secondary (manufacturing) and
tertiary sectors (services)
– Real versus nominal output
– Can be viewed as being national income, national
output or aggregate demand (AD)
These should all be the same as people spend what they
earn and are paid for providing goods and services
In 2012, the value of GDP for the UK was
around £1.45 TRILLION pounds
Economic Growth (GDP)
Potential Growth – the overall capacity of the economy
(i.e. what the economy could produce if it used all its
resources)
Actual Growth – the annual percentage increase in output
Nominal Growth – the growth in output not including any
adjustment for price changes expressed as ‘current prices’
(the price reigning at the time of the measurement)
Real Growth – growth in GDP adjusted to take account of
changes in the price level – expressed as ‘constant prices’
The Business Cycle
Illustrates growth in actual and potential output
Shows:
– fluctuations in actual growth
– the phases of the business cycle
the upturn
the slowdown
the boom
the recession
The Business Cycle
Growth
Potential Growth
Actual Growth
Boom/Overheating
Growth/Upturn
Decline/slowdown
Recession/Slump
Time
The Business Cycle
Potential output
National output
Trend
output
Actual
output
DEFINITION:
O
Time
The business cycle is a
phenomenon whereby
GDP fluctuates around
its underlying trend,
following a regular
pattern
UK performance
What does the above diagram tell us?
Achieving Economic Growth
Some examples of how to increase growth:
Firms building new factories and using
machinery (capital goods)
Government or firms spending on
education or training
Spending on infrastructure
Firms investing in RnD
Inflation
Definition: the sustained increase in the general
price level over a period of time
It measures the purchasing power of money
If Inflation rises this means prices are rising and
so your purchasing power falls
Calculating Inflation
Now measured by the CPI – Consumer Price Index –
CPI based on average price of a bundle of 700 goods
and services measured at different points in time from a
sample of 7000 households
Each household completes a living costs and food
survey
Each good is weighted according to typical spending
Inflation does not fall – it slows down or speeds up!
A fall in the price level is termed ‘deflation’
The RPI – retail price index – was used prior to the CPI
RPI includes mortgage interest payments – more
relevant for UK?
CPI more useful for international comparisons
Recent UK Inflation
What does the above diagram tell us?
Real and Nominal Measurements
We typically use money values to measure economic
output, using e.g. the prices of goods
We must however be aware that prices of goods
change over time
A NOMINAL value is the value of an economic variable
based on current prices
A REAL value of an economic variable takes account of
changing prices over time
REAL = NOMINAL – INFLATION
So if I get a 5% pay rise, and CPI inflation is 2%, then
my NOMINAL rise is 5% and my REAL rise is 3%.
Inflation
Anticipated and Unanticipated inflation:
– affects the outcome of economic decision
making
– if anticipated, changes in prices can be
accommodated,
– if unanticipated can cause shocks and
problems to arise
Causes of Inflation
Demand-Pull –
– Where an increase in demand causes firms to
raise prices in order to take advantage and
increase profits
– Causes an increase in AD (aggregate demand)
Cost-Push –
– Where an increases in costs is passed onto
consumers forcing prices up to maintain profits
(labour, raw materials, imported costs, etc.)
– Causes an increase in AS (aggregate supply)
Costs of Inflation
1. Menu costs – the cost of having to change prices –
vending machines, labels, etc.
2. Wealth costs – inflation affects those on fixed
incomes and redirects wealth to those in strong
bargaining positions or with physical assets
3. Planning costs – businesses uncertain about future
price changes may be reluctant to invest – hits
economic growth
4. Fall in Competitiveness – inflation at a higher rate
in the UK than elsewhere hits domestic
competitiveness and affects the balance of payments
5. Social Instability - At very high rates, confidence in
the currency is eroded and production and exchange
can be stifled – can lead to food riots, looting and
violence
Hyper Inflation
The following photographs help illustrate how money can become
worthless when inflation gets out of control. – Hyper Inflation
Title: Money Kite. Date: 1922. Description: A boy with a kite made of banknotes in Germany,
during the depression when escalating inflation rendered much currency worthless. Copyright:
Getty Images, available from Education Image Gallery (http://edina.ac.uk/eig/)
Hyper Inflation
Title: Overflowing Riches. Date: 1922. Description: A shopkeeper using a
tea chest to store money which won't fit in the cash register during
Germany's high inflation. Copyright: Getty Images, available from Education Image Gallery
(http://edina.ac.uk/eig/)
Hyper Inflation
Title: The Value Of Money
Date: circa 1923
Description: Children using notes
of money as building blocks during
the 1923 German inflation crisis.
Copyright: Getty Images, available
from Education Image Gallery
(http://edina.ac.uk/eig/)
Zimbabwe
more
recently
$306
million
Unemployment
General definition:
– The number of people of working age who are
without a job
Two measures:
– The Claimant Count – those actively seeking
work and claiming job seekers allowance
– ILO (International Labour Organisation) labour
force survey – the number of people available
for work and actively seeking employment
Differences in types
Claimant Count
–
–
–
–
Claiming Job seekers allowance
18 to 65 years
Have to prove that you are looking for work
Stigma attached – doesn’t fully reflect unemployed
ILO
– Out of work for 4 weeks, ready to start in 2
– Face to face interview then phone survey of 60,000
households
– 16 to 65 year olds
– Published every month – out of date
Recent Unemployment in UK
What does the above diagram tell us?
Types of Unemployment
Frictional Unemployment – Short term
unemployment where people become unemployed
between jobs
Demand Deficient/Cyclical Unemployment – When
in a recession there is very little demand for goods
and services and as labour is derived unemployment
increases
Technological Unemployment – caused where
people are put out of work by changes in technology
Seasonal Unemployment – caused by the seasonal
nature of some types of employment
Real Wage or Classical Unemployment – caused
by wage rates being held above market clearing
levels
Structural Unemployment – Long term
unemployment caused by changes to the structure of
industry in the economy
Costs of unemployment to the
economy
Lower tax revenues
Higher benefit payments
Social costs: crime, vandalism, family
breakdowns and social welfare support,
regional decay
Opportunity cost of lost potential output
Costs of Unemployment to the
individual
De-skilling
Loss of self-esteem
Lower income – reduced purchasing power and
lower standard of living
Effects on the family unit
Increase in likelihood of stress related illnesses
and mental breakdown
Potential benefits of unemployment
Unemployment means that there is an
excess supply of labour
Downward pressure is put on wages
Businesses gain by paying out less in
wages
Productivity may also rise as workers are
scared of losing their jobs
Balance of Payments
Measures economic transactions between
UK residents and the rest of the world:
– Trade in goods
– Trade in services
– Income flows from investments
– Financial flows – shares, loans
– Foreign aid
Balance of Payments
Current Account:
–
–
–
–
The trade in goods (exports/imports)
The trade in services
Income flows (profits/dividends/interest)
Current transfers (grants/subsidies)
Capital Account:
– Sale and purchase of capital assets and nonproduced or non-financial assets
Financial Account:
– Trade in financial assets
Net Errors and Omissions
UK balance of payments:
1999 (£ millions)
CURRENT ACCOUNT
1. Trade in goods
a) Exports
b) Imports
Balance on trade in goods
2. Trade in services
a) Exports
b) Imports
Balance on trade in services
Balance on trade in goods and services
+165 204
191 815
26 611
+63 826
52 712
+11 114
15 497
3. Net income flows (wages and investment income)
+6 848
4. Net current transfers (government and private)
4 112
Current account balance
–12 761
UK balance of payments:
1999 (£ millions)
CURRENT ACCOUNT
1. Trade in goods
a) Exports
b) Imports
Balance on trade in goods
2. Trade in services
a) Exports
b) Imports
Balance on trade in services
Balance on trade in goods and services
+165 204
191 815
26 611
+63 826
52 712
+11 114
15 497
3. Net income flows (wages and investment income)
+6 848
4. Net current transfers (government and private)
4 112
UK balance of payments:
1999 (£ millions)
CURRENT ACCOUNT
1. Trade in goods
a) Exports
b) Imports
Balance on trade in goods
2. Trade in services
a) Exports
b) Imports
Balance on trade in services
Balance on trade in goods and services
+165 204
191 815
26 611
+63 826
52 712
+11 114
15 497
3. Net income flows (wages and investment income)
+6 848
4. Net current transfers (government and private)
4 112
Current account balance
–12 761
UK balance of payments:
1999 (£ millions)
CURRENT ACCOUNT
1. Trade in goods
a) Exports
b) Imports
Balance on trade in goods
2. Trade in services
a) Exports
b) Imports
Balance on trade in services
Balance on trade in goods and services
+165 204
191 815
26 611
+63 826
52 712
+11 114
15 497
3. Net income flows (wages and investment income)
+6 848
4. Net current transfers (government and private)
4 112
Current account balance
–12 761
UK balance of payments:
1999 (£ millions)
CURRENT ACCOUNT
1. Trade in goods
a) Exports
b) Imports
Balance on trade in goods
2. Trade in services
a) Exports
b) Imports
Balance on trade in services
Balance on trade in goods and services
+165 204
191 815
26 611
+63 826
52 712
+11 114
15 497
3. Net income flows (wages and investment income)
+6 848
4. Net current transfers (government and private)
4 112
Current account balance
–12 761
UK balance of payments:
1999 (£ millions)
CURRENT ACCOUNT
1. Trade in goods
a) Exports
b) Imports
Balance on trade in goods
2. Trade in services
a) Exports
b) Imports
Balance on trade in services
Balance on trade in goods and services
+165 204
191 815
26 611
+63 826
52 712
+11 114
15 497
3. Net income flows (wages and investment income)
+6 848
4. Net current transfers (government and private)
4 112
Current account balance
–12 761
UK balance of payments:
1999 (£ millions)
CAPITAL ACCOUNT
5. Net capital transfers
+788
Capital account balance
FINANCIAL ACCOUNT
6. Investment (direct and portfolio)
a) Net investment in UK from abroad
b) Net UK investment abroad
Balance of direct and portfolio
7. Other financial flows (mainly short-term)
a) Net deposits in UK from abroad and
borrowing by UK residents
b) Net deposits abroad by UK residents and UK
lending to overseas residents
Balance of other financial flows
8. Reserves (drawing on +, adding to –)
+788
+173 242
142 568
+30 674
+24 728
48 213
–23 485
+638
UK balance of payments:
1999
(£
millions)
CAPITAL ACCOUNT
5. Net capital transfers
+788
Capital account balance
FINANCIAL ACCOUNT
6. Investment (direct and portfolio)
a) Net investment in UK from abroad
b) Net UK investment abroad
Balance of direct and portfolio
7. Other financial flows (mainly short-term)
a) Net deposits in UK from abroad and
borrowing by UK residents
b) Net deposits abroad by UK residents and UK
lending to overseas residents
Balance of other financial flows
8. Reserves (drawing on +, adding to –)
+788
+173 242
142 568
+30 674
+24 728
48 213
–23 485
+638
UK balance of payments:
1999
(£
millions)
CAPITAL ACCOUNT
5. Net capital transfers
+788
Capital account balance
FINANCIAL ACCOUNT
6. Investment (direct and portfolio)
a) Net investment in UK from abroad
b) Net UK investment abroad
Balance of direct and portfolio
7. Other financial flows (mainly short-term)
a) Net deposits in UK from abroad and
borrowing by UK residents
b) Net deposits abroad by UK residents and UK
lending to overseas residents
Balance of other financial flows
8. Reserves (drawing on +, adding to –)
Financial account balance
+788
+173 242
142 568
+30 674
+24 728
48 213
–23 485
+638
+7 827
UK balance of payments:
1999
(£
millions)
CAPITAL ACCOUNT
5. Net capital transfers
+788
Capital account balance
FINANCIAL ACCOUNT
6. Investment (direct and portfolio)
a) Net investment in UK from abroad
b) Net UK investment abroad
Balance of direct and portfolio
7. Other financial flows (mainly short-term)
a) Net deposits in UK from abroad and
borrowing by UK residents
b) Net deposits abroad by UK residents and UK
lending to overseas residents
Balance of other financial flows
8. Reserves (drawing on +, adding to –)
Financial account balance
+788
+173 242
142 568
+30 674
+24 728
48 213
–23 485
+638
+7 827
UK balance of payments:
1999
(£
millions)
CAPITAL ACCOUNT
5. Net capital transfers
+788
Capital account balance
FINANCIAL ACCOUNT
6. Investment (direct and portfolio)
a) Net investment in UK from abroad
b) Net UK investment abroad
Balance of direct and portfolio
7. Other financial flows (mainly short-term)
a) Net deposits in UK from abroad and
borrowing by UK residents
b) Net deposits abroad by UK residents and UK
lending to overseas residents
Balance of other financial flows
8. Reserves (drawing on +, adding to –)
Financial account balance
+788
+173 242
142 568
+30 674
+24 728
48 213
–23 485
+638
+7 827
UK balance of payments:
1999 (£ millions)
TOTAL CURRENT + CAPITAL + FINANCIAL ACCOUNTS
Total current account
–12 761
Total capital account
+788
Total financial account
Total current + capital + financial accounts
9. Net errors and omissions
Overall balance of payments
+7 827
–4 146
+4 146
0
UK balance of payments:
1999 (£ millions)
TOTAL CURRENT + CAPITAL + FINANCIAL ACCOUNTS
Total current account
–12 761
Total capital account
+788
Total financial account
Total current + capital + financial accounts
9. Net errors and omissions
Overall balance of payments
+7 827
–4 146
+4 146
0
UK BOP Data
What does the diagram tell us?
Current position
Facts and figures
In 2011, the UK’s current account deficit was
£29.0 billion.
Latest figures show a rise in the trade deficit
The rising goods trade deficit was largely a
result of a fall in exports to countries outside the
EU
Despite the recession in the eurozone, exports
to EU countries rose over the month, by £300m,
to hit £13.1bn. Imports from the region fell by
£200m.
Causes of a Current Account Deficit
Economic Growth
Recession abroad
Producing goods which are not in demand
Loss of competitiveness in manufacturing
industry
Inflation
Lack of Investment
Strong Currency
When is a Current Account Deficit
a problem
Only a problem if the current account deficit is
unsustainable.
Becomes a problem if unable to finance it via the
capital account (financial flows, FDI)
Leakage from the circular flow of income
Could cause devaluation of the currency
Which in turn may be inflationary
May lead to interest rates rising
Negative multiplier due to confidence falling
If it is caused by structural imbalance
Exchange Rates
The price of one currency in terms of another –
the amount of one currency that has to be given
up to purchase another currency
Exchange rates are determined by the demand
and supply of a currency in foreign exchange
markets
To a lesser degree determined by the purchase
of exports, and the purchase of imports
Exchange Rates
Floating Exchange Rates:
– Where the rate is determined by the interaction of
supply and demand of the currency with no
intervention by government or other agencies in the
market
‘Dirty’ or ‘Managed’ Floating:
– Where the exchange rate is allowed to float freely but
intervention by governments or other agencies is
carried out to manipulate the rate within some desired
band
Exchange Rates
Fixed Exchange Rates:
– Where the rate is fixed or pegged to another
currency or asset (such as gold – the ‘Gold
Standard’) – intervention may be necessary
to maintain the rate or economic policies to
influence the strength of economic growth
Effect of Exchange rate on current
account
Strong Currency
–
–
–
–
–
Exports appear more expensive
Imports appear cheaper
Exports fall
Imports rise
Current Account worsens
Weak Currency
–
–
–
–
–
Exports appear cheaper
Imports appear more expensive
Exports rise
Imports fall
Current Account improves
Non –Economic measures:
Social Investment
Infrastructure – roads, communication networks,
bridges, railways, airports, ports
Education – schools, colleges and universities
Hospitals/Health – primary and secondary care,
health education, disease and accident prevention,
number of doctors per head, access to health care
Water/Sanitation
Housing – affordable and accessible housing to
meet the needs of those in search of homes and
employment
Environment – Sustainable Growth
Pollution – land, air, sea and noise
Waste – waste disposal and waste
management
Nature – areas of outstanding beauty,
national parks, wildlife, ecology, sites
of special scientific interest
Land Use – planning regulations, building
regulations
Taxation
Tax Burden – the amount of tax paid by
the population – direct and indirect
taxation
Incentives – aimed at encouraging
enterprise, business development and
creativity
Quality of Life
Material Wealth – telephones, fridges, computers,
cars, etc.
Mental State
Stress – caused by employment, unemployment,
travel, etc.
Crime – crime prevention, crime reduction,
monitoring of crime and perceptions of crime